17 October 2012 Ruling 2011-0428321R3 - qualifying disposition -mutual fund trust

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 transfer of portion of assets by a certain class of unitholders to a new Pooled fund result in a qualifying disposition?

Position: 1. Yes

Reasons: 1. all conditions are met

XXXXXXXXXX
2011-042832
XXXXXXXXXX

XXXXXXXXXX , 2012

Attention XXXXXXXXXX

Re: XXXXXXXXXX
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 you 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 the regulations thereunder (the "Regulations"), and all terms and conditions used herein that are defined in the Act and Regulations have the meaning given in such definitions unless otherwise indicated.

I. DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) “Class XXXXXXXXXX Unit” means a Unit of a Fund designated as a Class XXXXXXXXXX Unit;

(b) “Effective Date” means a date following the receipt of the rulings requested in this letter, and the date as of which the Proposed Transactions will be effected;

(c) “Exchange Percentage” with respect to a Fund means (i) the “NAV per Unit of the Exchange Units” of the Fund multiplied by the number of Exchange Units of the Fund (ii) divided by the NAV of the Fund, each determined as of the beginning of the Effective Date, (iii) multiplied by 100;

(d) “Exchanging Unitholder” means a unitholder of a Fund that wishes to exchange that Unitholder’s Class XXXXXXXXXX Units of the Fund for corresponding units of the New Fund;

(e) “Exchange Unit” means a Class XXXXXXXXXX Unit of a Fund that is to be exchanged by the Exchanging Unitholder for a New Unit of the corresponding New Fund pursuant to the Proposed Transactions;

(f) “Gross Asset Value” of a Fund means the value of the assets of the Fund as of the Valuation Time;

(g) “XXXXXXXXXX” means XXXXXXXXXX , a corporation governed by the Canada Business Corporations Act, and the manager and portfolio manager of the Funds and the Pooled Funds and “XXXXXXXXXX” refers to the XXXXXXXXXX name;

(h) “Mutual Funds” means the XXXXXXXXXX each a member of the XXXXXXXXXX group of mutual fund trusts, and each of which is a separate trust governed by the Trust Agreement. The tax account numbers of these funds are, respectively XXXXXXXXXX . XXXXXXXXXX is the manager and portfolio manager of each of the Mutual Funds (each a “Fund” and together the “Funds”);

(i) “NAV” or “Net Asset Value” for a Fund means the value of the assets of the Fund as of the Valuation Time, less the amount of its liabilities at that Valuation Time;

(j) “NAV per Exchange Unit” of each Fund means the quotient obtained by dividing the amount of the portion of the NAV of the Fund attributable to the Exchange Units as of a Valuation Time on a Valuation Day by the total number of outstanding Exchange Units at that Valuation Time prior to giving effect to any redemptions or subscriptions on that Valuation Date;

(k) “New Fund” means a new unit trust to be established as described under “Proposed Transactions” below;

(l) “New Unit” means a unit of beneficial interest in a New Fund;

(m) “Pooled Funds” means a group of separate unit trusts that have been established and are governed under the Pooled Fund Trust Agreement, and of which XXXXXXXXXX is the manager and the portfolio manager;

(n) “Pooled Fund Trust Agreement” means a trust agreement between XXXXXXXXXX and the Trustee dated XXXXXXXXXX as amended from time to time under which the Pooled Funds have been established;

(o) “Proposed Transactions” means the transactions described in paragraphs 11 to 14 below under the heading “Proposed Transactions”;

(p) “Transfer Amount” for a Fund means the Exchange Percentage for that Fund multiplied by the NAV of the Fund, each determined as of the Valuation Time on the day immediately preceding the Effective Date;

(q) “Transfer Percentage” for a Fund means the Transfer Amount for the Fund divided by the Gross Asset Value of the Fund determined as of the Valuation Time on the day immediately preceding the Effective Date;

(r) “Trust Agreement” means a trust agreement made as of XXXXXXXXXX and amended several times since that date, which established and governs each Fund, and which is governed by the laws of the Province of XXXXXXXXXX ;

(s) “Trustee” means XXXXXXXXXX , the trustee of each Fund and the Trustee of the Pooled Funds;

(t) “Unit” means a unit of beneficial interest in a Fund;

(u) “Unitholder” means a person whose name appears in the register of a Fund as a holder of Units of that Fund;

(v) “Valuation Day” means a day on which XXXXXXXXXX are open for trading and XXXXXXXXXX in each year, and such other days as may be notified to the Trustee from time to time by the Manager and specified in the current simplified prospectus of a Fund; and

(w) “Valuation Time” means XXXXXXXXXX on each Valuation Day.

II. STATEMENT OF FACTS

The following is a description of the facts that are relevant to this advance income tax ruling request.

1. XXXXXXXXXX is a “taxable Canadian corporation” within the meaning of subsection 89(1) of the Act. XXXXXXXXXX is engaged in the provision of asset management services, and acts as the manager and the portfolio manager of the Mutual Funds including each Fund and each of the Pooled Funds.

2. The Trustee is a “taxable Canadian corporation” within the meaning of subsection 89(1) of the Act. The Trustee acts as trustee of the Mutual Funds including each Fund and as trustee of the Pooled Funds.

3. Each Fund was established and operates as a separate trust under the Trust Agreement. Each Fund is a “mutual fund trust” within the meaning of that term in the Act. The Trust Agreement governs a number of separate trusts including each Fund.

4. The beneficial interest in each Fund is divided into Units. The Trust Agreement permits each Fund to issue more than one class of Units. Currently, each Fund has several classes of issued and outstanding Units including the Class XXXXXXXXXX Units. The sole difference among the various classes of Units is the management fee that is borne by the Fund with respect to each class of Units.

5. At no time has any Fund been established or maintained primarily for the benefit of Unitholders who are not resident in Canada.

6. Each Fund has specific investment objectives and investment strategies.

7. For reasons described in paragraphs 15 and 16 below, it has been decided that it is preferable that the Class XXXXXXXXXX unitholders of the Funds (the “Exchanging Unitholders”), rather than continuing to be unitholders of that Fund, become unitholders of a newly established unit trust (a “New Fund”) in which the Exchanging Unitholders will, immediately after the Proposed Transactions occur, be the only unitholders. The Proposed Transactions described below will not require any amendments to the Trust Agreement.

8. Accordingly, XXXXXXXXXX proposes to create a New Fund in respect of each Fund. At the time of and immediately following the Proposed Transactions, the New Fund, in respect of a Fund, would hold the same assets, have the same investment objectives and have the same investment strategy as those of the Fund. XXXXXXXXXX would like to offer the Exchanging Unitholders the ability to transfer their investment in a Fund to the corresponding New Fund without causing either the Fund or the Exchanging Unitholders to realize any gain or loss for tax purposes.

9. XXXXXXXXXX is also the manager and portfolio manager of a group of investment funds established as unit trusts (the “Pooled Funds”). The Pooled Funds have been established under a separate trust agreement (the “Pooled Fund Trust Agreement”) under which each unit trust is a separate trust. Each of the Pooled Funds is a unit trust within the meaning of the Act, and some of the Pooled Funds are mutual fund trusts and/or registered investments under the Act. XXXXXXXXXX is in the process of preparing and executing an amendment to the Pooled Fund Trust Agreement that will provide for the New Funds. In order to have the New Funds ready to participate in the Proposed Transactions as soon as possible after receipt of the ruling, the necessary amendment to the Pooled Fund Declaration of Trust will be executed in the near future. No units of a New Fund will be issued and a New Fund will hold no assets prior to the Proposed Transactions taking place as described below. At the time of and immediately following the Proposed Transactions, each New Fund will be authorized to issue a single class of New Units. The conditions and attributes of the New Units of a New Fund will be identical to those of the Class XXXXXXXXXX Units of the corresponding Fund.

10. XXXXXXXXXX is in the process of communicating with Class XXXXXXXXXX Unitholders by sending them information that describes the establishment of the New Funds and asking Class XXXXXXXXXX Unitholders to provide a direction and consent to XXXXXXXXXX regarding their participation in the Proposed Transactions.

III. PROPOSED TRANSACTIONS

11. As of the time that is immediately before the Valuation Time on the day immediately preceding the Effective Date, the Fund will make payable to unitholders of the Fund a distribution in an amount equal to the net income of the Fund and any capital gains realized by the Fund in the period from XXXXXXXXXX to such Valuation Day. As of the Valuation Time on the day immediately preceding the Effective Date, the net asset value of each class of units of the Mutual Fund will be determined and such Net Asset Value will take into account any and all accrued liabilities of the Mutual Fund as of the Valuation Time.

12. Effective as of before the opening of trading on the XXXXXXXXXX on the Effective Date, the Trustee of each Fund will transfer to the corresponding New Fund a percentage of each asset held by the Fund equal to the Transfer Percentage for the Fund. In particular, for each class of identical securities held by the Fund, the Transfer Percentage of such securities will be transferred by the Fund to the corresponding New Fund. The Transfer Percentage of any cash amounts held by the Fund will also be transferred to the corresponding New Fund. If and as necessary, a Fund will take advantage of the provisions of subsection 107.4(2.1) to avoid the need to transfer a fractional share to the New Fund where this would not be feasible. The New Fund will issue to each Exchanging Unitholder in respect of that New Fund such number of New Units of the New Fund as have a fair market value equal to the fair market value of that Exchanging Unitholder’s Exchange Units of the Fund.

13. Contemporaneously with the foregoing step, and, for greater certainty on the same day as the foregoing step, the Exchange Units of each Exchanging Unitholder of the Fund will be surrendered to the Fund by the Exchanging Unitholders and will be cancelled by the Fund.

14. Following completion of the Proposed Transactions, the value of each Exchanging Unitholder’s beneficial interest in each asset held by a New Fund will be the same as the value of that Unitholder’s beneficial interest in such asset when it was held by the corresponding Fund prior to the Proposed Transactions taking place.

IV. PURPOSES OF THE PROPOSED TRANSACTIONS

15. The purpose of the proposed transactions is to allow the Exchanging Unitholders of a Fund to become investors in the corresponding New Fund rather than continuing to be investors in the Fund. XXXXXXXXXX.

16. XXXXXXXXXX.

V. RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and the purpose thereof, and the terms of the agreement to be entered into as described in paragraphs 11 to 14 above are legally effective, we rule as follows:

A. The transfer by a Fund of the Transfer Percentage of its assets to the corresponding New Fund, as described in paragraph 12 above, will in each case be a “qualifying disposition” within the meaning of subsection 107.4(1) of the Act.

B. Paragraph 107.4(3)(a) will apply to determine the amount of the proceeds of disposition realized by a Fund on the transfer of the Transfer Percentage of its assets to the corresponding New Fund, respectively, and paragraph 107.4(3)(b) will apply to determine the cost to the New Fund of the assets so transferred to it.

C. Paragraph 107.4(3)(j) will apply in respect of the cancellation of the Exchange Units of an Exchanging Unitholder, and the receipt by each such Unitholder of New Units of the corresponding New Fund, as described in paragraphs 12 and 13 above, to determine the proceeds of disposition realized by the Exchanging Unitholder on the disposition of his, her or its Exchange Units.

D. The general anti-avoidance rule in subsection 245(2) (“GAAR”) will not be applicable as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences set out above.
The above advance income tax rulings, which are based on the Act and Regulations 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 Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .

VI. OPINIONS

Provided that the amendments to subsection 107.4(1) contained in the Income Tax Amendments Act - Part -1- Technical Amendments dated July 16, 2010 are enacted as proposed the transfer by a Fund of the Transfer Percentage of its assets to the corresponding New Fund, as described in paragraph 12 above, will in each case be a “qualifying disposition” within the meaning of subsection 107.4(1) of the Act.

Yours truly,

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