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 issuance of new classes of US dollar units and hedged units of a mutual fund trust would result in (1) a disposition by the existing unitholders of their units, (2) a disposition by the Fund of its assets, (3) the application of 104(7.1).
Position: (1) no (2) no (3) no
Reasons: (1) No cash consideration or other proceeds of disposition will be received by the existing unitholders - moreover the changes to issue a new series is not viewed as sufficiently material to take the view that the units after the issuance are 'new' units. (2) The changes to issue a new series of units are not so extensive so as to result in a resettlement of the fund and it is submitted that there will be no legal resettlement as a matter of provincial law. (3) Consistent with previous rulings given, especially in light of the uncertainty of foreign exchange fluctuations.
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (collectively, the "Taxpayers")
This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-named Taxpayers. 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 Taxpayers, none of the issues involved in the ruling request is:
(i) in an earlier tax return of the Taxpayers 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 Taxpayers or a related person;
(iii) under objection by the Taxpayers or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Directorate to the Taxpayers 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 referred to throughout this document will have the following meaning:
"CRA" means the Canada Revenue Agency;
"Fund 1" means XXXXXXXXXX ;
"Fund 2" means XXXXXXXXXX ;
"Fund 3" means the XXXXXXXXXX ;
"Fund" means each individual fund of Fund 1, Fund 2 and Fund 3, as itemized in Appendix A;
"Funds" means each of the Funds in Fund 1, Fund 2 and Fund 3, collectively;
"Hedge Contracts" means the foreign currency forward contracts which the Manager intends to use to hedge the particular Funds against changes in the Canadian dollar relative to other foreign currency with respect to the proposed new Series USD and Hedged Series;
"Hedged Series" means a new Series of any Fund as described in 15 and 16 herein;
"Hedged Unitholder" means the holder of a Hedged Unit;
"Hedged Unit" means an equity interest of the Hedged Series in any Fund, with such designation, rights, privileges, restrictions and conditions attached thereto as determined by the Trustee and which are issued from time to time in accordance with the provisions of the Master Declaration of Trust;
"Manager" means XXXXXXXXXX ;
"Master Declaration of Trust" means the amended and restated Declaration of Trust of Fund 1, Fund 2 and Fund 3 dated XXXXXXXXXX ;
"Net Asset Value of a Fund" or "Net Asset Value of a Series" at the Valuation Time shall equal the fair value of the property of the Fund or Series less an amount equal to the total expenses and liabilities of the Fund or Series as of that Valuation Time;
"Net Asset Value per unit of a Fund" or "Net Asset Value per unit of a Series" at the Valuation Time shall be determined by dividing the Net Asset Value of a Fund or Series by the total number of outstanding units of such Fund or Series at the particular time;
"Proposed Transactions" means the proposed transactions described in 12 to 20 herein;
"Series" of a Fund means the division of Units of the Fund into various categories as authorized by the Trustee;
"Series USD" means a new Series of any Fund as described in 13 and 14 herein;
"Trustee" of the Funds means the duly appointed trustee under each trust indenture and is currently the Manager;
"TSX" means the Toronto Stock Exchange;
"Unit" means a unit interest in a Fund issued from time to time, and, for greater certainty, does not include a Hedged Unit or a USD Unit;
"USD Unit" means an equity interest of Series USD of any Fund, with such designation, rights, privileges, restrictions and conditions attached thereto as determined by the Trustee and which are issued from time to time in accordance with the provisions of the Master Declaration of Trust;
"USD Unitholder" means a holder of USD Units;
"Unitholder" means a holder of Units;
"Valuation Date" means each day on which there is a regular trading session of the TSX; and
"Valuation Time" means the particular time on a Valuation Date at which the Trustee or an accounting agent appointed by the Trustee determines the Net Asset Value of a Fund or the Net Asset Value of a Series, as prescribed from time to time by the Trustee.
The relevant Taxation Services Office for XXXXXXXXXX is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX . The relevant Taxation Services Office for the Funds is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX .
Our understanding of the facts, the Proposed Transactions, and the purpose of the Proposed Transactions is as follows:
1. Each Fund has qualified at all relevant times as a "unit trust" as defined in subsection 108(2) and as a "mutual fund trust" as defined in subsection 132(6).
2. Each Fund is a separate trust governed by the Master Declaration of Trust.
3. Article XXXXXXXXXX of the Master Declaration of Trust provides that the beneficial interest in each Fund shall be divided into equal interests referred to as whole Units, and fractions thereof. Each outstanding Unit shall participate pro rata in any distributions made by the applicable Fund (except with respect to management fee distributions within certain Funds).
4. Each Fund may issue an unlimited number of Units which represents an equal and rateable undivided share of the assets of a Fund, without distinction, preference or priority (except with respect to management fee distributions within certain Funds).
5. Article XXXXXXXXXX of the Master Declaration of Trust provides that the Trustee may divide the Units of a Fund into two or more Series, provided all Units of a Fund are identical to all other Units of a Fund, except that there may be certain variations between the different Series with respect to allocation of expenses, right of redemption, special and relative rights as to distributions and on liquidation, conversion rights, and conditions under which each Series shall have separate voting rights, are permissible.
6. For greater certainty, article XXXXXXXXXX of the Master Declaration of Trust further provides that where a Series has identifiable expenses that should be properly allocated to the particular Series to the exclusion of others, those expenses may be charged to and borne solely by such Series. The bearing of expenses solely by a Series may be appropriately reflected in a manner determined by the Trustee which may cause differences in the Net Asset Value of a Series, relative to other Series of the Fund, and the distribution, redemption and liquidation rights of, the Units of such Series.
7. However, where Units of a Fund are divided into more than one Series, no Series of the Fund may, in a particular taxation year, have either a loss, computed in accordance with the provisions of the Act, or net capital loss, when another Series has net income or net capital gains in that particular taxation year.
8. Pursuant to article XXXXXXXXXX and XXXXXXXXXX of the Master Declaration of Trust respectively, each Fund is required to declare as due and payable to Unitholders by the end of each taxation year of the Fund, an amount equal to the sum of the net income of the Fund computed in accordance with the provisions of the Act regarding the calculation of income of a trust (without including any net capital gains) and the net realized capital gains of the Fund after taking into account any adjustments as determined by the Trustee.
9. Distributions may be made in a currency determined by the Trustee.
10. The Net Asset Value per unit of a Fund or Net Asset Value per unit of a Series is calculated in Canadian dollars.
11. There is currently no foreign currency hedging in any particular Fund.
12. In accordance with article XXXXXXXXXX of the Master Declaration of Trust, each Fund will establish and designate two additional Series of Units, namely Series USD and the Hedged Series.
13. Series USD is intended for those investors who have US dollar holdings which they intend to invest in a Canadian mutual fund trust denominated in Canadian dollars on a currency neutral basis so as to isolate the performance of the underlying assets of the relevant Fund from fluctuations in the US dollar relative to the Canadian dollar.
14. Attributes of Series USD will include the following:
a. investors in Series USD pay the subscription price in US dollars and receive Fund distributions and redemption proceeds in US dollars;
b. distributions of net income and net realized capital gains of the Fund payable to USD Unitholders will be determined in the same manner as distributions to Unitholders, however, as outlined in 6 herein, specific expenses in respect of the Fund's Hedge Contracts will be allocated solely within Series USD; and
c. the net asset value of each USD Unit will be computed in the same manner as the Net Asset Value per unit of a Series, except that the net asset value of Series USD otherwise determined will be adjusted by the value of any Hedge Contracts held by the Fund in respect of Series USD.
15. The Hedged Series is intended for those investors who have Canadian dollar holdings which they intend to invest indirectly in foreign currency securities on a currency neutral basis so as to isolate the performance of the underlying assets of the relevant Fund from fluctuations in the Canadian dollar relative to the relevant foreign currency.
16. Attributes of the Hedged Series will include the following:
a. distributions of net income and net realized capital gains of the Fund payable to Hedged Unitholders will be determined in the same manner as distributions to Unitholders, however, as outlined in 6 herein, specific expenses in respect of the Fund's Hedge Contracts will be allocated solely within the Hedged Series; and
b. the net asset value of each Hedged Unit will be computed in the same manner as the Net Asset Value per unit of a Series, except that the net asset value of the Hedged Series otherwise determined will be adjusted by the value of any Hedge Contracts held by the Fund in respect of the Hedged Series.
17. Existing Unitholders will not receive any financial compensation or proceeds of any kind whatever, as consideration for the issuance of USD Units or Hedged Units; nor will Units be redeemed or cancelled as a result of the issuance of units of either Series USD or the Hedged Series.
18. Unitholders will not be able to convert or exchange Units from an existing Series to either Series USD or the Hedged Series, and vice versa.
19. Unitholders will continue to receive their undivided pro-rata share of distributions of a particular Fund calculated before the effects of the Hedge Contracts. The costs or benefits sustained from the Hedge Contracts will only be allocated to those investors who hold either Series USD or the Hedged Series.
20. For greater certainty, however, losses, if any, from the Hedge Contracts will first be allocated against income attributable to either Series USD or the Hedged Series and in circumstances where losses exceed such income, the losses will then be applied against income of all other Series within the Fund, consistent with article XXXXXXXXXX of the Master Declaration of Trust.
PURPOSE OF THE PROPOSED TRANSACTIONS
21. The purpose of the Proposed Transactions is to enable the Funds to offer a new Series to investors who wish to invest in the Funds but on the basis that their investment return is,
a. in the case of Series USD, the Canadian market return neutral to fluctuations in the US dollar compared to the Canadian dollar; and
b. in the case of the Hedged Series, the foreign market return neutral to fluctuations in the Canadian dollar compared to the relevant foreign currency.
22. The constating documents for each Fund, including its Simplified Prospectus and Annual Information Form, describe it as having a currency neutral strategy pursuant to which it intends to maintain an effective hedge between its investments and a particular currency to isolate the real rate of return of the investment from the specified currency fluctuation.
23. The currency neutral hedge involves purchasing currency forward contracts for a specified currency with a significant correlation or linkage between the currency forward contracts and the securities that are being hedged.
24. Each Fund will consistently maintain the hedge. The proportion hedged will be constant. As each contract terminates, it will be replaced with another similar contract for the next period (subject to fluctuations in the value of the Fund's securities and any dispositions and acquisitions in the period).
25. A hedge will be maintained regardless of the strength of the reference currency against the protected currency. Thus, protection will be achieved against both appreciation and depreciation of the relevant currencies to each other.
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 execution by the Trustee of an instrument in order to establish and designate Series USD in respect of a Fund, as described in article XXXXXXXXXX of the Master Declaration of Trust, will not result, in and by itself, in a disposition by any Unitholder of all or part of his, her or its beneficial interest in the Fund provided the rights, privileges, restrictions and conditions attaching to Series USD are based on current market conditions at the time of the offering.
B. The execution by the Trustee of an instrument in order to establish and designate the Hedged Series in respect of a Fund, as described in article XXXXXXXXXX of the Master Declaration of Trust, will not result, in and by itself, in a disposition by any Unitholder of all or part of his, her or its beneficial interest in the Fund provided the rights, privileges, restrictions and conditions attaching to the Hedged Series are based on current market conditions at the time of the offering.
C. The execution by the Trustee of instruments in order to establish and designate Series USD and the Hedged Series described herein will not, in and by themselves, result in a disposition by the Funds of their property or in a resettlement of the Funds for purposes of the Act.
D. The implementation of the Proposed Transactions will not, in and by themselves, cause subsection 104(7.1) to deny the deduction by Fund of any amount it is otherwise entitled to deduct under paragraph 104(6)(b) in respect of amounts paid or payable to its Unitholders, USD Unitholders and its Hedged Unitholders.
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) whether any specific changes or amendments to the Master Declaration of Trust before the present time would impact on the specific rulings given;
(b) the potential tax consequences should a Unitholder reclassify or exchange a Unit for a USD Unit or a Hedged Unit; however, in this regard, it is our preliminary view that at the time of reclassification or an exchange of said Unit, or vice versa, the event would likely result in a taxable disposition;
(c) whether any Fund is, at any particular time, a mutual fund trust within the meaning of subsection 132(6) or a unit trust within the meaning of subsection 108(2) of the Act;
(d) whether there has been a legal resettlement of any trust under provincial law;
(e) whether the attributes associated with Series USD and the Hedged Series represent current market conditions; and
(f) the potential tax consequences associated with the hedging arrangements described in the Additional Information in 22 to 25 herein and more specifically, whether these arrangements represent hedging for income tax purposes.
Further to item (f) above, nothing in this advance income tax ruling should be construed as implying that we are confirming any income tax implications related to the recognition of any currency hedge gain or loss in any particular period and in particular, whether the resulting currency hedge gain or loss is on account of income or capital for tax purposes.
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
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Name of Fund
Tax Account Number
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