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 XXXXXXXXXX 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 considered material or significant 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. Further, the changes to the trust indenture in the given instance, when viewed as a whole do not support the conclusion that there would be a disposition. (3) Consistent with previous rulings.
Re: Advance Income Tax Ruling Request
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 in your subsequent submissions.
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:
“Certificate of Amendment” has the meaning ascribed thereto in 19 below;
“closed-end investment trust” means a trust that qualifies as a unit trust under paragraph 108(2)(b) of the Act;
“CRA” means the Canada Revenue Agency;
“Declaration of Trust” means the declaration of trust pursuant to which the Fund was formed under the laws of the Province of XXXXXXXXXX, as may be amended, supplemented and/or restated from time to time and includes any Certificate of Amendment;
“Fund” or “Trust” means XXXXXXXXXX, a trust established under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;
“Manager” means XXXXXXXXXX;
“Net Asset Value” means at any time, the Net Asset Value of the Fund as determined in accordance with XXXXXXXXXX of the Declaration of Trust;
“Net Asset Value per Preferred Unit” means the Net Asset Value per Preferred Unit determined in accordance with XXXXXXXXXX of the Declaration of Trust;
“Non-Resident” means a non-resident of Canada for purposes of the Act;
“Preferred Unit” means one unit of a class that represents a beneficial interest in the Fund as more particularly described in 17 below, which will be issued from time to time in accordance with the provisions of the Declaration of Trust;
“Preferred Unitholder” means a holder of Preferred Units;
“Proposed Transactions” means the proposed transactions described in 14 to 24 below;
“XXXXXXXXXX Preferred Unit” means a Preferred Unit of the series described in 19 and 20 below that will be offered to the public, in respect of which the Manager will determine the number to be issued and the subscription price thereof;
“Significant Event Proposal” has the meaning ascribed thereto in 20(g)(ii) below;
“Stock Exchange” means the XXXXXXXXXX;
“Trust Amendments” means the amendments to the Declaration of Trust described in 15 to 18 below;
“Trust Interests” means the Units and/or the Preferred Units;
“Trust Interest Holder” means a holder of a Trust Interest;
“Trustee” means the person(s) that act as trustee(s) of the Fund in accordance with and subject to the provisions of the Declaration of Trust, currently XXXXXXXXXX;
“Unit” means one unit of a class that represents a beneficial interest in the Fund, as more particularly described 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:
1. The Fund is an unincorporated, closed-end investment trust.
2. The head office of the Fund is located at XXXXXXXXXX. The Fund is located within the area served by the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Tax Centre.
3. The fiscal year end of the Fund is XXXXXXXXXX. The Fund’s business number is XXXXXXXXXX.
4. The Fund is governed by the Manager in accordance with, and subject to, the terms of the Declaration of Trust.
5. The Fund has qualified at all relevant times as a “unit trust” as defined in subsection 108(2) of the Act and as a “mutual fund trust” as defined in subsection 132(6) of the Act.
6. The Fund is not a “SIFT trust” as defined in subsection 122.1(1) of the Act. The Fund has not at any relevant time held any “non-portfolio property” as defined in subsection 122.1(1) of the Act. XXXXXXXXXX of the Declaration of Trust includes investment restrictions precluding the Fund from owning more than XXXXXXXXXX% of any class of securities issued by an issuer.
7. The Fund was established for the principal purpose of XXXXXXXXXX.
8. The Fund was not established and has not been maintained primarily for the benefit of Non-Residents. The Declaration of Trust provides that if the Manager determines, at any time, that Non-Residents beneficially own a majority of the Units, the Manager shall require the Non-Residents to sell Units and, if they do not comply, sell such Non-Residents’ Units on their behalf.
9. The beneficial interests in the Fund are represented by Units, which have the rights and are subject to the limitations, restrictions and conditions set out in the Declaration of Trust.
10. Currently, the Declaration of Trust provides that each Unit has the following rights:
(a) the right to one vote at any meeting of the Unitholders;
(b) the right to participate on a pro rata basis in any distributions made by the Fund to holders of Units including distributions of XXXXXXXXXX (as defined in the Declaration of Trust);
(c) in the event of the termination or liquidation of the Fund and following the discharge of all liabilities, the right to participate on a pro rata basis in the distribution of the net assets of the Fund; and
11. The Units are listed for trading on the Stock Exchange under the symbol XXXXXXXXXX and are widely held by the public. As of XXXXXXXXXX, there were approximately XXXXXXXXXX Units issued and outstanding.
12. To the knowledge of the directors and officers of the Manager, no person or company beneficially owns, directly or indirectly, more than XXXXXXXXXX% of the outstanding Units.
13. Pursuant to XXXXXXXXXX of the Declaration of Trust, the Trustee is authorized, subject to obtaining a favourable advance tax ruling from the CRA, to make all such amendments to the Declaration of Trust to enable the Fund to issue preferred units, with such designation, rights, privileges, restrictions and conditions attached to each series as determined by the Manager.
14. Pursuant to the authority granted by XXXXXXXXXX of the Declaration of Trust, the Trustee will amend the Declaration of Trust to enable the Fund to issue Preferred Units (as further described in 15 to 18 below).
15. XXXXXXXXXX of the Declaration of Trust will be amended to create a new class of Preferred Units. Specifically, XXXXXXXXXX of the Declaration of Trust will be amended to: (1) describe the beneficial interests in the Fund as two classes of units, 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 Trust Interest Holder shall be determined by the number of Trust Interests registered in the name of the Trust Interest Holder; and (2) limit the number of Preferred Units which the Fund may issue to XXXXXXXXXX% of the Fund’s total assets, XXXXXXXXXX.
16. XXXXXXXXXX of the Declaration of Trust will be deleted in its entirety.
17. The following will be added as new sections under XXXXXXXXXX of the Declaration of Trust:
18. As a consequence of and in connection with the creation of the Preferred Units and the amendments, as described in 15 to 17 above, to the Declaration of Trust, further consequential amendments will be made to the Declaration of Trust as follows:
(a) XXXXXXXXXX of the Declaration of Trust will be amended to provide that, in the event of the termination of the Fund, the assets of the Fund shall be liquidated and (after the liabilities of the Fund have been discharged) the net proceeds, up to the redemption value of the Preferred Units, shall be distributed proportionately to the 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 Unitholders;
(b) XXXXXXXXXX of the Declaration of Trust will be amended to provide that the Fund’s income and net taxable capital gains for purposes of the Act will be allocated to Trust Interest Holders in the same proportions as the distributions received by such holders;
(c) The description of each of the following defined terms in XXXXXXXXXX of the Declaration of Trust will be amended to contemplate Preferred Units in a manner consistent with those terms as defined herein:
(i) Declaration of Trust or Declaration;
(iii) Net Asset Value;
(v) XXXXXXXXXX; and
(d) The following defined terms, having definitions consistent with the definitions ascribed thereto herein, will be added to XXXXXXXXXX of the Declaration of Trust:
(i) Certificate of Amendment;
(ii) Net Asset Value per Preferred Unit;
(iii) Trust Interest;
(iv) Trust Interest Holder;
(v) Preferred Unit;
(vi) XXXXXXXXXX; and
(vii) Preferred Unitholder;
(e) XXXXXXXXXX and XXXXXXXXXX of the Declaration of Trust shall be amended to contemplate Preferred Units which rank in priority to Units;
(f) XXXXXXXXXX will be amended to provide for distributions to Preferred Units in priority to distributions to Units and Preferred Units ranking junior thereto;
(g) XXXXXXXXXX will be amended to reduce the Net Asset Value, at any time, for the purposes of computing the Net Asset Value per Unit by an amount equal to the Net Asset Value per Preferred Unit multiplied by the number of issued and outstanding Preferred Units at such time;
(h) XXXXXXXXXX and XXXXXXXXXX will be amended to provide for the limited voting rights attached to the XXXXXXXXXX Preferred Units described in 20(g) below;
(i) The following sections will be amended to apply to all Trust Interests:
(j) Such other consequential amendments as required to provide for the issuance, and to properly reflect the attributes, of the Preferred Units.
19. Following the implementation of the Trust Amendments, the Manager will approve and execute a Certificate of Amendment to create the initial series of Preferred Units, which will be designated as “XXXXXXXXXX Preferred Units”. The rights, privileges, restrictions and conditions attaching to the XXXXXXXXXX Preferred Units will be determined by the Manager based on current market conditions at the time of the offering and set out in the Certificate of Amendment.
20. The XXXXXXXXXX Preferred Units will have the following rights, privileges, restrictions and conditions:
(a) a subscription price of $XXXXXXXXXX per XXXXXXXXXX Preferred Unit;
(b) a right to a fixed, cumulative, preferential cash distribution payable quarterly on the XXXXXXXXXX day of XXXXXXXXXX at an annual rate not exceeding $XXXXXXXXXX per XXXXXXXXXX Preferred Unit, such distributions to be paid in priority to any distribution amounts being paid to the Unitholders (other than distributions paid solely through the issuance of additional Units);
(c) so long as any of the XXXXXXXXXX Preferred Units are outstanding, and except as required under XXXXXXXXXX of the Declaration of Trust, the Trust shall not:
(i) declare, pay or set apart for payment any distributions (other than amounts that are paid solely through the issuance of additional Units) on Trust Interests of the Trust ranking as to distributions junior to the XXXXXXXXXX Preferred Units; or
(ii) except pursuant to any purchase obligation, sinking fund, retraction privilege or mandatory redemption provisions attaching thereto, redeem or call for redemption, purchase or otherwise pay off, retire or make any return of capital in respect of any Preferred Units, ranking as to the payment of distributions or return of capital on a parity with the XXXXXXXXXX Preferred Units or in respect of any Units,
unless, in each such case, all accrued and unpaid distributions on the XXXXXXXXXX Preferred Units and on all other Trust Interests ranking on a parity with the XXXXXXXXXX Preferred Units with respect to the payment of distributions have been declared paid or set apart for payment;
(d) in the event of the termination, liquidation, dissolution or winding-up of the Fund, the right to receive $XXXXXXXXXX per XXXXXXXXXX Preferred Unit, together with all distributions accrued and unpaid to the date of payment before any amount shall be paid or any assets of the Fund distributed to holders of any Trust Interests ranking junior as to capital to the XXXXXXXXXX Preferred Units. The holders of the XXXXXXXXXX Preferred Units shall not be entitled to share in any further distribution of the property or assets of the Fund;
(e) the right to require the retraction of the XXXXXXXXXX Preferred Units by the Fund, on or after a specified date, at $XXXXXXXXXX per XXXXXXXXXX Preferred Unit, together with all accrued and unpaid distributions;
(f) the XXXXXXXXXX Preferred Units shall be redeemable, in whole or in part, at the option of the Fund on and after a specified date upon payment in cash of a specified amount, plus all accrued and unpaid distributions up to but excluding the date fixed for redemption; and
(g) the holders of the XXXXXXXXXX Preferred Units will not (except as required by law and except for meetings of holders of Preferred Units as a class and meetings of the holders of XXXXXXXXXX Preferred Units as a series as contemplated by the Declaration of Trust) be entitled to receive notice of, attend or to vote at any meetings of Trust Interest Holders unless:
(i) the Fund shall have failed to pay the whole amount of XXXXXXXXXX quarterly distributions on the XXXXXXXXXX Preferred Units, in which case, and only for so long thereafter as any distributions on the XXXXXXXXXX Preferred Units remain in arrears, the holders of the XXXXXXXXXX Preferred Units shall be entitled to receive notice of, and to attend, all meetings of Trust Interest Holders of the Fund (other than any meetings at which only holders of another specified class or series are entitled to vote) and will be entitled to one vote for each XXXXXXXXXX Preferred Unit together with all other Trust Interest Holders of the Fund who are entitled to vote at such meetings in respect of any business conducted at such meetings, or
(ii) in the event a Trust Interest Holder meeting has been called at which one of the items on the agenda is a proposal to terminate the existing management agreement or to terminate the Fund (a “Significant Event Proposal”), in which case, the holders of XXXXXXXXXX Preferred Units shall be entitled to receive notice of, and to attend, all meetings of Trust Interest Holders of the Fund at which one of the items on the agenda is a Significant Event Proposal and the holders of XXXXXXXXXX Preferred Units shall be entitled to one vote for each XXXXXXXXXX Preferred Unit on a vote to approve any such Significant Event Proposal.
21. The XXXXXXXXXX Preferred Units will be qualified for listing on the Stock Exchange at the time of issuance, and will be sold to the public by way of prospectus. There is no anticipated minimum dollar investment required on the offering of the XXXXXXXXXX Preferred Units, except as may be required by securities law. It is expected that the minimum aggregate subscription proceeds of the XXXXXXXXXX Preferred Units offering will be $XXXXXXXXXX and the maximum aggregate subscription proceeds will be $XXXXXXXXXX.
22. The proceeds from the offering of the XXXXXXXXXX Preferred Units will be added to the net assets of the Fund and used by the Fund to acquire additional investments, subject to the investment restrictions and criteria contained in the Declaration of Trust.
23. Unitholders will not receive any financial compensation or proceeds of any kind whatever, as consideration for the issuance of the XXXXXXXXXX Preferred Units; nor will Units be redeemed or cancelled as a result of the issuance of the XXXXXXXXXX Preferred Units.
24. Neither the Trust Amendments nor the creation and designation of the XXXXXXXXXX Preferred Units will result in a resettlement of the Fund or the creation of a new trust under the laws of the Province of XXXXXXXXXX.
Purpose of Proposed Transactions
25. The purpose of the Proposed Transactions is to increase the ability of the Fund to raise capital by appealing to a broader range of investors through offering an alternative equity interest in the Fund that has a different return and risk profile than the existing Units. In particular, the management of the Fund believes that the terms of the XXXXXXXXXX Preferred Units will enable the Fund to more effectively raise capital from investors that are looking for security and stability of returns while still maintaining the Fund’s appeal to investors looking for a combination of yield and capital appreciation through the Units. The addition of the XXXXXXXXXX Preferred Units allows investors to better match their investment in the Fund with their particular investment goals and risk profile thereby increasing the overall attractiveness of an investment in the Fund and the Fund’s ability to raise additional capital for future growth and expansion.
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, and that the Proposed Transactions are completed in the manner described above, our rulings are as follows:
A. The Trust Amendments will not, in and by themselves, result in a disposition by the Fund of its property or in a resettlement of the Fund for purposes of the Act.
B. The Trust Amendments will not result, in and by themselves, in a disposition by any Unitholder of all or part of his, her or its Units.
C. The issuance of the XXXXXXXXXX Preferred Units will not result in a disposition by any Unitholder of all or part of his, her or its Units, provided that the rights, privileges, restrictions and conditions attaching to the XXXXXXXXXX Preferred Units are based on current market conditions at the time of the offering, as described in 19 above.
D. The implementation of the Proposed Transactions will not, in and by themselves, cause subsection 104(7.1) to apply so as to deny the deduction by the Fund of any amount it is otherwise entitled to deduct under paragraph 104(6)(b) in respect of amounts paid or payable to its Trust Interest Holders.
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 the Trust Amendments will result in the creation of a new trust under the laws of the Province of XXXXXXXXXX;
b. whether the Fund is at any particular time, a mutual fund trust within the meaning of subsection 132(6) or a SIFT trust, as defined in subsection 122.1(1);
c. whether the attributes relating to the XXXXXXXXXX Preferred Units, as described in 20 above, represent current market conditions; and
d. the tax consequences of any amendments made to the Declaration of Trust before the date of this letter.
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 70-6R6 Advance Income Tax Rulings and Technical Interpretations, dated August 29, 2014, and are binding on the CRA provided that the proposed transactions are completed within six months of the date of this letter.
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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