Principal Issues: The REIT has acquired an indirect interest in real property located in Canada through its investment in a unit trust that is a limited partner of a limited partnership that holds the real property in co-ownership with other parties. XXXXXXXXXX and the financial institutions providing mortgages on the real property require the REIT and other co-owners to guarantee jointly and severally, or solidarily, the indebtedness on the real property. Will the issuance of guarantees by the REIT on the mortgages held on the properties for the benefit of the REIT and the other co-owners be considered an undertaking other than investing funds in property such that the REIT would not qualify as a mutual fund trust under 132(6)(b)?
Position: No, a guarantee issued in the situation described in the ruling will not, in and by itself, disqualify the REIT as a mutual fund trust as defined in 132(6)(b).
Reasons: The REIT will receive no fee for the guarantee and the other co-owners will be jointly and severally, or solidarily, liable for the indebtedness on the property. In addition, each guarantor will enter into an indemnity agreement with each other guarantor in respect of the indebtedness. The Supreme Court of Canada has opined that an undertaking can be made of an array of activities. Even though there is no case law dealing with the requirement that the only undertaking be the investing of funds, the courts have considered in several cases dealing with other issues that a guarantee can be part and parcel of an investment provided that the level of integration between the guarantees and the investing activities is sufficiently high to make sure that the undertaking blends with the investing of funds because a guarantee is an undertaking by itself. It is reasonable to conclude in this case that the degree of integration between the investment of the funds and the guarantee is sufficiently high that the guarantee will not be considered to be a separate undertaking.