2008 Ruling 2007-0234421R3 - distribution to the public

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: Can a trust qualify as mutual fund trust (assuming that it otherwise meets the conditions in 132(6)) if the units are issued without a prospectus pursuant to an exemption order from the various provinces?

Position: Yes

Reasons: Notwithstanding the fact that the exemption order of the XXXXXXXXXX and other security commissions limits the sale of units to a pre-defined group, the RRIFs of the retired employees, such group is sufficiently broad to qualify as a distribution to the public.

XXXXXXXXXX 								2007-023442

Attention: XXXXXXXXXX

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX

This is in reply to the letter from your colleague, XXXXXXXXXX in which she requested an advance income tax ruling in respect of the above-noted taxpayer.

To the best of your knowledge and that of your client, none of the issues involved in the ruling request is:

• in an earlier return of your client or a related person,
• being considered by a tax services office or taxation center in connection with a previously filed tax return of your client or a related person,
• under objection by your client or a related person,
• before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
• the subject of a ruling previously considered by the Directorate in respect of your client or a related person other than advance income tax ruling 2000-0041683.

Except as otherwise noted, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. All references to a "Regulation" are references to a regulation promulgated under the Act.

The following terms have the meanings specified:

"Employer RIF" means a retirement income fund established by a former employee, or in certain cases, by a spouse of an employee or former employee, that conforms to the Canada Revenue Agency approved specimen XXXXXXXXXX ;

"Employer RRIF" means an Employer RIF that has been accepted by the Canada Revenue Agency for registration for purposes of the Act;

"Employer" means XXXXXXXXXX ;

"Fund" means Diversified Bond Fund, one of the RPP Options and an account of the Master Trust;

"Jurisdictions" means XXXXXXXXXX , either individually or collectively;

"LIF" means a life income fund and is a RRIF that meets the requirements set out in section 20.1 of the Pension Benefits Standards Act;

"LRIF" means a locked-in retirement income fund and is a RRIF that has a locking-in provision as prescribed by the PBA;

"Master Trust" means XXXXXXXXXX , a trust that has elected to be a master trust as defined in paragraph 149(1)(o.4);

"Member" or "Members" means an employee or former employee of the Employer who has contributed to the Plan and still has an account balance in the Plan;

"PBA" means the Pension Benefits Act of XXXXXXXXXX ;

"Plan" or "Plans" means either of the two registered pension plans administered by the Employer on behalf of its employees, individually or collectively as appropriate in the context;

"RIF" means a retirement income fund as defined in subsection 146.3(1);

"RPP Options" means the various investment options available to Members in respect of funds held in a Plan on their behalf;

"RRIF Annuitant" or "RRIF Annuitants" means a former Member of the Plan, or where there has been marriage breakdown or death and a transfer in accordance with subsection 147.3(5) or subsection 147.3(7) has been made, the spouse of a Member or former Member who has established an Employer RIF;

"RRIF Option" means the various investment options available to RRIF Annuitants;

"RRIF" means a registered retirement income fund as defined in subsection 146.3(1);

"Transfer Vehicle" or "Transfer Vehicles" means any of a RRIF, a LIF, a LRIF, a locked-in retirement account or an annuity purchased from a life insurance company, individually or collectively as appropriate in the context;

"Trust" means the unit trust to be created under the proposed transactions which will be resident in Canada, and whose only undertaking would be the investing of its funds in property; and
"Trustee" means XXXXXXXXXX , a trust company that is resident in Canada that is the trustee of the various RRIFs established by the RRIF Annuitants under the Employer RIF.

The relevant Tax Services Office for the Employer is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Tax Centre. The relevant Tax Services Office for the Trust is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Centre.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The Employer is a tax-exempt entity.

2. The Employer sponsors two Plans that are registered under Act and the PBA. The Plans are administered by the Employer. Both Plans are primarily contributory money purchase pension plans under which Members have accounts that are comprised of contributions made by the Member and by the Employer, as well as the investment return earned on such contributions.

3. Each of the Plans is a beneficiary of the Master Trust. Each Plan holds units in the various accounts of the Master Trust based upon the investment decisions of the Members. The Master Trust holds the assets underlying the RPP Options either directly or as units of a quasi mutual fund trust as described in paragraph 7 below.

4. Members are permitted to maintain their account balances in their Plan following their retirement or termination of employment. Although no further contributions to the Plan are permitted following retirement or the termination of their employment, the account balances of the Members who maintain their account balances in the Plan continue to generate investment earnings or losses. In addition, the former employees of the Employer continue to benefit from lower investment management fees available under the Plans than under commercially available mutual funds.

5. As required by the Plans, the Act and the PBA, Members cannot draw variable retirement income directly from a Plan. Rather, the locked-in pension funds and non-locked-in pension funds must first be transferred to a Transfer Vehicle. By the end of the year in which a Member turns age XXXXXXXXXX , the Member is required to transfer the amount held in a Plan to a Transfer Vehicle under which the individual will commence receiving retirement income.

6. Each Member directs the investment of their account by choosing from a number of RPP Options. There are currently XXXXXXXXXX RPP Options available to the Members. The RPP Options comply with the requirements of the Act and the PBA for investments by a registered pension plan. The RPP Options are unique to the Plans and cannot currently be replicated under any of the commercially available Transfer Vehicles.

7. As stated in ruling 2000-0041683, the Employer has established various quasi-mutual funds that are registered investments pursuant to paragraph 204.4(2)(d) for the purpose of providing former Members with the investment choices similar to those available to Members. In order to give former Members greater flexibility in their investment options, the Employer, in conjunction with the Trustee, has created a specimen plan (along with LIF and LRIF supplements) for the Employer RIFs that was approved by the Registered Plans Division of the Canada Revenue Agency under specimen plan number XXXXXXXXXX . Currently, over XXXXXXXXXX RRIF Annuitants have established an Employer RIF.

8. The RRIF Options are a subset of the RPP Options. For each RRIF Option, the assets previously held in an account of the Master Trust were transferred to a quasi mutual fund trust established by the Employer as stated in paragraph 7 which was registered as a registered investment pursuant to paragraph 204.4(2)(d). To date, all of the assets underlying the RRIF Options have been qualified investments for a RRIF under subsection 146.3(1).

9. On XXXXXXXXXX , the Employer obtained prospectus and registration exemption under the securities legislation in each of the Jurisdictions to allow for the distribution of units of any of the trusts that hold the property relating to the RRIF Options to Members, former Members, and in the circumstances where a transfer has been made in accordance with subsection 147.3(5) or subsection 147.3(7), the spouse of a Member or former Member. To date, the exemption has been relied upon only for securities law purposes, and not for tax purposes.

10. The Fund is a popular RPP Option that is not currently available to RRIF Annuitants. At present, the Fund is simply an account of the Master Trust. The assets held in the Fund are invested mainly in Canadian and foreign bonds, including bonds that are not issued by corporations listed on prescribed stock exchanges and that are part of an issuance of less than $XXXXXXXXXX . Due to the restrictions on qualified investments under the Act and Regulations, some of the assets underlying the Fund are not qualified investments under subsection 146.3(1) and therefore are not prescribed investments for a RRIF. As a result, it would not be possible to make the Fund available to RRIF Annuitants as a RRIF Option using a quasi mutual fund trust structure.

Proposed Transactions

11. The Employer proposes to create the Trust. It will be a unit trust resident in Canada, the trustee of which will be Trustee. The only undertaking of the Trust will be the investing of its funds in property. All of the assets currently held by the Employer Master Trust under the RPP Option that is the Fund will be transferred to the trust. Some of the units of the Trust will be held by the Employer Master Trust in respect of the two Plans and other units of the Trust will be held by the trusts governed by the Employer RRIFs. It is expected that the Trust will qualify as a mutual fund trust under subsection 132(6) before the XXXXXXXXXX day after the end of its first taxation year and will elect pursuant to subsection 132(6.1) to be deemed to have qualified as a mutual fund trust commencing from the beginning of its first taxation year. It is recognized that if, in addition to the Master Trust's investment in the Trust, the Trust does not have at least 149 trusts governed by Employer RRIFs that hold at least one block of units as defined in subsection 4803(1) of the Regulations, having an aggregate fair market value of at least $500, in the Trust's first calendar year, any Member who has directed his or her Employer RRIF to acquire units of the Trust will be required to include the fair market value of the Trust units at the time the Trust units were acquired by his or her Employer RRIF in income for that taxation year under subsection 146.3(7) subject to the filing of an election under subsection 259(1).

12. The sale of units in the Trust to the Master Trust and to the trusts governed by the Employer RRIFs will be a lawful distribution of units under the securities laws of each of the Jurisdictions pursuant to the exemption order issued on XXXXXXXXXX . The Trust will not issue its units to anyone other than the Master Trust and to the trusts governed by the Employer RRIFs.

Purpose of the Proposed Transactions

13. Since the Fund is a popular RPP Option, the Employer has decided to restructure the manner in which the assets of the Fund are held such that the Fund can become an RRIF Option. Thus, the purpose of the transaction is to make the Fund into another RRIF Option which is available to the RRIF Annuitants and to ensure that that RRIF Option is a qualified investment under the Act and Regulations.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, the proposed transactions are completed in the manner described above and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A. The units of the Trust will constitute a class of units qualified for distribution to the public for the purposes of subparagraph 4801(a)(ii) of the Regulations.

The above ruling is subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter.

This ruling is based on the law as it currently reads and does not take into account any proposed amendments to the Act or Regulations. However, provided that paragraph 4801(a) of the Regulations is enacted in substantially the same form as proposed in the draft regulations released by the Department of Finance on July 18, 2005 and subject to the same conditions as set out in the ruling, it is our view that the amendment to paragraph 4801(a) of the Regulations would not affect the ruling given.

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