2007 Ruling 2007-0244691R3 - reorg of an existing REIT to eliminate subtrust

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: 1. Will a transfer of subtrust's property to a newly created trust with the same beneficiaries, terms and conditions qualify as a qualifying disposition under 107.4(1)?

2. Provided that the newly created trust meets the conditions required to be a MFT, will the exchange between the REIT and the MFT qualify under 132.2?

3. Will the proposed transactions cause the REIT to exceed the Normal Growth Guidelines as set out in the Dept of Finance of December 15, 2006: http://www.fin.gc.ca/news06/06-082e.html?

Position: 1. Yes, provided the conditions are met and the new trust elects out of (f) of the definition of disposition and the subtrust does not elect out of 107.4(3)(a). 2. Yes. 3 No.

Reasons: 1. The facts demonstrate that the conditions of 107.4(1) are met. 2. The facts demonstrate that the conditions of 132.2 are met. 3. The proposed transaction will not result in any net growth of equity to the REIT.

XXXXXXXXXX 2007-024469

Attention: XXXXXXXXXX

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.

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.

This document is based solely on the facts and proposed transactions described below. We have not reviewed any documentation related to your request and as a result, any reference to a document completed or to be completed in respect of the facts and proposed transactions is provided solely for the convenience of the reader.

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:

"Buyer" means XXXXXXXXXX general partnership;

"XXXXXXXXXX Debt" means the XXXXXXXXXX debt of LP;

"Declaration of Trust" means the amended and restated declaration of trust dated XXXXXXXXXX governing the Fund as it may be amended and restated from time to time;

"Draft Amendments" means the legislative proposals included in Bill C-33 which received first reading in the Senate on June 18, 2007;

"XXXXXXXXXX Portfolio" means the portfolio of real estate assets located principally in XXXXXXXXXX Canada owned by LP;

XXXXXXXXXX;

"Fund XXXXXXXXXX" means a holder of Fund XXXXXXXXXX;

"Fund XXXXXXXXXX" means a holder of Fund XXXXXXXXXX;

"Fund XXXXXXXXXX" means a Fund XXXXXXXXXX with the terms and conditions described in paragraph 3;

"Fund XXXXXXXXXX" means a Fund XXXXXXXXXX designated as XXXXXXXXXX with the terms and conditions described in paragraph 3;

"Fund XXXXXXXXXX" means a holder of a Fund XXXXXXXXXX;

XXXXXXXXXX;

"Fund" means XXXXXXXXXX, an unincorporated open-ended limited purpose trust formed under the laws of the province of XXXXXXXXXX;

"GP Unit" means the interest of GP in LP;

"GP" means XXXXXXXXXX, the general partner of LP, a corporation incorporated under the laws of the Province of XXXXXXXXXX;

"LP Agreement" means the amended and restated XXXXXXXXXX agreement dated XXXXXXXXXX governing the affairs of LP as it may be amended and restated from time to time;

"LP Class A Unit" means an interest of a limited partner in LP, designated as an LP Class A Unit of LP;

"LP Class B Unit XXXXXXXXXX" means an interest of a limited partner in LP, designated as an LP Class B Unit, XXXXXXXXXX, of LP;

XXXXXXXXXX;

"LP" means XXXXXXXXXX, a limited partnership formed under the laws of the province of XXXXXXXXXX and established pursuant to the LP Agreement;

"Normal Growth Guidelines" means the Guidance Provided on "Normal Growth" for Income Trusts and Other Flow-Through Entities issued in a press release by the Department of Finance on December 15, 2006, which guidelines are incorporated by reference in the SIFT Rules;

"Partnership Units" means an interest of a limited partner in the capital of Partnership;

"Partnership" means a limited partnership formed under the laws of the province of XXXXXXXXXX, all of the limited Partnership Units of which are owned by Trust A and the general partner of which is a corporation that is owned by the Fund;

"Pubco" means XXXXXXXXXX, a public corporation and a taxable Canadian corporation;

"SIFT Rules" means the amendments to the Act enacted on June 22, 2007 to modify the tax treatment of certain publicly-traded trusts that are specified investment flow-through trusts, their beneficiaries, certain partnerships that are specified investment flow-through partnerships and their partners;

"Simplifying Transactions" means the transactions described in paragraph 17 and for which no ruling has been requested that will be implemented in order to simplify the structure of the Fund and its affiliates described hereunder;

"Special Fund Unit" means a Fund Unit that is designated as a Special Unit of the Fund that is issued in connection with the issuance of LP Class B Units XXXXXXXXXX, with the terms and conditions described in paragraph 5;

XXXXXXXXXX;

"Transfer Time" means the point in time at which the transfer of assets described in paragraph 26 will occur and for greater certainty, will be the transfer time referred to in the definition of "qualifying exchange" in subsection 132.2(2);

"Trust A Unit" means a trust unit of Trust A with the terms and conditions described in paragraph 10;

"Trust A" means XXXXXXXXXX as described in paragraph 8;

"Trust B Units" means a trust unit of Trust B with the terms and conditions described in paragraph 24; and

"Trust B" means a trust to be formed under the laws of the Province of XXXXXXXXXX as described in paragraphs 22 to 25.

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

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

Facts

1. The Fund is a mutual fund trust within the meaning of subsection 132(6) which was established in XXXXXXXXXX to, among other things, invest in securities, including units and debt of Trust A and its affiliates. The Fund has a XXXXXXXXXX year end for purposes of the Act. The Fund owns all the Trust A Units and debt of Trust A.

2. The principal office of the Fund is located at XXXXXXXXXX.

3. Under the terms of the Declaration of Trust, the Fund may issue an unlimited number of Fund XXXXXXXXXX, Fund XXXXXXXXXX and Special Fund Units. Each Fund XXXXXXXXXX and Fund XXXXXXXXXX represents an undivided beneficial interest in the Fund and distributions by the Fund, whether of income, net realized capital gains or other amounts, and in the event of termination or winding-up of the Fund, in the net assets of the Fund remaining after satisfaction of all liabilities. Each Fund XXXXXXXXXX and Fund XXXXXXXXXX is redeemable at the option of the holder and entitles the holder thereof to one vote at all meetings of Fund Unitholders. Fund XXXXXXXXXX are issued in accordance with the terms of the XXXXXXXXXX upon the surrender or exchange of LP Class B Units XXXXXXXXXX . Fund XXXXXXXXXX are convertible into Fund XXXXXXXXXX at the option of the Fund XXXXXXXXXX

4. Fund XXXXXXXXXX are widely held by the public, and to the knowledge of the trustees of the Fund, no person beneficially owns, directly or indirectly, or exercises control or direction over, more than 10% of the issued and outstanding Fund XXXXXXXXX. Fund XXXXXXXXXX are listed and traded on the XXXXXXXXXX.

5. Each Special Fund Unit entitles the holder thereof to a number of votes at all meetings of Fund Unitholders equal to the number of Fund XXXXXXXXXX which may be obtained upon the surrender or exchange of LP Class B Units XXXXXXXXXX. A Special Fund Unit is not transferable separately from the LP Class B Unit XXXXXXXXXX issued in connection with it. The Special Fund Units are entitled to a nominal return of capital on a liquidation, dissolution or winding-up of the Fund.

6. The Fund was not established and has not been maintained primarily for the benefit of non-residents of Canada.

7. XXXXXXXXXX of the Fund's XXXXXXXXXX trustees are individuals who are resident in Canada.

8. Trust A is an unincorporated open-ended limited purpose trust established under the laws of the Province of XXXXXXXXXX that qualifies as a "unit trust" pursuant to the Act. Trust A was formed, among other things, to invest in securities of LP. Trust A has no employees. Trust A has a XXXXXXXXXX year end for purposes of the Act.

9. The principal office of Trust A is located at XXXXXXXXXX . The account number for Trust A is XXXXXXXXXX.

10. Under the terms of the declaration of trust of Trust A, Trust A may issue an unlimited number of Trust A Units. Each Trust A Unit represents an equal undivided beneficial interest in any distributions by Trust A, whether of income, net realized capital gains or other amounts, and in the event of termination or winding-up of Trust A, in the net assets of Trust A remaining after satisfaction of all liabilities. Each Trust A Unit is redeemable at the option of the holder and entitles the holder thereof to one vote at all meetings of holders of Trust A Units.

11. Trust A has XXXXXXXXXX trustee who is resident in Canada. Trust A currently owns all the Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt.

12. LP was formed as a limited partnership under the laws of XXXXXXXXXX . GP, a wholly-owned subsidiary of the Fund, is the general partner of LP. LP has a XXXXXXXXXX year end for purposes of the Act. LP Class A Units are owned by Partnership, LP Class B Units XXXXXXXXXX are owned by Pubco and its affiliates, including XXXXXXXXXX, and XXXXXXXXXX are owned by Trust A.

13. LP owns directly, and indirectly through its affiliates, XXXXXXXXXX properties in Canada, and earns virtually all of its income from the leasing of such properties.

14. The registered office of LP is located at XXXXXXXXXX. The federal business number of LP is XXXXXXXXXX.

15. XXXXXXXXXX/

Other Information

16. XXXXXXXXXX.

17. XXXXXXXXXX.

18. Following the completion of the Simplifying Transactions, the Fund will own all of the issued and outstanding Trust A Units with a fair market value in excess of their adjusted cost base. The Trust A Units will be capital property to the Fund for purposes of the Act. The Fund will not own any other asset of material value other than temporary surplus cash.

19. Following the completion of the Simplifying Transactions, Trust A will own all of the issued and outstanding Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt. The Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt will be capital property to Trust A. Trust A will not have any outstanding debt.

20. Following the completion of the Simplifying Transactions, all of the issued and outstanding LP Class A Units will be held by Partnership, the XXXXXXXXXX will be held by Trust A and all of the issued and outstanding LP Class B Units XXXXXXXXXX will be held by Pubco and its affiliates, including XXXXXXXXXX , though, in connection with the transaction described in paragraphs 15 and 16, some holders of LP Class B Units XXXXXXXXXX have exchanged some of their LP Class B Units XXXXXXXXXX for Fund XXXXXXXXXX.

Proposed Transactions

21. The Fund intends to take steps before January 1, 2008 to satisfy the definition of "real estate investment trust" in subsection 122.1(1) in order to ensure that the Fund will not be subject to the SIFT Rules after December 31, 2007.

22. Subsequent to the transactions described above, the following transactions will be undertaken. A Canadian resident third party settlor will settle Trust B with a nominal cash contribution in exchange for one Trust B Unit with the terms and conditions described in paragraph 24.

23. The Fund will subscribe for Trust B Units for a nominal cash consideration. The initial Trust B Unit that will be issued to the third party settlor, as described in paragraph 22, will be repurchased by Trust B for an amount equal to the cash received from the third party settlor.

24. Pursuant to the declaration of trust of Trust B, Trust B will be authorized to issue an unlimited number of Trust B Units with the following terms and conditions:

(i) each Trust B Unit will represent an equal undivided interest in Trust B;

(ii) each Trust B Unit will participate pro-rata in any distributions;

(iii) each Trust B Unit will participate pro-rata in the net assets of Trust B in the event of termination or winding-up of Trust B;

(iv) each Trust B Unit will entitle the holder thereof to one vote at all meetings of holders of Trust B Units;

(v) each Trust B Unit will be redeemable at the option of Trust B for an amount equal to the fair market value of the Trust B Unit. The redemption price will be payable in cash or Fund XXXXXXXXXX or Fund XXXXXXXXXX; and

(vi) each Trust B Unit will be redeemable at the option of the holder at fair market value. The redemption price will be payable in cash or Fund XXXXXXXXXX or Fund XXXXXXXXXX.

25. The declaration of trust of Trust B will provide that the only undertaking of Trust B will be the activities described in paragraph 132(6)(b) and its terms will be substantially the same as the terms of the declaration of trust of Trust A such that the rights, privileges and conditions attached to the Trust B Units will be substantially the same as those attached to the Trust A Units. The trustee of Trust B will be an individual resident in Canada and will not be a director of GP.

26. Pursuant to the agreement to be entered into between Trust A and Trust B, immediately prior to the Transfer Time, Trust A will transfer all of its Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt to Trust B for no consideration. Trust A will not make the election in subparagraph 107.4(3)(a)(i). Trust B will file a written election with the Minister within the time period specified in subparagraph (f)(v) of the definition of disposition in subsection 248(1) that paragraph (f) will not apply to the transfer.

27. Following the transfer described in paragraph 26, the Fund will own all of the Trust A Units and all of the Trust B Units and will continue to hold an indirect interest in all of the Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt by reason of its ownership of all of the Trust B Units. Trust A will then be wound up.

28 The Fund will distribute a certain number of its Trust B Units acquired in paragraph 23 to all of the Fund XXXXXXXXXX and all of the Fund XXXXXXXXXX on a pro rata basis as a distribution of capital. The Fund will remit to the Receiver General, on behalf of each Fund XXXXXXXXXX or each Fund XXXXXXXXXX that is a non-resident, an amount equal to the amount required by the Act to be withheld on behalf of that Fund Unitholder in respect of the return of capital, and will remit such amount to the Receiver General of Canada on behalf of that Fund Unitholder, pursuant to subsection 218.3(2), if applicable.

29. The distribution of Trust B Units and other proposed transactions described in this ruling will be described in a management information circular containing prospectus level disclosure to the extent required by applicable law and to be filed by the Fund on XXXXXXXXXX with the securities regulator in each of the provinces of Canada and the XXXXXXXXXX Stock Exchange, although there is no regulatory review or waiting period following the filing. The management information circular will be provided to Fund Unitholders before the meeting described in paragraph 41 to enable them to make informed decisions as to the merits of the proposed transactions described herein. There will be a lawful distribution of the Trust B Units within the meaning of paragraph 4801(a) of the Regulations. In addition, the number of Trust B Units distributed by the Fund to the Fund XXXXXXXXXX and Fund XXXXXXXXXX will be such that Trust B will satisfy all of the conditions to be a mutual fund trust pursuant to subsection 132(6) and section 4801 of the Regulations immediately after the distribution described in paragraph 28. In particular, there will be at least 150 unitholders of Trust B, each holding at least 25 Trust B Units with an aggregate fair market value of at least $500. The fair market value of each Trust B unit will be $25 or more but will be less than $100. For purposes of satisfying the requirements in section 4801 of the Regulations, the unitholders of Trust B would exclude insiders of Trust B within the meaning assigned by subsection 4803(1) of the Regulations, but would include groups of unitholders that collectively meet such requirements, as determined in accordance with subsections 4803(3) and 4803(4) of the Regulations.

30. Following the transactions described in paragraph 28, but prior to the winding-up of Trust B described in paragraph 40, Trust B will file an election to be deemed to have been a mutual fund trust from the beginning of its first taxation year within the prescribed time specified in subsection 132(6.1).

31. Before the transactions described in paragraph 32, the Declaration of Trust of the Fund will be amended as follows:

a) the provisions in respect of the consolidation of Fund XXXXXXXXXX and Fund XXXXXXXXXX will be amended to provide that the consolidation of Fund Units described in paragraph 37 will be automatic and not require the consent of the Fund Unitholders; and

b) the provisions regarding in specie redemption of Fund XXXXXXXXXX and Fund XXXXXXXXXX will be amended to provide that the redemption proceeds may be paid and satisfied by way of a distribution in specie of securities of a subsidiary of the Fund.

32. Pursuant to the agreement to be entered into by the Fund and Trust B:

a) Trust B will transfer all of its Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt acquired in paragraph 26 to the Fund at the Transfer Time; and

b) as consideration for the transfer, the Fund will assume any outstanding liabilities of Trust B and issue Fund XXXXXXXXXX and Fund XXXXXXXXXX having an aggregate fair market value equal to the aggregate fair market value of the assets transferred to the Fund less any assumed liabilities.

33. At the Transfer Time, each of the Fund and Trust B will qualify as a mutual fund trust for purposes of the Act.

34. At the Transfer Time, Trust B will have no material outstanding liabilities and the only material assets of Trust B will be the Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt.

35. Within XXXXXXXXXX days after the Transfer Time, Trust B will redeem all of the issued and outstanding Trust B Units held by the Fund, the Fund XXXXXXXXXX and the Fund XXXXXXXXXX except for one Trust B Unit which the Fund will continue to hold until the winding-up of Trust B described in paragraph 40. Trust B will satisfy the redemption price for such Trust B Units by transferring the Fund XXXXXXXXXX and Fund XXXXXXXXXX acquired in paragraph 32. No consideration other than the Fund XXXXXXXXXX and Fund XXXXXXXXXX will be received by the Fund, the Fund XXXXXXXXXX and Fund XXXXXXXXXX on the redemption of the Trust B Units.

36. The Fund XXXXXXXXXX that will be received by the Fund upon the redemption of the Trust B Units described in paragraph 35 will be cancelled upon receipt. The Fund will not receive any Fund XXXXXXXXXX on the redemption of the Trust B Units.

37. Immediately after the transactions described in paragraphs 35 and 36, the outstanding Fund XXXXXXXXXX held by the Fund XXXXXXXXXX and Fund XXXXXXXXXX held by the Fund XXXXXXXXXX will be consolidated on a basis such that the number of Fund XXXXXXXXXX outstanding following such consolidation will be equal to the number of Fund XXXXXXXXXX outstanding immediately before the reorganization and the number of Fund XXXXXXXXXX outstanding following such consolidation will be equal to the number of Fund XXXXXXXXXX outstanding immediately before the reorganization. No XXXXXXXXXX will be cancelled or redeemed and the Fund Unitholders will not receive, and shall not be entitled to receive, any proceeds of disposition as a consequence of this consolidation.

38. Following the transactions described in paragraphs 32 through 37, but prior to the winding-up of Trust B described in paragraph 40, Trust B will jointly elect with the Fund, in prescribed form and within the prescribed time in paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2), to have the rules in section 132.2 apply to the proposed transactions described in paragraphs 32 to 36.

39. Trust B will not be wound-up but will continue to exist, at least until the later of the last day on which the election under paragraph 132.2(2)(c) referred to in paragraph 38 and the election under subsection 132(6.1) described in paragraph 30 can be filed.

40. After the elections described in paragraph 39 have been filed, Trust B will be wound up. The one Trust B Unit held by the Fund will be cancelled for no consideration.

41. A meeting of Fund Unitholders will be held prior to the implementation of the proposed transactions to approve the proposed reorganization of the Fund by way of special resolution.

Purpose of the Proposed Transactions

42. The proposed transactions are intended to modify the current structure of the Fund to ensure that the Fund will satisfy the definition of "real estate investment trust" in subsection 122.1(1) of the Act before January 1, 2008, such that the Fund will not be subject to the SIFT Rules after December 31, 2007. Since it is unclear whether the Fund would satisfy the "real estate investment trust" definition if it maintains its current structure, the Fund believes that the elimination of Trust A is necessary in order to remove any uncertainty regarding the status of the Fund as a "real estate investment trust".

Rulings 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 transfer of the Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt by Trust A to Trust B will be a "qualifying disposition" within the meaning of subsection 107.4(1), such that the rules in subsection 107.4(3) will apply to Trust A and Trust B in respect of such transfers.

B. Provided that:

a) each of Trust B and the Fund is a mutual fund trust within the meaning of subsection 132(6) at the Transfer Time;

b) the property transferred by Trust B to the Fund has an aggregate fair market value equal to at least XXXXXXXXXX % of the fair market value of all property owned by Trust B at the Transfer Time; and

c) Trust B and the Fund jointly elect, in prescribed form within the prescribed time in paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2),

the transactions described in paragraphs 32 to 36 will constitute a "qualifying exchange" such that the rules in subsection 132.2(1) will apply to such transactions.

C. Fund will not be considered to have exceeded the Normal Growth Guidelines solely by reason of the transactions described in this ruling such that Fund will not be subject to the SIFT Rules solely as a result of such proposed transactions. For greater certainty, and in accordance with the Normal Growth Guidelines, the reorganization of the Fund described herein will not be considered growth because there will be no net addition to the equity of the Fund as a result of such proposed transactions.

D. Subsection 245(2) will not be applied to redetermine any of the tax consequences confirmed in rulings given above solely as a result of the transactions described herein.

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, we express no opinion with respect to:

? whether the Fund or Trust B qualify as mutual fund trusts within the meaning of subsection 132(6) at any particular time;

? the tax consequences related to the consolidation of units as described in paragraph 37; or

? any aspect of the Simplifying Transactions.

The above rulings are given 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. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

Bill C-33, which received first reading in the Senate on June 18, 2007, proposes to introduce several substantive improvements to the rules in section 132.2 and to restructure the provision as a whole. In addition, we understand that the Department of Finance issued a letter dated February 14, 2006 (the "Comfort Letter"), indicating that it was prepared to recommend further amendments to the Minister of Finance in respect of section 132.2 to clarify that the time period in which the proceeds of disposition of units of the transferee or shares of the transferor would be determined under proposed paragraph 132.2(3)(f) or (g) includes the time that is immediately after the "transfer time" as that term is defined in the proposed amendments to subsection 132.2(1). Provided that paragraphs 132.2(3)(f) and (g) are amended in the manner suggested in the Comfort Letter and the conditions set out in ruling B are met in respect of the proposed transactions, it is our view that the proposed transactions described in paragraphs 32 to 36 would qualify as a qualifying exchange within the meaning of proposed subsection 132.2(1).

Likewise, provided that the amendments to section 107.4 as set out in Bill C-33 are enacted in substantially the same form as proposed, it is also our opinion that the transfer of the Partnership Units, XXXXXXXXXX and XXXXXXXXXX Debt by Trust A to Trust B will be a "qualifying disposition" within the meaning of subsection 107.4(1), such that the rules in subsection 107.4(3) will apply to Trust A and Trust B in respect of such transfers.

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