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: Unit trusts propose to modify their trust indenture to maximize the distribution of the trusts net capital gains to redeeming unitholders (capital gains will first be allocated to redeeming unitholders and then to the remaining unitholders). The rulings requested are:
A) The trust may deduct the taxable portion of the capital gains payable to a redeeming unitholder (104(6)(b)).
B) The taxable portion of the capital gain paid to a redeeming unitholder will be included in his income (104(13)).
C) The taxable portion of the capital gain paid to a redeeming unitholder will be deemed to be a taxable capital gain of the unitholder (104(21)).
D) The proceeds of disposition of the redeemed units will be equal to the excess of the net asset value of the units over the capital gains distribution in respect of those units.
E) 107(4.1) will not apply.
F) 245(2) will not apply.
Position: The Rulings are granted.
Reasons: Consistent with rulings previously issued. The amended trust indenture indicates the amounts of net capital gains to be allocated to the redeeming unitholders and the trustee cannot exercise any discretion in making that determination.
Re: Advance Income Tax Ruling
XXXXXXXXXX (XXXXXXXXXX Tax Services Office and XXXXXXXXXX Taxation Centre)
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
a) dealt with in an earlier return of the taxpayers or a related person;
b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;
c) under objection by one or any of the taxpayers or a related person;
d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and
e) the subject of a ruling previously issued by this Directorate.
In this document, unless otherwise indicated, all statutory references are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended, the "Act")
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
"Funds" means collectively and "Fund" means individually each of XXXXXXXXXX;
"Manager" means XXXXXXXXXX;
"Trustee" means XXXXXXXXXX.
FACTS AND PROPOSED TRANSACTIONS
1. The Manager is a corporation incorporated under the laws of Canada established to provide asset management services. The Manager is a "taxable Canadian corporation" and a "private corporation" within the meaning of paragraphs 89(1)(i) and 89(1)(f), respectively, of the Act.
2. The head office and registered office of the Manager is XXXXXXXXXX.
3. The Manager acts as the manager of certain recently established pooled investment trusts, the Funds. Each of these Funds is a "unit trust" within the meaning of paragraph 108(2)(a). It is not currently expected that the Funds will be "mutual fund trusts" within the meaning of subsection 132(6). The Funds do not yet have tax account numbers.
4. The Trustee, a trust company existing under the laws of Canada, acts as the trustee of these Funds. Accordingly, each Fund is resident in Canada for the purposes of the Act.
5. The Trustee is a taxable Canadian corporation within the meaning of the Act and is a trust company licensed to carry on the business of providing trust services in Canada. This business includes, among other things, establishing pooled investment trusts under the laws of Canada or a province thereof and acting as trustee thereof for the benefit of unitholders of such trusts.
6. The Manager and the Trustee have entered into a master trust agreement in order to establish standard terms and conditions (the "Standard Terms and Conditions") for the Funds that were created contemporaneously with the execution of the master trust agreement by way of execution of supplemental trust agreements.
7. The supplemental trust agreements for each Fund set out matters relating to the creation of their units, their investments, incorporate the Standard Terms and Conditions, designate any exclusions from or exceptions to the Standard Terms and Conditions, and contain such other matters that the Trustee and the Manager deem advisable. Each supplemental trust agreement, incorporating the master trust agreement, constitutes the "Trust Agreement" in respect of a Fund.
8. Each Trust Agreement provides that a Fund may issue one class of units issuable in an unlimited number of series and an unlimited number of units of each series.
9. Each Trust Agreement provides that the net income of a Fund (the "Net Income") shall be determined in accordance with the provisions of the Act (other than paragraph 82(1)(b) and subsection 104(6)) regarding the calculation of income, taking into account such adjustments thereto as are determined by the Trustee in respect of dividends received from taxable Canadian corporations, amounts paid or payable by the Fund to unitholders, non-capital losses of the Fund carried forward and such other amounts as the Trustee is directed by the Manager to take into account, but excluding the net realized capital gains of the Fund for such taxation year.
10. Each Trust Agreement provides that the net realized capital gains of a Fund (the "Net Capital Gains") shall be determined as the amount, if any, by which the aggregate of the capital gains of the Fund in the taxation year exceeds the aggregate of the capital losses of the Fund in the year and the amount determined by the Manager in respect of any net capital losses for prior years which the Fund is permitted by the Act to deduct in computing its taxable income for the taxation year.
11. Each Trust Agreement will be amended to provide that the Trustee shall allocate all or any portion of the Net Capital Gains to unitholders who have redeemed units of the Fund at any time in the year, provided that the amount of Net Capital Gains allocated to a particular redeeming Unitholder shall not exceed the amount, if any, by which the amount payable on the redemption of the units exceeds the adjusted cost base of the units being redeemed (the "Net Capital Gains Allocation on Redemption").
12. Where units of a Fund are redeemed, the Fund pays to the unitholder, out of the assets of the Fund, an amount equal to the series net asset value of such units (determined as of the applicable valuation date in respect of the redemption). The master trust (and incidentally, each trust agreement) will be amended to provide that the proceeds of redemption will be reduced by the Net Capital Gains Allocation on Redemption allocated to the redeeming unitholder as described above in order to clarify that the payment made to the redeeming unitholder (the series net asset value of such units) will include that Net Capital Gains Allocation on Redemption allocated to the redeeming unitholder.
13. On XXXXXXXXXX of each calendar year, each Fund will make payable to its unitholders of record, the respective unitholders' pro rata share of the amount by which the Net Income and Net Capital Gains of the Fund for the year exceed any amount previously made payable or allocated on an interim basis during the year. As an exception, a portion of Net Income of the Fund may be distributed to certain unitholders as a management fee distribution and a portion of Net Capital Gains of the Funds may be distributed to the unitholders who have redeemed units of the Fund as described above.
14. Distributions of Net Income and Net Capital Gains payable to a non-redeeming unitholder, including management fee distributions, are reinvested in additional units of the relevant series, including fractional units, at the series net asset value per unit next determined after declaration of the distribution.
15. The amendment of the master trust (and incidentally, each trust agreement) as described above will be made once the advance income tax ruling has been issued to the Manager by the CRA.
16. Each Trust Agreement provides that if the total of the amounts determined by the Trustee in accordance with the allocation methodology described above for all redeeming unitholders in any year exceeds the Net Capital Gains of the Fund for that taxation year, the Net Capital Gains shall be allocated rateably to those redeeming unitholders.
17. Each Fund will make a designation under subsection 104(21) so that the taxable portion of any Net Capital Gains distributed to a unitholder (either at redemption or otherwise) is deemed to be a taxable capital gain of the unitholder.
PURPOSE OF THE PROPOSED TRANSACTIONS
18. The purpose of the proposed transactions is to allow the Net Capital Gains of a Fund for a year to be allocated among its unitholders in a more equitable manner.
Provided the above statements of facts, proposed transactions and purposes thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:
A. Each Fund will be entitled under paragraph 104(6)(b) of the Act to deduct in computing its income for a taxation year of the Fund the taxable portion of the Net Capital Gains Allocation on Redemption that was payable in the taxation year to a unitholder in respect of his, her or its redeemed units.
B. The taxable portion of a Net Capital Gains Allocation on Redemption made by a Fund that was payable in the taxation year to a unitholder must be included in computing the income of the unitholder pursuant to paragraph 104(13)(a) of the Act.
C. To the extent that a Fund makes the proper designations in its return of income for a taxation year, the taxable portion of a Net Capital Gains Allocation on Redemption paid to a unitholder will be deemed to be a taxable capital gain of the unitholder in accordance with subsection 104(21) of the Act.
D. In computing a redeeming unitholder's gain in respect of his, her or its redeemed units of a Fund, the proceeds of disposition for the redeemed units will be the amount by which the series net asset value of such units (determined as of the applicable valuation day in respect of the redemption) exceeds the amount of the unitholder's Net Capital Gains Allocation on Redemption in respect of those units.
E. The implementation of the proposed transactions described herein, will not, in and by itself, cause subsection 104(7.1) of the Act to apply so as to deny a Fund a deduction under paragraph 104(6)(b) of the Act.
F. The general anti-avoidance rule (the "GAAR") under subsection 245(2) of the Act will not be applied as a result of the proposed transactions to redetermine the tax consequences confirmed in the rulings given.
The rulings given herein are based solely on the facts, proposed transactions and purpose of the proposed transactions described above. Facts and proposed transactions in the documents submitted with your request not described above do not form part of the facts and proposed transactions on which these rulings are based and any reference to these documents is provided solely for the convenience of the reader.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.
for the Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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