2012 Ruling 2012-0432341R3 - XXXXXXXXXX Common Contractual Fund

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: Characterization of XXXXXXXXXX CCF for purposes of the Act

Position: A contractual arrangement.

Reasons: The investors maintain an undivided co-ownership interest in the property held by the CCF.

XXXXXXXXXX
2012-043234

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above company.

Unless otherwise stated, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c.1, (5th Supplement) (the “Act”), as amended to the date of this advance income tax ruling.

The rulings given herein are based solely on the facts, proposed transactions and the purpose of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your request that are not set out below do not form part of the facts and proposed transactions on which these rulings are based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

(a) “Authority” means the Financial Services Authority of Foreign Jurisdiction 1;

(b) “Administrator” means XXXXXXXXXX;

(c) “Canadian corporation” has the meaning assigned by subsection 89(1) of the Act;

(d) “Canadian Legislation” means the Bank Act, (S.C. 1991, c. 46);

(e) “Common Contractual Fund” or “CCF” means a common contractual fund authorised by the Financial Regulator;

(f) “CRA” means the Canada Revenue Agency;

(g) “Custodian” means XXXXXXXXXX or any other person as may be appointed in accordance with the requirements, and prior approval, of the Financial Regulator to provide custodial services to the Fund;

(h) “Custody Agreement” means the agreement to be entered into between the Manager and the Custodian as amended, supplemented or otherwise modified from time to time in accordance with the requirements of the Financial Regulator;

(i) “Deed of Constitution” means the contract entered into between the Manager and the Custodian providing for the constitution of the Fund and establishing the terms and conditions governing the Fund, as may be amended and supplemented from time to time, with prior approval of the Financial Regulator;

(j) “Exchange” means XXXXXXXXXX;

(k) “Financial Regulator” means the XXXXXXXXXX or any successor regulatory authority with responsibility for authorising and supervising the Fund;

(l) “Foreign Country 1” means XXXXXXXXXX;

(m) “Foreign Country 2” means XXXXXXXXXX;

(n) “Foreign Jurisdiction 1” means XXXXXXXXXX;

(o) “Foreign Jurisdiction 2” means XXXXXXXXXX;

(p) “Fund” means the XXXXXXXXXX;

(q) “Gross Income” means all dividends, interest income and all other income earned by the Initial Portfolio and the Portfolios to which each Unitholder will be beneficially entitled as these items of income arise;

(r) “Gross Income Payment” means a payment of Gross Income in accordance with the Deed of Constitution;

(s) “Initial Portfolio” means the XXXXXXXXXX;

(t) “Investment Manager” means XXXXXXXXXX or such other person(s) appointed by the Manager in accordance with the requirements of the Financial Regulator to manage the investment and re-investment of some or all of the assets of the Initial Portfolio or the Portfolios;

(u) “Manager” means XXXXXXXXXX or any successor thereto duly appointed with the prior approval of the Financial Regulator as manager of the Fund;

(v) “Market” means XXXXXXXXXX;

(w) “non-resident” has the meaning assigned by subsection 248(1) of the Act;

(x) “Parent” means XXXXXXXXXX;

(y) “Portfolio(s)” means any (all) separate group(s) of assets (other than the Initial Portfolio) established in accordance with the Deed of Constitution or established by the Manager and approved by the Financial Regulator;

(z) “Prospectus” means the document that will be used by the Manager to offer interests in the Fund to prospective investors;

(aa) “Regulations” means the Income Tax Regulations, C.R.C., c. 95, as amended;

(bb) “Stock Exchange” means the XXXXXXXXXX;

(cc) “Sub-Custodian” means XXXXXXXXXX;

(dd) “Sub-Custodian’s Parent” means XXXXXXXXXX;

(ee) “subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1) of the Act;

(ff) “Tax Treaty” has the meaning assigned by subsection 248(1) of the Act;

(gg) XXXXXXXXXX;

(hh) “TLCA” means the Trust & Loans Companies Act (S.C. 1991, c. 45);

(ii) “Unit(s)” means a unit of account, representing a proportionate undivided co-ownership interest in the assets of the Fund, as tenants in common with the other Unitholders. A Unit includes any fraction of a Unit, any interest in the Initial Portfolio and any interest in any of the Portfolios of the Fund. Units will be further divided into different classes; and

(jj) “Unitholder(s)” means any person(s) holding Units of a Fund or, where appropriate, holding a particular class of Units of a Fund, including any person who is a joint holder of a Unit of a Fund, as long as that person is legally entitled to an undivided co-ownership interest with the other holder(s) in the property of the Fund.

Facts

1. Parent is a non-resident financial holding company formed in Foreign Country 1. The shares of Parent are publicly traded on the Exchange. Parent provides XXXXXXXXXX services.

2. The Custodian is a non-resident private limited liability company formed in Foreign Country 2. The Custodian is a subsidiary wholly-owned corporation of Parent and is regulated by the Financial Regulator. The Custodian provides custodial services to collective investment schemes.

3. The Administrator is a non-resident private limited liability company formed in Foreign Country 2. The Administrator is a subsidiary wholly-owned corporation of Parent. The Administrator provides XXXXXXXXXX for, CCFs.

4. The Investment Manager is a non-resident limited liability partnership formed in Foreign Jurisdiction 2 and is regulated by the Authority. The executive partners own XXXXXXXXXX % of the Investment Manager with the remaining XXXXXXXXXX% owned by investors. The Investment Manager provides XXXXXXXXXX services.

5. The Manager is a non-resident private limited liability company incorporated in Foreign Country 2. The Manager is indirectly owned by the Investment Manager. The Manager provides XXXXXXXXXX services.

6. Sub-Custodian Parent is a Canadian corporation that qualifies as an authorized foreign bank branch under the Canadian Legislation. Sub-Custodian Parent is indirectly owned by Parent.

7. The Sub-Custodian is an authorized trust company formed under the TLCA. The Sub-Custodian is a Canadian corporation and a subsidiary wholly-owned corporation of Sub-Custodian Parent. The Sub-Custodian’s primary business is providing XXXXXXXXXX services to institutional clients.

8. A CCF is governed by The Investment Funds, Companies and Miscellaneous Act, 2005. This legislation provides that a CCF is a collective investment undertaking that is not a corporate entity or a trust but rather a contractual arrangement under which the participants in the CCF have a co-ownership interest in the assets of the CCF that are held by the Custodian. Even though a CCF does not have a legal existence separate and apart from its investors, the proportionate interests in a CCF are typically described as “units” and the investors are called “unitholders”.

9. A CCF is established by a contract, a deed of constitution, which must be filed with and approved by the Financial Regulator. The provisions of the deed of constitution are considered to have been accepted by unitholders of the CCF as a term of the acquisition of units under the terms of a prospectus. The laws of Foreign Country 2 set out the basic provisions which must be included in a deed of constitution.

10. XXXXXXXXXX of the XXXXXXXXXX governs the taxation of a CCF in Foreign Country 2. Provided that all of the participants of a CCF are pension funds or persons other than individuals, the CCF will be treated as fiscally transparent under the income tax laws of Foreign Country 2. Accordingly, the income, gains and losses in relation to the investment undertakings of the CCF are treated as arising or accruing to each unitholder of the CCF in proportion to the property of the CCF that is owned by the unitholder. The nature and characterization of any income, gain or loss is therefore retained by the unitholder.

11. To the best of your knowledge and that of the Sub-Custodian, none of the issues included in this ruling is:

(i) dealt with in an earlier return of any persons related to the Sub-Custodian,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any persons related to the Sub-Custodian,

(iii) under objection by any persons related to the Sub-Custodian, or

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Proposed Transactions

12. The Custodian and the Manager will enter into the Deed of Constitution. The Deed of Constitution will constitute the Fund as an umbrella CCF and will confirm the respective obligations and responsibilities of the Manager and the Custodian with respect to the Fund. Paragraph 2.1(A) of the Deed of Constitution will specify that the Fund will be constituted as a CCF.

13. The Deed of Constitution will provide the following:

(a) The Fund may be subdivided into portfolios i.e. the Initial Portfolio and the Portfolios;

(b) A Unit is defined as one undivided co-ownership interest in the assets of a portfolio of the Fund;

(c) A Unitholder is defined as any person holding a particular Unit as entered in the Register;

(d) Unitholders are legally entitled to participate and share in the income and profits of the Fund as it arises through their investment in a Unit of the Initial Portfolio and/or one or more Portfolios of the Fund; and

(e) The Manager has the authority and the discretion to distribute any Gross Income to the Unitholders as Gross Income Payments and it is the Manager’s intention to make such Gross Income Payments annually.

14. Units of the Fund will be issued pursuant to the Prospectus. The Fund will consist of a number of different classes of Units, including but not limited to the following: Class A1, Class A2, Class A3, Class A4, Class B1, Class C1, Class C2, Class D1, Class E1, Class E2, Class F1, Class F2, Class G1, Class G2 and Class X. An application will be made to the Stock Exchange to have these Units admitted to the Market. Once issued to a Unitholder, Units of the Fund are not transferable.

15. The initial Unitholders of the Fund will be Canadian pension trusts and/or pension corporations and pension funds in Foreign Country 2 and Foreign Jurisdiction 1. The Canadian pension trusts and corporations are exempt from tax under paragraphs 149(1)(o) and 149(1)(o.1) of the Act. Over time, the investor base could be expanded to include other institutional investors.

16. The following terms and conditions are attached to each of the Units:

(a) The transfer of Units is not permitted;

(b) The Units will not have any voting rights save the right, on written notice signed by Unitholders holding at least XXXXXXXXXX% of the Units, to require the Manager to resign;

(c) The liability of each Unitholder is limited to the issue price of the Units subscribed to by such Unitholder;

(d) Unitholders have no rights with respect to the representation or management of the Fund;

(e) The failure or insolvency of a Unitholder will have no effect on the existence of the Fund;

(f) Units in any Class within the Fund are recorded in registered form only by the Administrator; and

(g) The Fund, the Initial Portfolio and any Portfolio will be established for an unlimited period. However, any or all of them may be terminated by the Manager upon giving 30 days written notice to the Unitholders.

17. The investment objectives of the Initial Portfolio will be to achieve, over the long term, a total return in excess of that of the Morgan Stanley Capital International World Index (with net dividends reinvested). The investments will initially consist of cash deposits and equity securities of large companies listed, traded or dealt with on regulated markets on stock exchanges worldwide. The investment objectives of any other Portfolio will be determined at the time the Portfolio is established.

18. The Manager has delegated the day-to-day administration of the Fund to the Administrator. The Administrator will be responsible for the day-to-day administration of the Fund, the provision of fund accounting for the Fund and the computation of net asset value and net asset value per Unit for each of the Units of the Fund.

19. The Manager has appointed the Investment Manager to advise on the purchase, sale and exchange of the investments held by the Fund and to distribute the Units of the Fund.

20. Pursuant to the Custody Agreement, the Manager has delegated the custody of the assets of the Fund to the Custodian. The Custodian will be responsible for the safe-keeping of all of the assets of the Fund and will be obliged to enquire as to the conduct of the Manager in each financial year and to report thereon to the Unitholders. The Custodian’s safekeeping responsibilities will also include the responsibility to ensure that the appropriate amount of withholding tax is deducted and remitted to the relevant tax authorities and that any requirements under Part II of the Regulations are fully complied with.

21. The Custodian has delegated its responsibility for collecting the Fund’s Canadian source receipts and its responsibilities under Part XIII of the Act and Part II of the Regulations to the Sub-Custodian. Accordingly, the Sub-Custodian will have the responsibility to ensure that the appropriate amount of withholding tax is deducted and remitted to the Canadian tax authorities and that any requirements under Part II of the Regulations are fully complied with. The Sub-Custodian will withhold and remit Part XIII tax on behalf of Unitholders that are resident in a country other than Canada in respect of their Part XIII tax liabilities by determining the amount of Part XIII tax payable on amounts paid or credited on a particular day to the Fund. Based upon the percentage of Unitholders taxable under Part XIII of the Act, the Sub-Custodian will apply that percentage to the aggregate amount of the Fund’s Canadian source receipts to determine the amounts received by non-resident Unitholders. The Sub-Custodian will then apply the provisions of any relevant Tax Treaty to determine the amount of Part XIII tax to withhold in respect of the amounts received by a Unitholder. At the end of each month the Custodian will compute the total amount withheld on behalf of all of the Unitholders for that month as determined above and remit that amount to the CRA by the 15th day of the following month. Within the time limits prescribed by the Regulations, the Sub-Custodian will comply with the requirements of Part II of the Regulations including the provision of NR4 Supplementary forms to the Unitholders to report the total amount of Part XIII tax withheld and remitted on their behalf and providing the CRA with a copy of the NR4 Supplementary forms and a NR4 Summary for the year.

The Sub-Custodian will also determine the percentage of its Unitholders that are resident in Canada. The Sub-Custodian will then apply that percentage to the aggregate amount of the Fund’s Canadian source receipts to determine the amount received by each Canadian resident Unitholder (the “T5 Amount”). Within the time limits prescribed by the Regulations, the Sub-Custodian will provide a T5 Supplementary form reporting the T5 Amount to each Unitholder that is resident in Canada and will forward to the CRA a copy of each T5 Supplementary issued to the Unitholders as well as a T5 Summary for the year.

Purpose of the Proposed Transactions

22. The purpose of the proposed transactions is to create an asset pooling vehicle for the Unitholders whereby they will own a proportionate undivided co-ownership interest in assets producing dividends, interest and other income sourced in various countries, including Canada.

23. A CCF is generally only viable as an asset pooling vehicle for institutional investors’ property where it does not materially increase the tax costs incurred by such institutional investors. Accordingly, it is of critical importance that the Fund be treated as fiscally transparent for purposes of the Act to allow the institutional investors to claim treaty benefits in respect of the income and gains they earn from their share of the assets owned by the Fund, based on an application of the Tax Treaty between their country of residence and the country where the assets of the Fund are located.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Each Unitholder that owns a direct and undivided interest in each property of the Initial Portfolio or a Portfolio will, for the purposes of the Act, be treated as directly earning or realizing, as the case may be, their proportionate share of income, losses, capital gains and capital losses from the property of the Initial Portfolio or a Portfolio and the character, source and timing of such income, losses, capital gains and capital losses earned or realized by each Unitholder of the Initial Portfolio or a Portfolio will not be affected by the fact that the property is being administered by the Investment Manager.

B. Any distribution made to a Unitholder, as described in paragraph 13(e) above, will not be treated as income to the Unitholder.

C. For the purposes of computing any capital gain or capital loss under Part I of the Act by a Unitholder, the redemption of Units by a Unitholder will be considered to result in a disposition of that Unitholder’s proportionate undivided interest in the property of the Initial Portfolio or a Portfolio.

D. Provided that a non-resident Unitholder’s ownership of Units is not considered to be the carrying on of a business in Canada, a non-resident Unitholder that is a resident of a Tax Treaty jurisdiction and eligible for benefits under the relevant Tax Treaty will be entitled to the benefits of that Tax Treaty in respect of the Unitholder’s proportionate undivided interest in the income of the Initial Portfolio or a Portfolio to the extent such income qualifies for relief under the provisions of that Tax Treaty.

E. Provided that a non-resident Unitholder’s ownership of Units is not considered to be the carrying on of a business in Canada, for the purposes of applying Parts XIII and XIII.2 of the Act, any amount paid or credited to the Sub-Custodian by a payer resident in Canada, in respect of the property of the Fund, will be an amount paid or credited to each Unitholder in proportion to the particular Unitholder’s ownership of the property of the Fund.

F. To the extent that the Sub-Custodian withholds and remits tax under Part XIII or Part XIII.2 of the Act on behalf of a non-resident Unitholder, any amount remitted by the Sub-Custodian in respect of a non-resident Unitholder’s Part XIII or Part XIII.2 tax liability will be considered as being paid on behalf of such Unitholder and in respect of such Unitholder’s Part XIII or Part XIII.2 tax liability.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are entered into before XXXXXXXXXX.

The above-noted rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Nothing in this ruling should be construed as implying that the CRA has considered, examined, agreed to or ruled on:

(a) whether any Unitholder is a resident of a country with which Canada has entered into a Tax Treaty;

(b) whether any income referred to herein is taxable under Part I of the Act;

(c) the manner in which any article of a Tax Treaty applies to any Unitholder; or

(d) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Additional Comments

Without restricting the generality of the preceding, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has reviewed or made any determinations in respect of the compliance of any Canadian payer, otherwise than as specifically provided in the above rulings, concerning its duties and obligations under Part XIII in respect of any amount paid or credited to a Unitholder.

Yours truly,

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