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: What is the characterization of a particular Luxembourg FCP for the purposes of the Income Tax Act (Act)?
Position: The FCP is a contractual arrangement that is not a person or a taxpayer nor is it a partnership for the purposes of the Act and the Canada-Luxembourg Treaty.
Reasons: The FCP is an unincorporated contractual arrangement that has no legal personality and is being established such that each investor has an undivided co-ownership interest in the underlying properties of the Sub-Funds.
Re: Advance Income Tax Ruling –
We are writing in reply to your letter of XXXXXXXXXX, with a subsequent revision on XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-referenced persons. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
We understand that, to the best of your knowledge and that of each of the taxpayers (herein referred to as the New Investors) involved, none of the issues involved in this letter:
(i) is in an earlier tax return of the taxpayer or a related person;
(ii) is being considered by a Tax Services Office or a Taxation 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; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
The Facts described in this letter are substantially the same as the facts that were the subject of the ruling 2007-023158. However, the transactions described in that ruling were not implemented within the allotted time period. Consequently, this letter represents an extension of the previously issued ruling. Unless otherwise stated, all statutory references herein are to the corresponding provisions of the Income Tax Act, R.S.C. 1985, (5th Supplement) c.1, as amended (the “Act”) to the date of this advance income tax ruling.
For greater certainty, all the documents and information submitted in support of your request are part of this letter only to the extent described herein and any reference to these documents is provided solely for the convenience of the reader. The rulings given herein are based solely on the Facts, Proposed Transactions and the Purpose of the Proposed Transactions described below.
In this letter the following terms have the meanings specified:
(a) “Canadian Corporation” has the meaning assigned by subsection 89(1);
(b) “Class” means a particular class of Units issued by the Sub-Fund, where each Unit embodies an entitlement to a share in the undivided assets of the Sub-Fund concerned;
(c) “CRA” means the Canada Revenue Agency;
(d) “CSD” means central securities depository. A CSD is commonly used in an investment context to provide custodial services whereby securities are deposited with the CSD for safekeeping in physical certificate or electronic form;
(e) “CSSF” means the Grand-Duchy of Luxembourg’s Commission de surveillance du secteur financier (Commission for the Supervision of the Financial Sector). The CSSF is a regulatory body responsible for the prudential supervision of undertakings for collective investment, credit institutions, other professionals of the financial sector, pension funds, SICARs (Société d’investissement en capital à risque), securitisation vehicles issuing securities to the public on a continuous basis, stock exchanges, payment and securities settlement systems, and operators of payment or securities settlement systems. It also supervises the securities markets. Accordingly, the CSSF has supervisory authority over compliance with the Law of 2010;
(f) “Custodian” means XXXXXXXXXX (Luxembourg Branch), the Luxembourg branch of XXXXXXXXXX, an indirect subsidiary of the Manager with a registered office in XXXXXXXXX, acting as custodian on appointment by the Manager with respect to the assets comprising the Fund;
(g) “Custody Agreement” means the Re-Stated Custodian and Paying Agent Agreement entered into between the Manager and Custodian on XXXXXXXXXX with respect to the appointment and duties of the Custodian in relation to the Fund;
(h) “FCP” or “Fonds commun de placement” means, pursuant to Article 5 of the Law of 2010, for the purpose of the application of Part I of the Law of 2010, an undivided collection of transferable securities and other liquid assets enumerated in Article 41 of the Law of 2010, made up and managed according to the principle of risk-spreading on behalf of joint owners who are liable only up to the amount contributed by them and whose rights are represented by units intended for placement with the public by means of a public or private offer;
(i) “Fund” means XXXXXXXXXX, constituted as an FCP in an “umbrella” form with Sub-Funds, and established by the Manager and the Custodian under the terms of the Management Regulations pursuant to the Law of 2010;
(j) “Gross Income” includes, pursuant to the Management Regulations, interest, dividends, profits and similar amounts derived or generated from the assets comprising a particular Sub-Fund, as such income arises;
(k) “Gross Income Entitlement” means the proportion of Gross Income from the assets comprising a particular Sub-Fund as the Manager is required to calculate on each Valuation Day, Special Subscription Date or Special Redemption Date, to which each Unitholder is beneficially entitled;
(l) “Law of 2010” means the Law of 17 December 2010 of Luxembourg relating to UCIs;
(m) “Luxembourg Direct Tax Authority” means the “Administration des contributions directes”, the ministerial department in the government of the Grand-Duchy of Luxembourg that is responsible for administering the Luxembourg Income Tax Act;
(n) “Manager” means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX and organized as a public limited company (société anonyme) under (i) Chapter 15 of the Law of 2010, acting as the management company of the Fund and (ii) Chapter II of the Law of 12 July 2013 on alternative investment fund managers. The Manager has its head office and its registered office in XXXXXXXXXX. The Manager is a direct subsidiary of XXXXXXXXXX;
(o) “Management Regulations” means the agreement, dated
XXXXXXXXXX and drafted in accordance with Chapter 2 of the Law of 2010, between the Manager, the Custodian and the Unitholders;
(p) “New Investor” means XXXXXXXXXX. None of the foregoing holds any Units in the Sub-Funds as of the date of this ruling letter but will subsequently invest in Sub-Funds. Certain Sub-Funds will invest, among other things, in Canadian securities;
(q) “Non-Resident” has the meaning assigned by subsection 248(1);
(r) “Pension Plans” mean the following XXXXXXXXXX;
(s) “Proposed Transactions” means the transactions described in paragraphs hereafter which appear under the heading “Proposed Transactions”;
(t) “Prospectus” means the prospectus relating to the permanent offering and issue of Units in XXXXXXXXXX, dated XXXXXXXXXX, prepared in accordance with the Law of 2010 and pursuant to which Units of the Sub-Funds are issued;
(u) “Special Redemption Date” means a date for redemption of Units which complies with section XXXXXXXXXX of the Prospectus;
(v) “Special Subscription Date” means a date for subscription of Units that is not a normal Subscription Date as outlined in section XXXXXXXXXX of the Prospectus;
(w) “Sub-Custodians” means XXXXXXXXXX, a taxable Canadian corporation incorporated in XXXXXXXXXX under the law of the Province of XXXXXXXXXX as XXXXXXXXXX and continued in XXXXXXXXXX as a trust company under the federal Trust and Loans Companies Act and/or the XXXXXXXXXX, a taxable Canadian Corporation. XXXXXXXXXX is related, within the meaning of subsection 251(2), to the Manager and the Custodian. The XXXXXXXXXX serves as XXXXXXXXXX sub-custodian only for securities not eligible for settlement in Canada’s local central securities depository;
(x) “Sub-Fund” means a distinct portfolio of assets within the Fund invested in accordance with the particular objectives and liabilities attributable to that portfolio of assets which are managed by policies determined by the Manager and disclosed in the Prospectus;
(y) “Tax Treaty” means a tax treaty as defined in subsection 248(1);
(z) “UCIs” means, pursuant to the Law of 2010, undertakings for collective investment, including a UCITS;
(aa) “UCITS” means undertaking for collective investment in transferable securities governed by European Council Directive 2009/65/EC of the European Parliament and of Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to the undertaking for collective investment in transferable securities (UCITS), and amended by Directive 2014/91/EU relating to these securities. Pursuant to Article 2 of the Law of 2010, such undertakings may be constituted under the law of contract as FCPs managed by a management company or under statute as an investment company;
(bb) “Unit” in a particular Sub-Fund means a right of ownership evidenced by the inscription of the Unitholder’s name in the register of Unitholders, representing the holder’s proportionate (i) co-ownership interest in the assets comprising the Sub-Fund and Gross Income from such assets and (ii) share of the liabilities attributable to such assets;
(cc) “Unitholder” of a particular Sub-Fund means a XXXXXXXXXX company that beneficially owns Units of the particular Sub-Fund;
(dd) “XXXXXXXXXX” as defined in the Prospectus, means XXXXXXXXXX and XXXXXXXXXX and their direct and indirect subsidiaries; and
(ee) “XXXXXXXXXX Canada Pension Plans” means XXXXXXXXXX.
Description of the Fund
1. The Fund is a UCITS constituted under the Luxembourg law of contract as an FCP and registered pursuant to Part I of the Law of 2010.
2. The Fund does not have a legal personality but instead is an unincorporated co-proprietorship of transferable and other liquid financial assets permitted by the Law of 2010.
3. The Fund is managed by the Manager under the terms of the Management Regulations in accordance with Chapter 2 of the Law of 2010.
4. The assets comprising the Fund are entrusted to the Custodian for safekeeping, appointed by the Manager to carry out the usual duties of a custodian of a UCITS in accordance with the Law of 2010.
5. The Law of 2010 authorizes the establishment of an FCP with multiple segregated portfolios of assets invested in accordance with different investment objectives and policies applicable to each portfolio of assets. Pursuant to the Law of 2010, the Fund is an “umbrella fund” that enables investors to choose between one or more investment objectives by investing in one or more portfolios of assets. The Fund consists of XXXXXXXXXX distinct segregated portfolios of assets and liabilities, each constituting a Sub-Fund. The board of directors of the Manager may also decide at any time to create new Sub-Funds.
6. Investors invest in a particular portfolio of assets by acquiring a class of Units of a particular Sub-Fund issued by the Manager in accordance with the Management Regulations. The Manager may decide to issue one or more Classes of Units for a Sub-Fund, each Class having: (i) a specific sales and redemption charge structure and/or (ii) a specific management or advisory fee structure and/or (iii) different Unitholders servicing or other fees and/or (iv) different types of targeted investors and/or (v) such other features as may be determined by the board of directors of the Manager from time to time.
7. Appendix XXXXXXXXXX of the Prospectus provides that each of the Sub-Funds currently has various Classes available for investment. The distinction between the Classes is their Gross Income Entitlement which arises because of the different tax profiles of the Unitholders. The tax profile and country of residence of each Unitholder will determine which Tax Treaty rate and rate of withholding tax should be applied to each item of Gross Income. In order to ensure that each Unitholder receives Gross Income payments that reflect their entitlement to reduced withholding tax rates under applicable tax treaties, Unitholders with different tax profiles and country of residence will invest in different Unit Classes.
8. It is the intention of the Manager that only pension plans in which XXXXXXXXXX employees participate will invest in the Fund, either directly or indirectly. Currently, a few of the XXXXXXXXXX pension plans have invested in the Fund, the most significant of which are the XXXXXXXXXX plans. Certain Sub-Funds have invested in Canadian securities.
Rights of Unitholders
9. The Management Regulations provide that each Unit of a Sub-Fund represents the proportion of each Unitholder’s ownership interest in the assets and liabilities comprising the Sub-Fund to which each Unitholder is beneficially entitled. Ownership of Units shall entitle a Unitholder to participate and share in the property of the relevant Sub-Fund including, without limitation, interest, dividends, profits and similar amounts derived or generated from the investment of such property received by such Sub-Fund as they arise in the Sub-Fund. The Management Regulations further provide that each Unit is indivisible with respect to the rights conferred to it.
10. Pursuant to Article 5 of the Law of 2010, the liabilities of a Unitholder are limited to the Unitholder’s participation in a particular Sub-Fund.
11. The Management Regulations provide that the Gross Income from the assets comprising a particular Sub-Fund is beneficially owned by the Unitholders of the Sub-Fund and as such the Manager is required to calculate the Unitholder’s Gross Income Entitlement. The Manager shall, on dates determined at its discretion, but in any event at least XXXXXXXXXX in each calendar year, and to the extent that such amounts are available, pay to each Unitholder a sum equal to the Unitholder’s Gross Income Entitlement less any amounts recovered in respect of fees, costs, taxes, charges and expenses. The Gross Income does not include gains or losses from the dispositions of assets. The proceeds of such dispositions are reinvested and gains or losses realized on the dispositions of assets are reflected in the net asset value of the Units.
12. The Management Regulations provide that the transfer of Units requires the unanimous consent of the Manager and of all Unitholders of the Fund, regardless of which Sub-Fund they are invested in. Furthermore, no voting rights are attached to the Units.
13. Unitholders can redeem their Units of a Sub-Fund in the manner set out in the Management Regulations, for an amount based on the net asset value per Unit of a particular Class of Units in a particular Sub-Fund.
Management of the Fund
14. The Manager has the overall responsibility for the management of the assets comprising the Fund in accordance with the Prospectus, Management Regulations, Law of 2010 and any other relevant regulatory requirements.
15. Pursuant to Article 14 of the Law of 2010, the Manager is required to manage the Fund in accordance with the Management Regulations and in the exclusive interest of the Unitholders. Pursuant to Part IV of the Law of 2010, access to the business of management companies having their registered office in Luxembourg is subject to prior authorisation by the CSSF. Furthermore, the CSSF may, in the circumstances enumerated in Part IV of the Law of 2010, revoke the authorization of a management company to manage a UCITS.
16. XXXXXXXXXX. Both the Manager and the Custodian are Non-Residents of Canada for purposes of the Act and do not engage in any activities in Canada other than through the agency of the Sub-Custodians as described in paragraphs 21 to 23 below.
17. Under the Law of 2010, the Manager can delegate its functions to third parties for the purpose of a more efficient conduct of its business. Similarly, the Custody Agreement provides that the Custodian is entitled to delegate its functions to third parties.
Custodian and Sub-Custodian
18. Section XXXXXXXXXX of the Custody Agreement provides that the Custodian will, for safe and efficient handling of the assets of the Sub-Funds, from time to time appoint a sub-custodian as an agent of the Custodian in each jurisdiction to execute and perform such powers and obligations of the Custodian under the Custody Agreement as the Custodian may from time to time determine. The Custodian or any sub-custodian may lodge or deposit securities or certificates of title to the Sub-Funds’ assets with a CSD.
19. The Custodian, in accordance with the Law of 2010, carries out the duties of a custodian of a Luxembourg UCITS. In particular, the Custodian is entrusted with the safekeeping of the assets comprising the Fund, carries out all operations concerning the day-to-day administration of the assets comprising the Fund, performs its duties pursuant to the Management Regulations and executes transactions at the direction of the Manager pursuant to the Custody Agreement entered into between the Custodian and the Manager. The Custodian has no duties in connection with the management of the Fund.
20. Section XXXXXXXXXX of the Custody Agreement further provides that the delegation by the Custodian of certain of its duties to sub-custodians and CSDs shall not affect, reduce or increase the Custodian’s duty of supervision in accordance with the Law of 2010.
21. The Custodian has delegated its functions, in accordance with the Custody Agreement, to the Sub-Custodians. The Sub-Custodians have custody of the Fund’s securities and cash deposits in Canada.
22. The Sub-Custodians provide custody services, with respect to securities traded in a particular market or jurisdiction, on behalf of the Custodian. Their duties include:
a. Safekeeping assets/securities such as stocks, bonds, commodities such as precious metals, and currency (cash), both domestic and foreign;
b. Arranging settlement of any purchases and sales and deliveries in/out of such securities and currency;
c. Collecting information on, and income from, such assets and administering related tax withholding documents and foreign tax reclamations;
d. Administering voluntary and involuntary corporate actions on securities held;
e. Providing information on the securities and their issuers such as annual general meetings and related proxies;
f. Maintaining currency/cash bank accounts, effecting deposits and withdrawals and managing other cash transactions; and
g. Performing foreign exchange transactions.
23. Sub-Custodians also withhold and remit amounts on behalf of the Unitholders in respect of their Part XIII tax liabilities under the Act. Specifically, the Sub-Custodians determine the amount of Part XIII tax to be withheld on amounts paid or credited by a payer resident in Canada on a particular day, as well as determine any Canadian tax obligations under section 116.
Pass-Through Treatment of the Fund
24. Pursuant to Chapter 23 of Part V of the Law of 2010, apart from an annual subscription tax at a rate of XXXXXXXXXX% based on the net asset value of the Fund at the end of the relevant quarter calculated and paid quarterly, subject to specific exemptions depending upon the investments of the Fund, no other tax referred to in the Law of 2010 is payable by the UCIs. Specifically, the Fund is exempt from such tax if its Units are reserved to (i) professional pension institutions or similar investment vehicles, created on the initiative of one or more employers for the benefit of their employees and (ii) companies of one or more employers investing the funds they hold in order to provide pension benefits to their employees. This exemption applies so long as these conditions are met.
25. A reduced subscription tax of XXXXXXXXXX% per annum is applicable to individual compartments of UCIs with multiple compartments referred to in the 2010 Law, as well as for individual classes of securities issued within a UCI or within a compartment of UCI with multiple compartments, provided that the securities of such compartments or classes are reserved to one or more institutional investors.
26. Pension funds in Luxembourg are exempt from paying the taxes described in paragraphs 24 and 25 above. While the Fund is an investment fund and not a pension fund, all of the investors are pension funds or entities making investments on behalf of pension funds, so the Fund is currently exempt from paying these taxes as a result of the underlying Unitholders.
27. In Luxembourg, the amounts distributed by UCIs in the form of income and gains are not subject to a deduction at source and are not taxable if received by non-residents.
28. Pursuant to Chapter 23 of Part V of the Law of 2010, the Fund is not subject to Luxembourg tax, and existing Unitholders of a particular Sub-Fund are treated for Luxembourg tax purposes as having earned the income and gains that arise or accrue in respect of the Sub-Funds.
29. The Luxembourg Direct Tax Authority does not treat the Fund as a resident of Luxembourg for purposes of any income tax treaty as it is treated as a tax transparent fund under Luxembourg laws.
32. The Sub-Funds will issue Units to New Investors that will invest in Canadian securities and in assets located in various foreign jurisdictions as permitted under the Prospectus.
33. New Investors will invest in the Sub-Funds pursuant to the Prospectus and the Management Regulations. By purchasing Units of a Sub-Fund offered in the Prospectus, a New Investor will fully approve and accept the terms of the Management Regulations.
34. The Sub-Funds will continue to invest only in those investments permitted by the Management Regulations, the Prospectus, the Law of 2010 and any other regulatory requirements.
35. The Fund will continue to operate as an open-ended umbrella fund, which means that there will be multiple Sub-Funds in which a New Investor may invest.
36. A New Investor will not be subject to Luxembourg tax, to the extent that they do not hold through the Fund XXXXXXXXXX% or more of the shares of a Luxembourg resident company and will be treated for Luxembourg tax purposes as having earned the income and gains that arise or accrue in respect of the Sub-Funds in which they invest.
Purpose of the Proposed Transactions
37. The XXXXXXXXXX has established approximately XXXXXXXXXX pension plans in approximately XXXXXXXXXX countries around the world. Such pension plans invest in assets located not only in their home countries, but also in other jurisdictions.
After significant research and input from interested parties, including some of XXXXXXXXXX largest funds, the FCP was selected as a pooling vehicle for the pension plan assets because it is a vehicle designed to provide complete tax transparency for multi-national corporations seeking to offer their individual, underlying country pension plans an opportunity to access an array of pooled investment options.
The pooling of the pension plan assets provides the opportunity to lower overall risks, leverage the strengths of XXXXXXXXXX and its national-based pension funds, and enable a number of cost savings to be achieved through economies of scale. These savings include a reduction in management fees, administration costs, and custodian fees. Equally important, a pooled arrangement allows smaller country funds to diversify their risk by using a larger number of investment managers than would be possible if they operated on a stand-alone basis.
In short, the proposed investment in the Fund by New Investors is expected to reduce costs, reduce risks and increase the net return potential to New Investors while at the same time improving their governance and efficiency.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and Purpose of the Proposed Transactions, we rule as follows, in reliance on such statements and subject to the Caveats below:
A. The tax consequences to the New Investors of their investments in the Fund as described in the Proposed Transactions will be determined under the Act on the basis that the Fund, including each of its Sub-Funds, is not a person or a taxpayer for the purposes of the Act and as such, the Fund and each of its Sub-Funds is treated as fiscally transparent for the purposes of the Act.
B. For the purposes of Part XIII withholding and section 116, any amount paid or credited by a payer to the Sub-Custodians in respect of property held by a Sub-Fund on behalf of the New Investors, including purchase consideration for such property, will be considered an amount paid or credited to the New Investor in proportion to its co-ownership interest in the assets and Gross Income of the particular Sub-Fund.
The above-noted rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014 and are binding on the CRA provided that the proposed transactions are entered into before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
In particular, nothing in this ruling should be construed as implying that the CRA has considered, examined, agreed to, or ruled on, whether:
(a) any Unitholder would be considered to be carrying on business in Canada because of the provision of services to them by the Sub-Custodians in reference to the Unitholder’s investments in Canadian securities and consequently, whether the income in respect of the investments referred to herein would be taxable under Part I or Part XIII;
(b) any Unitholder is a resident of a country with which Canada has entered into a Tax Treaty, or the manner in which any article of a Tax Treaty applies to any Unitholder; or
(c) a Canadian payer or the Sub-Custodians have complied with the withholding requirements under Part XIII (including guidance in respect of financial intermediaries provided in IC76-12R6 “Applicable rate of Part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention”, and on the CRA webpage “Pending updates to IC76-12, Applicable rate of Part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention related to forms NR301, NR302, and NR303”) in respect of the amounts paid or credited to the Sub-Custodians and the amounts paid or credited by the Sub-Custodians to Unitholders.
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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