2010 Ruling 2010-0361771R3 - Variation of trust indenture

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 create and issue a new class of preferred units of a mutual fund trust 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 104(7.1).

Position: (1) no (2) no (3) no

Reasons: (1) The changes are not so extensive so as to result in a resettlement of the trust and it is submitted that there will be no resettlement as a matter of provincial law. (2) No cash consideration or other proceeds of disposition will be received by the unitholders in respect of the diminishment of their rights as a consequence of the amendments. Moreover, the changes to the trust deed in this case, as a whole are not viewed as sufficiently material to take the position that the amended units would be proceeds of disposition. (3) Consistent with previous rulings on this similar issue.

XXXXXXXXXX
				2010-036177

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

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 except as expressly referred to herein, and any references thereto are otherwise 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:

"CRA" means the Canada Revenue Agency;

"Debentures" means the following debentures outstanding at XXXXXXXXXX of Trust:

XXXXXXXXXX

"Declaration of Trust" means the declaration of trust pursuant to which Trust was formed under the laws of the Province of XXXXXXXXXX , most recently amended and restated on XXXXXXXXXX , as may be amended, supplemented and/or restated from time to time;

"Deferred Plans" means trusts governed by any of the following plans: registered retirement savings plans, registered education savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans or tax-free savings accounts;

"Equity Interests" means the Units and/or the Preferred Units;

"mutual fund trust" has the meaning assigned by subsection 132(6);

"Preferred Unit" means a preferred equity interest of any series in Trust as more particularly described in 10(c) herein, with such designation, rights, privileges, restrictions and conditions attached thereto as determined by the Trustees and which are issued from time to time in accordance with the provisions of the Declaration of Trust;

"Preferred Unitholder" means a holder of Preferred Units;

"qualified investment" has the meaning assigned by subsection 146(1) in respect of a registered retirement savings plan, by subsection 146.1(1) in respect of a registered education savings plan, by subsection 146.3(1) in respect of a registered retirement income fund, by section 204 in respect of a deferred profit sharing plan, by subsection 205(1) in respect of a registered disability savings plan and by subsection 207.01(1) in respect of a tax-free savings account;

"real estate investment trust" has the meaning assigned in subsection 122.1(1);

"REIT" means a real estate investment trust;

XXXXXXXXXX

"Series A Preferred Unit" means the initial series of Preferred Units described in 12 and 13 herein that will be offered to the public, in respect of which the Trustees will determine the number to be issued, the subscription price thereof, and the specific rights, privileges, restrictions and conditions attaching to each Preferred Unit within this series;

"Series B Preferred Unit" means the second series of Preferred Units described in 14 herein, to be authorized in connection with the initial issuance of the Series A Preferred Units. The Trustees will determine the number to be issued, the subscription price thereof, and the specific rights, privileges, restrictions and conditions attaching to each Preferred Unit within this series;

"SIFT trust" has the meaning assigned by subsection 122.1(1);

"Trustees" means the individuals that act as trustees of Trust in accordance with and subject to the provisions of the Declaration of Trust, and which as of the date hereof consist of XXXXXXXXXX Canadian resident individuals;

"Trust" means XXXXXXXXXX , a trust established under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;

"Trust Amendments" means only those proposed modifications to the Declaration of Trust as described in 10 herein and, for greater certainty, includes the terms set out in the "Certificate of Preferred Unit Terms", described in 12 herein;

"XXXXXXXXXX " means the XXXXXXXXXX Stock Exchange;

"Unit" means a unit interest in Trust issued from time to time, as more particularly described in 6 herein (and, for greater certainty, does not include a Preferred Unit); and

"Unitholder" means a holder of Units.

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

FACTS

1. Trust is an unincorporated closed-end mutual fund trust constituted in accordance with the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust.

2. Trust is governed by a board of trustees, consisting of the Trustees, which hold in trust the Trust property and conduct and manage the affairs of Trust in accordance with, and subject to, the terms of the Declaration of Trust.

3. Trust was established for the principal purpose of investing in XXXXXXXXXX .

4. The head office of Trust is located at XXXXXXXXXX , and it is located within the area served by the XXXXXXXXXX Tax Services Office.

5. Pursuant to Article XXXXXXXXXX of the Declaration of Trust, the beneficial interests in Trust are currently represented and constituted by Units. Units are currently traded on the XXXXXXXXXX and are widely held by the public. As of XXXXXXXXXX there were XXXXXXXXXX Units issued and outstanding. Trust has also issued the Debentures.

6. The Declaration of Trust sets out the rights, privileges, restrictions and conditions pertaining to the Units including:

a. The right to receive notice of and to vote at all annual and special meetings of Unitholders. Each Unit entitles its holder to one vote;

b. The right to participate equally and rateably in any distributions made by Trust; and

c. In the event of the termination of Trust, the right to participate equally and rateably in the distribution of the net assets of Trust following the discharge of all of the liabilities of Trust.

7. The Units are qualified investments for Deferred Plans.

8. Pursuant to Article XXXXXXXXXX of the Declaration of Trust, the Trustees are permitted to create and issue rights, warrants or options to subscribe for fully paid Units which rights, warrants or options may be exercisable, as the case may be, into Units at such prices and at such time or times as the Trustees may determine.

PROPOSED TRANSACTIONS

9. The Declaration of Trust will be amended in the manner described in 10 herein. The Trust 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 Declaration of Trust will be amended as follows:

a. Article XXXXXXXXXX of the Declaration of Trust will be amended to create a new class of units described and designated as Preferred Units. Specifically, Article XXXXXXXXXX of the Declaration of Trust will be amended to describe the beneficial interests in Trust as two classes of units, described and designated as Units and Preferred Units, which shall be entitled to the rights and subject to the limitations, restrictions and conditions set out in the Declaration of Trust and the interest of each Unitholder and Preferred Unitholder shall be determined by the number of Equity Interests registered in the name of the Unitholder and Preferred Unitholder, respectively. The number of Preferred Units which Trust may issue is limited to XXXXXXXXXX .

b. Article XXXXXXXXXX of the Declaration of Trust will be amended to provide that the right of Unitholders to participate in distributions made by Trust and, in the event of the termination of Trust, to participate in the net worth of Trust remaining after the satisfaction of the rights of the Preferred Unitholders, will in both instances be subject to the prior rights of holders of Preferred Units.

c. Article XXXXXXXXXX will be added to the Declaration of Trust to describe the attributes of the Preferred Units as follows:

i. the Preferred Units may, from time to time, be issued in one or more series, and the Trustees may fix from time to time before such issue the number of Preferred Units which is to comprise each series and the designation, rights, privileges, restrictions and conditions attaching to each series of Preferred Units including, without limiting the generality of the foregoing, any voting rights, the rate or amount of distributions (which may be cumulative or non-cumulative and variable or fixed) or the method of calculating distributions, the dates of payment thereof, the terms and conditions of redemption, purchase and conversion, if any, any rights on the liquidation, dissolution or winding-up of Trust, and any sinking fund or other provisions;

ii. the Preferred Units of each series shall, with respect to the payment of distributions (other than distributions paid solely through the issuance of additional Units) and the distribution of assets of Trust or return of capital in the event of liquidation, dissolution or winding-up of Trust, whether voluntary or involuntary, or any other return of capital or distribution of assets of Trust among its Unitholders for the purpose of winding-up its affairs, be entitled to preference over the Units, and over any other Equity Interests of Trust ranking by their terms junior to the Preferred Units. The Preferred Units of any series may also be given such other preferences, not inconsistent with this Declaration of Trust, over the Units, and any other Equity Interests of Trust ranking by their terms junior to the Preferred Units, as may be fixed in accordance with (i) above; and

iii. if any cumulative distributions or amounts payable on the return of capital in respect of a series of Preferred Units are not paid in full, all series of Preferred Units of equal ranking shall participate rateably in respect of accumulated distributions and return of capital based on the accumulated distributions and return of capital of a series of Preferred Units as a proportion of the accumulated distributions and return of capital of all series of Preferred Units of equal ranking.

d. Article XXXXXXXXXX of the Declaration of Trust will also provide that the terms of a particular series of Preferred Units as fixed by the Trustees in accordance with the provisions set out above shall be set out in a certificate ("Certificate of Preferred Unit Terms") which shall be approved by the Trustees prior to the issue of such Preferred Units and, upon such approval, the Certificate of Preferred Unit Terms shall become a part of the Declaration of Trust.

e. For greater certainty, Article XXXXXXXXXX of the Declaration of Trust will also provide that, except as otherwise provided in the terms of a particular series of Preferred Units as fixed by the Trustees, neither the Units nor any series of Preferred Units shall have or be deemed to have any term, condition, right or other attribute which would provide any holder of either Units or Preferred Units of any series with an interest in the income of Trust as a percentage in any distribution received by that Unitholder that is greater or lesser than an interest in the income of Trust as a percentage of any distribution received by the holder of any other Units or Preferred Units of any series.

f. Article XXXXXXXXXX of the Declaration of Trust will be amended to contemplate that the form of certificate representing any series of Preferred Units shall be in such form as is from time to time authorized by the Trustees.

g. Article XXXXXXXXXX of the Declaration of Trust will be amended to provide that, except as otherwise provided in the terms of a particular series of Preferred Units as fixed by the Trustees, income and net taxable capital gains for purposes of the Act will be allocated to Unitholders and Preferred Unitholders in the same proportions as the distributions received by such holders.

h. Article XXXXXXXXXX of the Declaration of Trust will be amended to provide that distributions to the holders of Units are subject to the preferential entitlements of the holders of Preferred Units. Article XXXXXXXXXX of the Declaration of Trust is also amended to provide that Trust shall pay or declare payable to holders of Preferred Units of each series as may from time to time be issued and outstanding, and the holders of such Preferred Units will have a right to receive, such portion of the income of Trust as the Trustees have determined to distribute to such holders of Preferred Units as prescribed by the rights, privileges, restrictions and conditions established by the Trustees on the creation of such series of Preferred Units. For so long as any Preferred Units remain issued and outstanding, Trust shall not pay or declare payable any amount to holders of Units (other than amounts that are paid solely through the issuance of additional Units) unless and until the distribution entitlements of the Preferred Units have been paid in full.

i. Article XXXXXXXXXX of the Declaration of Trust will be amended to provide that, in the event of the termination of Trust, the net assets of Trust shall be liquidated and (after the liabilities of the Trust have been discharged), the proceeds distributed to Preferred Unitholders in accordance with the rights, privileges, restrictions and conditions attached to the Preferred Units, with the remaining balance of the proceeds distributed proportionately to the holders of Units.

j. As a consequence of and in connection with the creation of the Preferred Units and the above noted amendments to the Declaration of Trust described in paragraphs (a) to (i) above, further consequential amendments will be made to the Declaration of Trust as follows:

i. The description of each of the following defined terms in Article XXXXXXXXXX of the Declaration of Trust: "Equity Interests", "indebtedness", "Preferred Unit", "Unit", and "Unitholder";

ii. The description of the Nature of Trust as described in Article XXXXXXXXXX of the Declaration of Trust to include a reference to the Preferred Units and to provide that distributions on Equity Interests will be in such amounts as declared by the Trustees;

iii. The addition of paragraph XXXXXXXXXX to Article XXXXXXXXXX of the Declaration of Trust to set out the scope of the Trustees' specific power and authority with respect to the Preferred Units;

iv. Modifications to Articles XXXXXXXXXX to clarify the voting entitlements associated with the Units and Preferred Units, as well as certain other voting matters related thereto;

v. Paragraph XXXXXXXXXX of Article XXXXXXXXXX of the Declaration of Trust will be added to provide that at no time may persons who are not resident in Canada be the beneficial owner of a majority of the outstanding Preferred Units and the Trustee shall inform the transfer agent of such restriction;

vi. Paragraph XXXXXXXXXX will be added to Article XXXXXXXXXX of the Declaration of Trust to clarify that paragraphs XXXXXXXXXX of Article XXXXXXXXXX shall apply mutatis mutandis to any series of Preferred Units that is subject to a take-over bid (whether or not the Preferred Units are voting securities or equity securities for purposes of the Securities Act); and

vii. Throughout the Declaration of Trust, references to an "interest" in Trust will be changed to "Equity Interest" and, where appropriate, references to "Units" will be changed to "Equity Interests" and references to "Unitholders" will be changed to "holders of Units".

k. The Declaration of Trust will also be amended at the same time for the following administrative type changes that are unrelated to the creation and issuance of the Preferred Units of Trust:

XXXXXXXXXX

11. The Trust Amendments have been authorized and approved by special resolution at a meeting of Unitholders held on XXXXXXXXXX . Following the receipt of this advance income tax ruling, the Trustees will execute or cause to be executed on behalf of Trust, an amended and restated Declaration of Trust implementing the Trust Amendments.

12. Following the implementation of the Trust Amendments, in connection with an initial offering of Series A Preferred Units, the Trustees will authorize the issuance of two series of Preferred Units, designated as Series A Preferred Units and Series B Preferred Units, the terms of which will be set out in a "Certificate of Preferred Unit Terms", as described in 10(d) above.

13. The rights, privileges, restrictions and conditions attaching to the Series A Preferred Units will be based on current market conditions at the time of the offering. The terms of the Series A Preferred Units will be set out in the Certificate of Preferred Unit Terms referred to in 12 above and shall provide that, without restricting the Trustees' discretion in respect of determining the rights, privileges, restrictions and conditions at the time of the issuance of the Preferred Units, the Series A Preferred Units may have the following attributes:

a. a subscription price of $XXXXXXXXXX per Series A Preferred Unit;

b. fixed, cumulative, preferential cash distributions payable quarterly at a fixed annual rate of return of between XXXXXXXXXX % and XXXXXXXXXX % (the rate will be reset on the fifth anniversary of the issue date to an amount equal to the interest rate payable on Government of Canada five year bonds at such time plus a specified percentage), such distributions to be paid in priority to any amounts being paid to the Unitholders (other than distributions paid solely through the issuance of additional Units);

c. a right by the holder on the fifth anniversary of issuance and on each fifth anniversary thereafter to exchange or reclassify any or all of the Series A Preferred Units held by such holder as an equal number of Series B Preferred Units, as described in 14 herein;

d. the right to be paid, upon the termination of Trust, an amount per Series A Preferred Unit equal to the subscription price of such unit plus any accumulated and unpaid distributions thereon, before any amount will be paid or any assets of Trust distributed to the Unitholders;

e. redeemable at the option of Trust on the fifth anniversary of issuance (and on each fifth anniversary thereafter) upon payment in cash of an amount equal to the subscription price of such unit plus any accumulated and unpaid distributions thereon;

f. no voting rights unless and until Trust has failed to pay distributions on the Series A Preferred Units for a specified number of distribution periods, whether or not consecutive, in which event the holders of Series A Preferred Units shall be entitled to one vote for each Series A Preferred Unit held for so long as such distributions remain in arrears; and

g. Trust's income and net taxable capital gains for purposes of the Act will be allocated to holders of Units and Preferred Units in the same proportions as the distributions received by such holders, XXXXXXXXXX .

14. The terms of the Series B Preferred Units will also be set out in the Certificate of Preferred Unit Terms referred to in 12 above and shall provide that the rights, privileges, restrictions and conditions attaching to each the Series B Preferred Units will be identical to the rights, privileges, restrictions and conditions attaching to the Series A Preferred Units except as set out below:

a. rather than an entitlement to receive preferential cash distributions based on a fixed rate, holders of Series B Preferred Units will be entitled to receive preferential cash distributions based on a floating rate equal to the 90-day Canadian treasury bill rate, plus a specified percentage;

b. on the fifth anniversary of the issuance of the Series A Preferred Units and on each fifth anniversary thereafter, a holder of Series A Preferred Units will have the right to exchange or reclassify any or all of the Series A Preferred Units held by such holder as an equal number of Series B Preferred Units; and

c. on each fifth anniversary of the issuance of the Series A Preferred Units (other than the initial fifth anniversary thereof), a holder of Series B Preferred Units will have the right to exchange or reclassify any or all of the Series B Preferred Units held by such holder as an equal number of Series A Preferred Units.

15. The Series A Preferred Units and Series B Preferred Units will rank on parity with each other with respect to the payment of distributions and the payment of any proceeds on a termination of the Trust.

16. The Series A Preferred Units will be qualified for listing on the XXXXXXXXXX, and will be sold to the public by way of prospectus. There is no anticipated minimum dollar investment required on the initial or subsequent offerings of the Preferred Units, except as may be required by securities law. No Series B Preferred Units will be issued in connection with the initial offering of Series A Preferred Units; however, if any Series A Preferred Units are exchanged or reclassified as Series B Preferred Units on the fifth anniversary date, such Series B Preferred Units may be listed on the XXXXXXXXXX .

17. It is anticipated that the proceeds from the offering of the Series A Preferred Units will be used to XXXXXXXXXX .

ADDITIONAL INFORMATION

18. Trust was a SIFT trust on XXXXXXXXXX , and has not subsequently issued new equity in excess of the amounts permitted under the normal growth guidelines.

19. Trust intends to qualify as a real estate investment trust commencing in XXXXXXXXXX .

PURPOSE OF THE PROPOSED TRANSACTIONS

20. The purpose of creating the Preferred Units is to access capital by means of creating a security that is marketable in current or future economic conditions. XXXXXXXXXX .

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. Neither the Trust Amendments, as described in 10 above, nor the Unitholders' consent to the Trust 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.

B. The issuance of the initial series of Preferred Units designated as Series A Preferred Units, as described in 12 above, will not result in a disposition by any Unitholder of all or part of his, her or its beneficial interest in Trust, provided the rights, privileges, restrictions and conditions attaching to the Series A Preferred Units are based on current market conditions at the time of the offering, as described in 13 above.

C. The Trust Amendments will not, in and by themselves, result in a disposition by Trust of its property or in a re-settlement of Trust for purposes of the Act.

D. Subsection 104(7.1) will not apply to deny the deduction by Trust of any amount it is otherwise entitled to deduct under paragraph 104(6)(b) in respect of amounts paid or payable to its Unitholders or to its holders of Series A Preferred Units.

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 XXXXXXXXXX , as described in 19 above;

(b) whether the Trust 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 or a SIFT trust within the meaning of subsection 122.1(1) of the Act;

(d) whether any issuance of new equity of Trust, as described in 12, 18 or otherwise, is or would be in excess of the normal growth guidelines for purposes of the section 122.1 of the Act;

(e) whether or not an interest in Trust will, at any time, be considered a qualified investment as that term is defined in the Act for purposes of any Deferred Plan; and

(f) whether the attributes relating to the Series A Preferred Units, as described in 13 above, represent current market conditions.

For greater certainty, Rulings A and B shall be binding on the CRA only if: (i) the only changes or amendments made to the Declaration of Trust at this time are the Trust Amendments as specifically described in 10 above, (ii) any subsequent changes or amendments, if any, to the Declaration of Trust as a consequence of XXXXXXXXXX described in 19 above, do not constitute a single series of transactions with the Proposed Transactions, and (iii) any subsequent changes or amendments, if any, to the Declaration of Trust do not constitute a single series of transactions with the Proposed Transactions. This determination falls within the authority of the Compliance Programs Branch of the CRA.

In addition, nothing in this advance income tax ruling should be construed as implying that we are confirming any income tax implications, other than the rulings given herein, related to the authorization or the issuance of the Series B Preferred Units and in particular, whether the reclassification or exchange of a Series A Preferred Unit or a Series B Preferred Unit at the fifth anniversary date or any date subsequent, would be a taxable disposition to the Preferred Unitholder at the time of the reclassification or exchange. In this regard, however, it is our preliminary view that at the time of reclassification or an exchange of the Preferred Unit from a Series A Preferred Unit to a Series B Preferred Unit, or vice versa, the event would likely result in a taxable disposition at that time.

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.

Yours truly,

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