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 the variation of a trust indenture to ensure compliance with the new International Financial Reporting Standards would result in (1) a disposition by the trust of its assets or in a resettlement of the trust, (2) a disposition by the existing unitholders of their units, (3) the application of GAAR.
Position: (1) no (2) no (3) no
Reasons: The amendments to the trust indenture are not substantial - previous rulings on this similar issue.
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX) and your subsequent submissions of XXXXXXXXXX .
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier tax return of the taxpayer or a related person;
(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts or,
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to 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 definitions unless otherwise indicated.
The following terms and taxpayers referred to throughout this document will have the following meaning:
"Administrator" means, pursuant to XXXXXXXXXX of the Declaration of Trust, XXXXXXXXXX , a wholly-owned subsidiary corporation of Corp;
"affiliated persons" has the meaning assigned by subsection 251.1(1) of the Act;
"Amendments" means the proposed modifications to the Declaration of Trust described in 10 herein;
"capital gains" has the meaning assigned by section 39 of the Act;
"capital losses" has the meaning assigned by section 39 of the Act;
"Corp" means XXXXXXXXXX , a taxable Canadian corporation and a public corporation that is governed by the Canada Business Corporations Act;
"CRA" means the Canada Revenue Agency;
"Declaration of Trust" means the declaration of trust dated XXXXXXXXXX , pursuant to which Trust was established and is governed;
"designated stock exchange" has the meaning assigned by subsection 248(1) of the Act;
"Distributable Cash Flow" means, pursuant to XXXXXXXXXX of the Declaration of Trust, an amount equal to all cash amounts received by Trust (including interest, income, dividends, return of capital, amounts paid on the Trust 2 Common Units and/or Trust 2 Notes) plus any amounts allocated from the Reserve Amount for use by Trust less all liabilities of Trust (including any tax liability), cash amounts used in respect of a Trust Unit redemption, all amounts which relate to the repayment of indebtedness, and any reasonable Reserve Amount;
"GAAP" means generally accepted accounting standards;
"IFRS" means international financial reporting standards;
"Income of Trust" for any year means, pursuant to XXXXXXXXXX of the Declaration of Trust, the income of Trust computed in accordance with the Act; provided that capital gains and capital losses shall be excluded and provided that taxable dividends received from corporations resident in Canada shall be calculated on the basis that the amount included in Trust's income is the actual dividend received, no amount shall be deducted in respect of amounts paid or payable to Unitholders and Trust shall deduct the maximum amount available to it as deductions under the relevant law;
"mutual fund trust" has the meaning assigned by subsection 132(6) of the Act;
"Net Realized Capital Gains" for any year means, pursuant to XXXXXXXXXX of the Declaration of Trust, the amount by which the aggregate of capital gains of Trust in the year exceeds the aggregate of capital losses of Trust in the year and the amount of any net capital losses for prior years which Trust is permitted to deduct in computing its taxable income for the year;
"Ordinary Units" means, pursuant to XXXXXXXXXX of the Declaration of Trust, the beneficial interest in Trust designated as "Ordinary Units" having the rights, privileges, restrictions and conditions thereon as described in 4 herein;
"public corporation" has the meaning assigned by subsection 89(1) of the Act;
"Reserve Amount" means, pursuant to XXXXXXXXXX of the Declaration of Trust, any amount as determined in the discretion of the Administrator, for reasonable reserves to be maintained by Trust in connection with pursuing any purpose or activity of Trust and which is not inconsistent with the Declaration of Trust and the purpose of Trust;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"Trust" means XXXXXXXXXX , an unincorporated open-ended mutual fund trust formed under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;
"Trustee" means XXXXXXXXXX , a trust company existing under the laws of Canada and having an office in XXXXXXXXXX , and any successor thereof in its capacity as Trustee of Trust;
"Trust 2" means XXXXXXXXXX , an unincorporated open-ended trust formed under the laws of the Province of XXXXXXXXXX pursuant to the Trust 2 Declaration of Trust;
"Trust 2 Common Units" mean the beneficial interest in Trust 2 designated as "Common Units" pursuant to the Trust 2 Declaration of Trust;
"Trust 2 Declaration of Trust" means the declaration of trust dated XXXXXXXXXX , pursuant to which Trust 2 was established and is governed;
"Trust 2 Notes" means unsecured interest-bearing promissory notes issued by Trust 2 to Trust, from time to time. As of the date hereof, the aggregate principal amount outstanding and owed to Trust is approximately $XXXXXXXXXX ;
"Trust 2 XXXXXXXXXX Units" means the beneficial interest in Trust 2 designated as "XXXXXXXXXX Units" pursuant to the Trust 2 Declaration of Trust;
"Trust Unit" means either an Ordinary Unit or a XXXXXXXXXX Unit of Trust; and
"Unitholder(s)" means a registered holder of one or more Trust Units.
Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions is as follows:
1. Trust is a mutual fund trust having a XXXXXXXXXX taxation year end for purposes of the Act. It was established pursuant to the Declaration of Trust for the principal purpose of investing in securities of affiliated persons. It was not established nor is it currently maintained for the benefit of non-resident persons.
2. The head office of Trust is located at XXXXXXXXXX , and it deals with the XXXXXXXXXX Tax Services Office and files its returns at XXXXXXXXXX .
4. XXXXXXXXXX of the Declaration of Trust provides that the Trust Units are equal in all respects, without discrimination, preference or priority, XXXXXXXXXX . The rights, privileges, restrictions and conditions pertaining to the Trust Units are summarized as follows:
(a) Unitholders are entitled to receive notice of and to vote at all annual and special meetings of Unitholders. Each Unit entitles its holder to one vote;
(b) Unitholders are entitled to concurrently receive non-cumulative distributions as and when declared by the Trustee, in accordance with XXXXXXXXXX of the Declaration of Trust;
(c) In the event of liquidation, dissolution, or winding-up of Trust the Unitholders shall participate equally and rateably in the distribution. Such distribution shall be made in equal amounts per Trust Unit outstanding at the time; and
(d) Each Unitholder is entitled to require Trust to redeem at any time and from time to time, all or any part of the Trust Units registered in the name of the holder at a price determined in accordance with the XXXXXXXXXX of the Declaration of Trust.
5. The Ordinary Units are traded on the XXXXXXXXXX and are widely held by the public. As of the date hereof, there are XXXXXXXXXX Ordinary Units issued and outstanding. XXXXXXXXXX
6. Trust 2 owns, directly and indirectly, debt and equity securities of partnerships and corporations and, pursuant to the Trust 2 Declaration of Trust, it is represented and constituted by two classes of units, Trust 2 Common Units and the Trust 2 XXXXXXXXXX Units. Trust owns all of the issued and outstanding Trust 2 Common Units.
7. All or substantially all of the assets of Trust consist of Trust 2 Common Units, Trust 2 Notes and cash.
8. Specific provisions of the Declaration of Trust relevant to this particular ruling request include:
(a) XXXXXXXXXX which states that the Administrator may deduct from Distributable Cash Flow, a reasonable Reserve Amount which is to be maintained by Trust in connection with pursuing any purpose or activity of Trust, provided it is not inconsistent with the intention of the Declaration of Trust;
(b) XXXXXXXXXX which requires the Trustee to make payable to the Unitholders the Income of Trust, Net Realized Capital Gains and any other applicable amounts so that Trust will not have any liability for tax under the Act, adjusted as required by that paragraph of the Declaration of Trust. For greater certainty, this amount is currently required to be paid to each Unitholder of record on the last distribution date in a particular year, pursuant to the Declaration of Trust, and provides no discretion to the Trustee in this regard; and
(c) XXXXXXXXXX sets out the circumstances in which the Trustee may amend the Declaration of Trust without consent, approval or ratification of the Unitholders. These circumstances include situations where the changes are felt by the Trustee, to be necessary and desirable in the interests of the Unitholders as a result of changes in tax laws, or in their interpretation or administration.
9. The Declaration of Trust will be amended in the manner described in 10 below but it is submitted that the Amendments will not result in a resettlement of Trust or the creation of a new trust under the laws of the Province of XXXXXXXXXX .
10. The following three Amendments are proposed:
(a) XXXXXXXXXX and the definition of Distributable Cash Flow will be amended to provide that the Administrator will have absolute discretion to determine the Reserve Amount for purposes of calculating the Distributable Cash Flow of Trust in respect of a particular distribution period. For greater certainty, this Amendment will allow any Reserve Amount to be deducted in determining Distributable Cash Flow by the Administrator;
(b) XXXXXXXXXX will be amended to provide the Trustee with discretion as to whether the Income of Trust, as determined by that paragraph, will be payable in whole or in part to the Unitholders in the particular period; and
(c) XXXXXXXXXX will be amended to provide the Trustee with the authority to amend the Declaration of Trust without Unitholder consent, approval or ratification, not only as a result of changes in tax law, but also to include changes with respect to ensuring compliance with the IFRS or any changes to GAAP.
11. For greater certainty, where the Administrator or the Trustee exercises the discretion provided to it by the Amendments described in 10(a) and 10(b) above, the entitlement of a particular Unitholder to his, her or its pro-rata portion will not change in relation to the entitlement of any other Unitholder. Unitholders will be entitled to a pro-rata portion of any distribution of Income of Trust and of any amount retained by Trust, if and when such amount is ultimately distributed by Trust to the Unitholders.
12. Pursuant to XXXXXXXXXX of the Declaration of Trust, Unitholders must consent to the Amendments if the changes are to be made. It is expected that the Unitholders will provide their written consent to the Amendments by way of special resolution, as defined in XXXXXXXXXX of the Declaration of Trust.
13. Trust is also planning to undertake a transaction whereby all of the holders of Ordinary Units will transfer their interest to a newly formed taxable Canadian corporation ("Newco") in exchange for common shares of Newco (the "Conversion Transaction"). Corp will also transfer approximately XXXXXXXXXX % of its Subordinated Units for shares of Newco. Newco will be listed on the XXXXXXXXXX .
14. As a result of the Conversion Transaction, as described in 13 above, the following further amendments will be required to the Declaration of Trust to address the fact that:
(a) The Ordinary Units will no longer be listed on a designated stock exchange;
(b) Trust will no longer qualify as a mutual fund trust for purposes of the Act;
(c) Income distributions of Trust will be changed from XXXXXXXXXX distributions to XXXXXXXXXX distributions; and
(d) Unitholders of Trust will be granted a pre-emptive right to acquire additional Trust Units, should this opportunity arise.
15. It is anticipated that the Conversion Transaction will be undertaken in XXXXXXXXXX .
16. It is intended that Trust will continue to exist and not be terminated as a result of the Conversion Transaction. As a consequence of the Conversion Transaction, it is intended that Corp and Newco will be the only Unitholders of Trust.
17. It is submitted that the Conversion Transaction will be entirely independent of the Proposed Transactions. For greater certainty, Trust will undertake the Amendments whether or not the Conversion Transaction is completed.
PURPOSE OF THE PROPOSED TRANSACTIONS
The Amendments are being made solely to allow Trust to accommodate certain changes in accounting treatment arising from the implementation of IFRS on January 1, 2011. Currently, under Canadian GAAP, Trust accounts for its Trust Units as equity; however, under IFRS, the Trust Units may be regarded as liabilities or debt instruments of Trust. To ensure the financial statements of Trust are not materially affected upon the adoption of IFRS, the Amendments are being made to maintain the equity treatment of Trust Units by Trust.
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, in particular that the Unitholders' entitlements to income and capital are equivalent in all respects, as described in 11 above, and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:
A. The Amendments, as described in 10 above, will not, in and by themselves, result in a disposition by Trust of its property or in a resettlement of Trust for purposes of the Act.
B. Neither the Amendments, nor the Unitholders' consent to the Amendments will, in and by themselves, result in a disposition by any Unitholder of all or part of his, her or its beneficial interest in Trust.
C. Subsection 245(2) of the Act will not apply to the Amendments, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.
For greater certainty, this advance income tax ruling shall not be binding on the CRA if it should be determined that the Proposed Transactions described in 9 to 12 herein and the Conversion Transaction constitute a single series of transactions.
Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not considered, confirmed or made any determination in respect of:
(a) any income tax considerations associated with the Conversion Transaction, as described in 13 above;
(b) whether the Amendments will result in the creation of a new trust under the laws of the Province of XXXXXXXXXX ;
(c) whether Trust is, at any particular time, a mutual fund trust within the meaning of subsection 132(6) of the Act; and
(d) the appropriate characterization of the Trust Units under GAAP or IFRS.
The above advance income tax rulings, which are based on the Act and Income Tax Regulations to the Act in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed within six months of the date of this letter.
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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