2014 Ruling 2013-0509431R3 - Part XIII tax and distributions from a 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: Whether certain distributions from a mutual fund trust to non-resident unit holders are exempt from Part XIII withholding tax

Position: Yes

Reasons: To the extent that a portion of a distribution from the fund to a non-resident unit holder is in excess of the amount that is included in computing the income of such unit holder under subsection 104(13) of the Act, such portion of the distribution is outside of the scope of paragraph 212(1)(c) of Act. In addition, if the distribution is made to a unit holder who qualifies for the benefits of the Canada-U.S. Tax Treaty and the fund is not treated as fiscally transparent under the laws of the United States, a portion of the distribution made by the fund out of income earned outside of Canada is not subject to tax under paragraph 212(1)(c) of the Act as such portion of the distribution meets the exemption in paragraph (2) of Article XXII of the Canada-U.S. Tax Treaty.

XXXXXXXXXX
2013-050943

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you requested an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request the last of which was on XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this Ruling letter:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Tax Centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

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

(v) is the subject of a Ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

Our understanding of the Facts, Proposed Transactions and Purpose of the Proposed Transactions is as follows:

Definitions

The following definitions apply in respect of this advance income tax ruling. Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require.

(a) XXXXXXXXXX;

(b) "Administrator" means XXXXXXXXXX;

(c) "ASA" means the Administrative Services Agreement between the Trustee and the Administrator dated XXXXXXXXXX, pursuant to which the Administrator acts as the administrator of the Fund;

(d) "Can Holdco" means XXXXXXXXXX;

(e) XXXXXXXXXX;

(f) "capital property" has the meaning assigned by section 54 of the Act;

(g) "Converted Unitholder" means a Unitholder who beneficially owns a Converted Unit;

(h) "Converted Unit" means a Unit issued by the Fund on the conversion of the Convertible Debentures, as described in the Proposed Transactions;

(i) "Convertible Debentures" means the debentures described in paragraph 15 below;

(j) "Exchange" means the XXXXXXXXXX;

(k) "Form NR301" means Form NR301, "Declaration of Eligibility for Benefits under a Tax Treaty for a Non-Resident Taxpayer";

(l) "Form NR302" means Form NR302, "Declaration of Eligibility for Benefits under a Tax Treaty for a Partnership with Non-Resident Partners";

(m) "Form NR303" means Form NR303, "Declaration of Eligibility for Benefits under a Tax Treaty for a Hybrid Entity";

(n) "Fund" means XXXXXXXXXX;

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

(p) "non-portfolio property" has the meaning assigned by subsection 122.1(1) of the Act;

(q) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(r) "Offering" means the offer of the Convertible Debentures to the public as described in paragraph 15 below;

(s) "person" has the meaning assigned by subsection 248(1) of the Act;

(t) "Proposed Transactions" means the transactions which are described in paragraphs 15 to 22 below;

(u) "Prospectus" means the short-form prospectus of the Fund dated XXXXXXXXXX, which qualifies the Offering of the Convertible Debentures;

(v) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(w) "Qualifying Person" means a person who is a non-resident and who is, within the meaning of the Treaty, both a "resident" of the United States and a "qualifying person" entitled to all of the benefits of the Treaty;

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

(y) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(z) "taxable Canadian property" has the meaning assigned by subsection 248(1) of the Act;

(aa) "taxation year" has the meaning assigned by subsection 249(1) of the Act;

(bb) XXXXXXXXXX;

(cc) "Treaty" means the Canada-United States Tax Convention (1980), as amended by all applicable protocols;

(dd) "Trust Indenture" means the trust indenture dated XXXXXXXXXX, as amended and restated on XXXXXXXXXX, which governs the Fund;

(ee) "Trustee" means XXXXXXXXXX, the trustee of the Fund;

(ff) "Unit" means a unit of the Fund representing an equal undivided interest in the Fund;

(gg) "unit trust" has the meaning assigned by subsection 108(2) of the Act;

(hh) "Unitholder" means a person who beneficially owns a Unit;

(ii) "US Opco" means XXXXXXXXXX; and

(jj) "US Opco Notes" means the notes described in paragraph 8 below.

Facts

1. The Fund is an unincorporated limited purpose open-ended trust formed pursuant to the laws of the Province of XXXXXXXXXX under the Trust Indenture. The Fund is a unit trust and a mutual fund trust. The Fund is not a SIFT trust, as it does not, and will not at any time, hold any non-portfolio property. Notably, the Trust Indenture prohibits the Fund from acquiring any non-portfolio property or from carrying on any business. The Fund has a taxation year end of XXXXXXXXXX. The principal and head office of the Fund is located at XXXXXXXXXX. The Fund files its tax returns at the XXXXXXXXXX Tax Centre and it deals with the XXXXXXXXXX Tax Services Office. The Fund's objective is to create stable consistent returns for investors through the indirect acquisition and development of XXXXXXXXXX. All such property is and will, at all times, be located outside of Canada. The Fund is not treated as fiscally transparent under the laws of the United States.

2. The Administrator is a corporation incorporated on XXXXXXXXXX under the XXXXXXXXXX, which acts as the administrator of the Fund pursuant to the ASA. The Administrator is a taxable Canadian corporation and not a public corporation. The mailing address of the Administrator is XXXXXXXXXX and its registered address is XXXXXXXXXX. The Business Number of the Administrator is XXXXXXXXXX and it files its tax returns at the XXXXXXXXXX Tax Centre.

3. Can Holdco is a corporation incorporated on XXXXXXXXXX under the XXXXXXXXXX. Can Holdco is a taxable Canadian corporation and not a public corporation. The mailing address of Can Holdco is XXXXXXXXXX and its registered address is XXXXXXXXXX. All issued and outstanding shares of Can Holdco are held by the Fund. The Fund holds the shares of Can Holdco as capital property. The Business Number of Can Holdco is XXXXXXXXXX and it files its tax returns at the XXXXXXXXXX Tax Centre.

4. US Opco is a corporation incorporated on XXXXXXXXXX under the laws of the State of XXXXXXXXXX. US Opco is a non-resident and a resident of the United States for the purposes of the Treaty. The principal office of US Opco is located at XXXXXXXXXX and its registered office is located at XXXXXXXXXX. All issued and outstanding shares of US Opco are held by Can Holdco. Can Holdco holds the shares of US Opco as capital property.

5. The Fund's initial public offering of Units closed on XXXXXXXXXX pursuant to a Final Prospectus dated XXXXXXXXXX, with a closing of the exercise by the underwriters of their over-allotment option on XXXXXXXXXX. At all times since XXXXXXXXXX, the Units have been widely-held and listed for trading on the Exchange. XXXXXXXXXX.

6. To the knowledge of the officers and directors of the Administrator, less than XXXXXXXXXX% of Units are held by persons who are residents of the United States.

7. On each offering of Units described in paragraph 5 above, the Fund used substantially all of the net proceeds of the offerings to acquire shares of Can Holdco. Can Holdco used a portion of the proceeds received from the Fund on these share subscriptions to acquire shares of US Opco and loaned the remaining proceeds to US Opco in exchange for the US Opco Notes. Immediately after the closing of each offering of Units, as a payment on a reduction of stated capital, Can Holdco distributed the US Opco Notes then held by it to the Fund, such that the principal and interest under the US Opco Notes are at all material times owed by US Opco to the Fund.

8. The US Opco Notes represent XXXXXXXXXX. The material attributes and characteristics of the US Opco Notes are as follows:

(a) The US Opco Notes bear interest at the rate of XXXXXXXXXX%, payable monthly, in arrears;

(b) The US Opco Notes mature XXXXXXXXXX years after issuance with principal payments amortized on a straight-line basis over XXXXXXXXXX years starting in the year during which the US Opco Notes are outstanding;

(c) During the XXXXXXXXXX year term of the US Opco Notes, US Opco is permitted to repay all or any portion of the principal amount outstanding under the US Opco Notes at any time, together with accrued and unpaid interest and a make-whole amount calculated in accordance with the terms of the US Opco Notes;

(d) The US Opco Notes require that US Opco ensure that its consolidated indebtedness (including amounts outstanding under third-party credit facilities) does not exceed approximately XXXXXXXXXX% of its consolidated capitalization;

(e) The terms of the US Opco Notes prohibit them from being distributed to the public;

(f) Payment of the principal amount and interest on the US Opco Notes is subordinated in right of payment to the prior payment in full of the principal of, accrued and unpaid interest on, and all other amounts owing in respect of all senior indebtedness of US Opco. The US Opco Notes shall rank pari passu with US Opco's trade payables;

(g) The US Opco Notes provide for customary events of default; and

(h) The US Opco Notes are governed by the laws of the State of XXXXXXXXXX and the laws of the United States applicable therein.

9. In addition to offerings of Units as described in paragraph 5 above, on XXXXXXXXXX, the Fund completed an offering of XXXXXXXXXX% convertible unsecured subordinated debentures due XXXXXXXXXX, described in a Short Form Prospectus dated XXXXXXXXXX, with a closing of the exercise by the underwriters of their over-allotment option on XXXXXXXXXX. The Fund used substantially all of the net proceeds of the offering of the convertible debentures to acquire additional shares of Can Holdco. Can Holdco used the proceeds received from the Fund on this share subscription to acquire additional shares of US Opco.

10. US Opco has used the proceeds received from Can Holdco on the share subscriptions described in paragraphs 7 and 9 above and the issuance of the US Opco Notes described in paragraph 7 above, together with third-party loans, to acquire XXXXXXXXXX assets in the United States. At all times, the activities and undertakings of US Opco are and will take place solely in the United States. At no time will US Opco have a permanent establishment, within the meaning of the Treaty, in Canada.

11. None of the Fund, Can Holdco or US Opco has held or acquired or will hold or acquire, at any time, taxable Canadian property, real or immovable property situated in Canada, Canadian XXXXXXXXXX properties, or XXXXXXXXXX properties, or options in respect of, or interests in, any of the foregoing.

12. Current financial projections indicate that US Opco will not pay any dividends to Can Holdco for a number of years, such that any payments from US Opco to Can Holdco will only be in the form of return of capital. Similarly, any payments from Can Holdco to the Fund in the foreseeable future will only be in the form of return of capital.

13. The Fund's cash distributions to Unitholders are funded only by interest and principal repayments the Fund receives on the US Opco Notes, together with payments received from Can Holdco as payments on returns of capital. Can Holdco, in turn, funds its distributions to the Fund from payments received from US Opco as payments on returns of capital.

14. For its XXXXXXXXXX and XXXXXXXXXX taxation years, the Fund made distributions to Unitholders in excess of the amount that, but for subsection 104(6) of the Act, would be the Fund's income for each of these years. The Fund deducted, pursuant to paragraph 104(6)(b) of the Act, such amounts as were sufficient to ensure that the Fund was not liable for income tax under Part I of the Act. The amounts of distributions in each year equal to the amounts that, but for the deduction under subsection 104(6), would be the Fund's income for the respective taxation year were included in the income of Unitholders for the respective year pursuant to paragraph 104(13)(a) of the Act.

Proposed Transactions

15. Pursuant to the filing of the Prospectus, the Fund offered the Convertible Debentures to the public on XXXXXXXXXX. The issuance of the Convertible Debentures was allowed by the Trust Indenture. The Offering was completed on XXXXXXXXXX. The terms and conditions of the Convertible Debentures were arrived at through arm's length negotiations between the Fund and the underwriters. The material attributes and characteristics of the Convertible Debentures are as follows:

(a) The Convertible Debentures are direct unsecured obligations of the Fund and subordinated to payment of certain defined senior indebtedness;

(b) The aggregate principal amount of the Convertible Debentures is $XXXXXXXXXX;

(c) The Convertible Debentures were issued for a fixed amount of money in Canadian dollars ($XXXXXXXXXX or integral multiples thereof) that represented the face value of the Convertible Debentures. The Convertible Debentures were issued with no original discount;

(d) The Convertible Debentures bear interest at the rate of XXXXXXXXXX% calculated on their face value, payable in equal installments semi-monthly in arrears on XXXXXXXXXX and XXXXXXXXXX in each year commencing XXXXXXXXXX. The Fund may elect, subject to certain conditions, to satisfy its interest obligation by issuing Units;

(e) The principal amount of the Convertible Debentures is payable at maturity in cash (in Canadian currency) or, at the Fund's option and subject to the satisfaction of certain conditions, by the delivery of Converted Units or a combination of cash and Converted Units;

(f) Unless previously converted, redeemed, or purchased, the maturity date of the Convertible Debentures is XXXXXXXXXX;

(g) On or after XXXXXXXXXX and at any time prior to the maturity date, the Fund may, at its option, redeem the Convertible Debentures at a redemption price equal to the principal amount thereof plus accrued and unpaid interest thereon, provided that the current market price of Units on the date upon which the notice of redemption is given is not less than XXXXXXXXXX% of the conversion price;

(h) In the event of a change of control (as defined in the indenture governing the Convertible Debentures), the Fund shall be required to offer to purchase all of the outstanding Convertible Debentures at a price equal to the principal amount thereof plus accrued and unpaid interest thereon, with a make-whole premium payable in certain circumstances;

(i) Each Convertible Debenture is convertible into Converted Units at the option of the holder at any time prior to the close of business on the earlier of: (i) the business day immediately preceding the maturity date; (ii) if called for redemption, the business day immediately preceding the date specified by the Fund for redemption of the Convertible Debentures; and (iii) if called for repurchase pursuant to a Change of Control (as defined in the indenture governing the Convertible Debentures), the business day immediately preceding the date specified by the Fund for repurchase of the Convertible Debentures; in each case at a fixed conversion price of $XXXXXXXXXX per Converted Unit, being a conversion rate of XXXXXXXXXX Converted Units for each $XXXXXXXXXX principal amount of the Convertible Debentures, subject to adjustment in certain events, as described in the indenture governing the Convertible Debentures. Notwithstanding the foregoing, no Convertible Debenture may be converted during the XXXXXXXXXX business days preceding XXXXXXXXXX and XXXXXXXXXX in each year commencing XXXXXXXXXX;

(j) The Convertible Debentures provide for customary events of default; and

(k) The Convertible Debentures are governed by the laws of the Province of XXXXXXXXXX and the laws of Canada applicable therein.

16. Upon closing of the Offering, the Fund used substantially all of the net proceeds of the Offering to acquire shares of Can Holdco. In turn, Can Holdco used the proceeds received from the Fund to acquire shares of US Opco. US Opco used the proceeds received from Can Holdco to repay third-party debt.

17. XXXXXXXXXX, it is possible that some portion of the Convertible Debentures has been or will be acquired by non-residents. The disclosure provided in respect of the issuance of the Convertible Debentures provided that all payments to non-residents of interest on the Convertible Debentures (or amounts deemed to be interest under the Act), whether in cash or in Units, would be paid or issued net of any applicable Canadian withholding tax.

18. Some of the holders of the Convertible Debentures, including non-residents, will exercise the conversion privilege attached to the Convertible Debentures and will accordingly acquire Converted Units.

19. Upon the issuance of Converted Units by the Fund, US Opco will continue making payments to the Fund in the form of interest and principal repayments on the US Opco Notes and will continue making payments to Can Holdco in the form of returns of capital. Can Holdco will, in turn, continue making payments to the Fund in the form of returns of capital.

20. The Fund will use the funds received from US Opco and from Can Holdco to make distributions to Unitholders (including Converted Unitholders). As such, the distributions received by Unitholders (including Converted Unitholders) from the Fund will be derived only from interest payments and principal repayments made by US Opco on the US Opco Notes and returns of capital made by Can Holdco.

21. In all future taxation years, the Fund will make payable, within the meaning of subsection 104(24) of the Act, to Unitholders (including Converted Unitholders) an amount at least equal to the amount that would, but for subsection 104(6) of the Act, be the income of the Fund for the year, and will make a corresponding deduction under paragraph 104(6)(b) of the Act.

22. The Fund will request that Unitholders (including Converted Unitholders) who are Qualifying Persons complete and provide Form NR301, Form NR302, Form NR303, as applicable, or provide substantively similar information to the Fund (and to all withholding agents and intermediaries in the chain of payment) in order to establish the entitlement of Converted Unitholders who are Qualifying Persons to a reduced rate of withholding tax under Part XIII of the Act on distributions received by such Converted Unitholders on Converted Units.

Purpose of the Proposed Transactions

23. The purpose of the Proposed Transactions is to permit the Fund to raise funds in the capital markets through the issuance of the Convertible Debentures and to ensure that the Fund is able to make distributions on Converted Units in compliance with the withholding tax requirements of Part XIII of the Act.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our Rulings are as follows:

A. Paragraph 212(1)(c) of the Act will not apply to a portion of the distributions made on Converted Units beneficially held by non-resident Converted Unitholders to the extent that such portion of the distributions is in excess of the amount that is included in computing the income of Converted Unitholders under subsection 104(13) of the Act, and the Fund will not be required to make any withholdings under subsection 215(1) of the Act from such portion of the distributions.

B. To the extent any amounts paid or credited by the Fund to Converted Unitholders that are Qualifying Persons are distributed out of interest income earned by the Fund on the US Opco Notes, any such amounts will be exempt from Canadian tax imposed by paragraph 212(1)(c) of the Act by virtue of paragraph 2 of Article XXII of the Treaty, and the Fund will not be required to make any withholdings under subsection 215(1) of the Act from such amounts.

Comments

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the Canada Revenue Agency provided that the Proposed Transactions described in paragraphs 15-16 above are completed before XXXXXXXXXX.

The Rulings given are based solely on the Facts, Proposed Transactions and Purpose of the Proposed Transactions described above. Any documentation submitted in respect of 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. Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above and in particular, without limiting the generality of the foregoing, in respect of:

• any income tax considerations associated with the issuance of the Convertible Debentures or the conversion of the Convertible Debentures into Converted Units, or any other issues arising from these transactions, including whether the issuance or the conversion of the Convertible Debentures will impact previously issued Units or Unitholders and/or other convertible debentures or the holders thereof, or whether such issuance or conversion will result in the creation of a new trust under the laws governing the Fund;
• any considerations whether the Fund is, at any particular time, a unit trust, a mutual fund trust or a SIFT trust; any issues concerning the eligibility of Qualifying Persons for the benefits of the Treaty;
• any income tax considerations in respect of any distributions by the Fund out of sources not described above;
• any withholding tax considerations in respect of the distributions to persons who are not Qualifying Persons and any other withholding tax considerations, other than those specifically addressed in this ruling; and
• the GST implications of any of the Proposed Transactions.

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate