2007 Ruling 2006-0217281R3 - Qualification as "exempt foreign trust"

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether two US trusts would qualify as "exempt foreign trusts" under the proposed amendments to s. 94(1) of the Act.

Position: Yes.

Reasons: All conditions to qualify as "exempt foreign trusts" are met.

XXXXXXXXXX 							2006-021728

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re : XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you request an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence in connection with your request.

Since your request relates to the application of proposed amendments to the Income Tax Act (the "Act") to completed transactions, we cannot provide you with the Rulings requested. As provided in Information Circular 70-6R5, the Canada Revenue Agency (the "CRA") does not provide Advance Income Tax Rulings on completed transactions or on proposed amendments to the Act that are not yet law. However, we can provide you with the following opinions regarding the application of the November 22, 2006 Draft Amendments to the factual situation described below.

Facts

1. XXXXXXXXXX ("Trustco") is a XXXXXXXXXX Trust Company with authority to establish and maintain XXXXXXXXXX trusts. Trustco carries on business in Canada through various subsidiaries resident in Canada. Trustco is not resident in Canada.

2. Trustco, through its investment management division known as XXXXXXXXXX, provides investment management services to various institutional clients around the world through XXXXXXXXXX ("CTF"), described below, maintained by Trustco.

3. CTFs are governed, in part, by XXXXXXXXXX but are exempt from registration under the terms of this law. XXXXXXXXXX of the United States Internal Revenue Code of 1986 (the "Code").

4. By administrative promulgation of the United States tax authorities, CTFs file income tax returns in the United States as a partnership, all of the capital and income of which is attributed to the beneficiaries of the particular CTF on a quarterly basis.

5. A CTF is similar to a mutual fund in that it is a collective investment vehicle and is used to reduce administrative and operating costs. However, a CTF can only be maintained by a bank exclusively for the collective investment of moneys contributed to the CTF by the bank. Furthermore, a CTF is only available to the fiduciary customers of the bank.

6. To maintain the exemption for CTFs created under the XXXXXXXXXX, a bank must first establish a true fiduciary relationship with its clients that then participate indirectly in the CTF via the fiduciary relationship created with the bank.

7. In the course of an investment by an investor in a CTF managed by Trustco, a grantor trust is first created (the "Grantor Trust") by way of an agreement of trust (the "Agreement of Trust") entered into by the investor, as settlor, and Trustco, as trustee. A sample Agreement of Trust was provided with your request.

8. Under the terms of the Agreement of Trust:

(a) the settlor of the Grantor Trust contributes only cash to the Grantor Trust;

(b) the settlor of the Grantor Trust is the sole beneficiary of the Grantor Trust;

(c) the trustee agrees to pay on the last business day of each month such part of the trust property requested by the settlor;

(d) the trustee may make a payment of property of the Grantor Trust to the settlor even if no request is made;

(e) all of the income, losses, capital gains and capital losses of the Grantor Trust belong to the settlor as sole beneficiary of the Grantor Trust;

(f) the settlor can revoke the Grantor Trust at any time and the Grantor Trust terminates upon either its revocation by the settlor, the settlor's bankruptcy or the resignation of the trustee;

(g) on termination of the Grantor Trust, the trust property is payable and distributable to the settlor if the settlor is alive, or to the settlor's estate if the settlor is not then alive;

(h) the trustee of the Grantor Trust has discretion to retain, purchase or invest in any securities, including the investing of amounts into a CTF. However, any investment must conform with the investment objectives that are stated in a schedule to the Agreement of Trust;

(i) the trustee of the Grantor Trust may invest the trust property in such one or more securities or in a single CTF pre-specified in Exhibit 3 to the Agreement of Trust with the intention of matching the performance of a particular index;

(j) the investment in CTFs designated in Exhibit 3 to the Agreement of Trust can only be changed with the consent of the settlor;

(k) a beneficial interest in a Grantor Trust cannot be assigned directly or indirectly to any other party;

(l) the trustee of the Grantor Trust is not liable for errors in judgment but only for wilful default or gross negligence; and

(m) the Grantor Trust is governed by the laws of the State of XXXXXXXXXX.

9. Trustco, as trustee of the Grantor Trust, then invests the assets of the Grantor Trust into one or more CTFs maintained by Trustco as trustee. As a result, the assets of the Grantor Trust are commingled with trust property of other Grantor Trusts for which Trustco is also trustee, but for which there are different settlors. The CTF is a sub-trust created by reference to one or more master trusts of Trustco. Each of the master trusts have a number of sub-trusts, which are the actual CTFs. Pursuant to the declaration of trust for each master trust, each CTF is established by the trustee of the master trust but each CTF constitutes a separate trust. A sample of each of a master trust and sub-trust was provided with your request.

10. Under the terms of a CTF:

(a) interests in the CTF are composed of units representing equal units in the CTF;

(b) the units of the CTF are attributed to the various trusts (i.e. the Grantor Trust and other similar trusts) participating in the CTF on the basis of the fair market value (the "FMV") of each trust's cash contribution to the CTF;

(c) each settlor of a Grantor Trust participating in the CTF signs a Quarterly Income Distributions Form, a sample of which was provided with your request, instructing Trustco to either automatically reinvest its share of the particular CTF's quarterly income into the CTF or to make a cash payment of such income; if no election is made, the Grantor Trust's share of the CTF's quarterly income is automatically reinvested into the CTF;

(d) upon withdrawal of units in the CTF, the CTF pays the withdrawing trust an amount equal to the value of the withdrawn units; the trustee of the CTF has the discretion to make payments on units withdrawn in cash, in kind or in any other manner consistent with the laws of the State of XXXXXXXXXX;

(e) a beneficial interest in a CTF cannot be assigned directly or indirectly to any other party;

(f) title to all assets of the CTF is vested in the CTF and no beneficiary thereof has any severable ownership of any individual asset of the CTF;

(g) specific and detailed rules exist to establish the value of the CTF units held by a Grantor Trust, which value is based on the FMV of the property held by the CTF;

(h) expenses incurred from the purchase or sale of securities on commencement of participation in a CTF or on withdrawal of units can be charged to a particular unitholder at the discretion of the trustee of the CTF;

(i) subject to certain conditions and the objectives of the particular CTF, the trustee has discretion as to the investment of the assets of the CTF; generally, the established objective of a particular CTF is to track the return of a specified financial index in a specified country; and

(j) within a CTF, a segregated account may be created by the trustee of the CTF; a segregated account is maintained solely for the benefit of the participating trusts interested in the CTF at the time such account is established and the primary purpose of a segregated account is to provide a method of liquidation of the investments contained therein; the time and manner of making distributions from the segregated account rests in the sole discretion of the trustee of the CTF.

11. All Canadian residents participating directly in a Grantor Trust via an Agreement of Trust and indirectly in a CTF (the "Clients") are non-taxable entities pursuant to subsection 149(1) of the Act. More specifically, some of the Clients are registered pension plans described in paragraph (a) of the definition of "trust" in subsection 108(1) of the Act, some are master trusts described in paragraph 149(1)(o.4) of the Act, and some are investors that are not described in any of paragraphs (a) to (e.1) of the definition of trust in subsection 108(1) of the Act. Neither of the Clients is an entity described in paragraphs 149(1)(q.1), (t) or (z) of the Act.

Opinions

As stated earlier, although we cannot give the Rulings requested in your request we can provide you with the following opinions regarding the application of the November 22, 2006 Draft Amendments to the factual situation described above:

A. Provided it complies with the conditions set out in subclause (h)(ii)(B)(I) of the definition of "exempt foreign trust" in subsection 94(1) of the November 22, 2006 Draft Amendments, and provided it does not hold "restricted property" within the meaning of subsection 94(1) of the November 22, 2006 Draft Amendments, a CTF will qualify as an "exempt foreign trust" pursuant to paragraph (h) of the definition of "exempt foreign trust" in subsection 94(1) of the November 22, 2006 Draft Amendments.

B. Provided it complies with the conditions set out in subclause (h)(ii)(B)(I) of the definition of "exempt foreign trust" and clause (d)(i)(B) of the definition of "specified contributor" in subsection 94(1) of the November 22, 2006 Draft Amendments, and provided it does not hold "restricted property" within the meaning of subsection 94(1) of the November 22, 2006 Draft Amendments, a Grantor Trust will qualify as an "exempt foreign trust" pursuant to paragraph (h) of the definition of "exempt foreign trust" in subsection 94(1) of the November 22, 2006 Draft Amendments.

As provided in paragraph 22 of the Information Circular 70-6R5, the opinions provided therein are not binding on the CRA.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch