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 the particular XXXXXXXXXX for the purposes of the Act?
Position: The XXXXXXXXXX is a contractual arrangement that is not a person or a taxpayer for purposes of the Act and the Canada-XXXXXXXXXX Treaty.
Reasons: The XXXXXXXXXX is an unincorporated contractual arrangement that has no legal personality and is being established such that each unitholder has an undivided co-ownership interest in the underlying properties of the Sub-funds.
XXXXXXXXXX 2017-073804
XXXXXXXXXX, 2018
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-referenced taxpayer. We acknowledge receipt of the additional information provided in the correspondence exchanged with your firm concerning this ruling request.
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request:
(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;
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has expired; or
(v) is the subject of a Ruling previously issued by the Directorate.
Unless otherwise stated, all statutory references or 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 Purposes of the Proposed Transactions described below.
Definitions
In this letter the following terms have the meanings specified:
“Arm’s Length” has the meaning assigned by subsection 251(1).
XXXXXXXXXX
“Class” means a particular class of Units.
XXXXXXXXXX
XXXXXXXXXX means a collective investment contractual co-ownership arrangement that is authorised by XXXXXXXXXX.
“Country A” means XXXXXXXXXX.
“CRA” means the Canada Revenue Agency.
“Custodian” means XXXXXXXXXX, a XXXXXXXXXX subsidiary of the Depositary or such person as is appointed to act as the custodian of the Fund.
“Custody Agreement” means the XXXXXXXXXX.
“Deed” means the agreement governing the XXXXXXXXXX entered into between the Manager and the Depositary constituting and establishing the terms and conditions governing the Fund, as amended and supplemented from time to time in accordance with the XXXXXXXXXX with prior approval of the XXXXXXXXXX.
“Depositary” means XXXXXXXXXX, a company incorporated in XXXXXXXXXX, or such person as is appointed to act as the depositary of the Fund.
XXXXXXXXXX
“Fund” means the XXXXXXXXXX, which is governed by the Deed and qualifies as a XXXXXXXXXX.
“Investment Manager” means XXXXXXXXXX, a limited liability corporation in XXXXXXXXXX regulated by XXXXXXXXXX, or such other person(s) appointed by the Manager in accordance with the requirements of the XXXXXXXXXX to manage the investment and re-investment of some or all of the assets of any one or more of the Sub-funds of the Fund.
XXXXXXXXXX
“Manager” means XXXXXXXXXX, which is a corporation resident in Country A.
“Manual” means the XXXXXXXXXX issued by the Tax Authority.
“Non-Resident” has the meaning assigned by subsection 248(1).
“Paragraph” refers to a numbered paragraph in this letter.
“Person” has the meaning assigned by subsection 248(1).
XXXXXXXXXX
“Prospectus” means the document that is used by the Manager in order to offer Units to prospective investors.
“Register” means the register of Unitholders referred to in XXXXXXXXXX of the Deed.
“Related Persons” has the meaning assigned by subsection 251(2).
“Resident” means a person who is not a Non-Resident.
“Sub-custodian” means XXXXXXXXXX, a Canadian subsidiary of the Depositary. The Sub-custodian is serviced by the XXXXXXXXXX Tax Services Office.
“Sub-fund” means a constituent part of the property that is held as governed by the Deed, which is pooled separately as established by the Manager in accordance with XXXXXXXXXX of the Deed and with approval of the XXXXXXXXXX.
“Tax Authority” means XXXXXXXXXX.
“Tax Treaty” means a tax treaty as defined in subsection 248(1).
“Taxpayer” has the meaning assigned by subsection 248(1).
XXXXXXXXXX
“Unit” means a unit representing the co-ownership rights and interests of a Unitholder in the assets pooled in a Sub-fund as determined under the Deed. Units in a Sub-fund may be divided into Classes.
“Unitholder” means every person who is on the Register as a holder of a Unit.
Our understanding of the Facts, Proposed Transactions and the Purposes of the Proposed Transactions is as follows:
Facts
Background
1. The XXXXXXXXXX sets out the conditions under XXXXXXXXXX to qualify as a XXXXXXXXXX and provides the following:
a. A XXXXXXXXXX is generally defined as a collective investment XXXXXXXXXX that is not a body corporate, a partnership or a limited partnership, under which the Unitholders by contractual arrangements (set out in a deed) between a manager and a depositary, beneficially own the underlying property as tenants in common.
b. A XXXXXXXXXX must include the express statement that the arrangement is intended to constitute a co-ownership XXXXXXXXXX as defined in XXXXXXXXXX. It must also contain provisions for the issue and redemption of units and allow the manager to acquire, manage and dispose of property subject to the XXXXXXXXXX. The deed must prohibit the transfer of units or provide specified conditions to be met in order to allow a transfer of units. In addition, contracts entered into by the manager are binding on the unitholders for the purposes of, or in connection with, the acquisition, management or disposal of property subject to the XXXXXXXXXX. The deed must make provision requiring the manager and depositary to wind-up the XXXXXXXXXX in specified circumstances.
c. Pooling in relation to separate parts of the property is permitted and the Unitholders are entitled to exchange rights in one part for rights in another.
2. Currently, Country A does not provide any specific governing tax legislation pertaining to XXXXXXXXXX to administer their tax treatment. However, the Tax Authority has confirmed by written clearance, and this position is outlined in the Manual, that a XXXXXXXXXX is viewed by the Tax Authority as fiscally transparent for Country A income tax purposes and that only the Unitholders are taxable on income or gains on property governed by the XXXXXXXXXX in Country A. As such, income and expenses derived from the property governed by the XXXXXXXXXX accrue directly to each Unitholder in proportion to the value of the Units owned by the Unitholder. The nature and characterization of the income and expenses related to investments governed by the XXXXXXXXXX is retained in the hands of the Unitholders. For example, if a dividend is paid on a share held under the terms of the XXXXXXXXXX, each Unitholder is considered to have received a dividend equal to its pro rata share for Country A income tax purposes. XXXXXXXXXX.
3. For Country A capital gains tax purposes, a switch of Units in one Sub-fund for Units in any other Sub-fund is treated as a redemption of the Original Units and a purchase of New Units. A redemption of the Original Units may give rise to a liability to tax for Country A investors, depending on the Unitholder’s individual circumstances.
The Fund
4. The Depositary and the Manager entered into the Deed on XXXXXXXXXX, which was approved by and filed with the XXXXXXXXXX.
5. XXXXXXXXXX of the Deed provides that the Fund is constituted as XXXXXXXXXX. The Fund qualifies as a XXXXXXXXXX under XXXXXXXXXX law and is authorized by the XXXXXXXXXX as a XXXXXXXXXX, with effect from XXXXXXXXXX.
6. XXXXXXXXXX of the Deed states that the provisions of the Deed are considered to have been accepted by the Unitholders on the acquisition of Units under the terms of the Prospectus, as if the Unitholder had been a party to the Deed, and each Unitholder is bound by its provisions and authorities.
7. XXXXXXXXXX of the Deed states: “The assets of each Sub-fund … shall be held by, or for the order of, the Depositary for and on behalf of its Unitholders from time to time.” The Depositary is the custodian of the Fund. See also Paragraphs 24 and 25.
8. XXXXXXXXXX of the Deed states: “The assets of each Sub-fund are and shall be beneficially owned by the Unitholders in the Sub-fund as tenants in common and must not be used to discharge any liabilities of, or any claim against, any person other than the Unitholders in that Sub-fund.”
9. The Fund is a contractual arrangement that does not have legal existence separate from the Unitholders.
10. The proportionate interests in the Fund are described as “Units” and the investors are called “Unitholders”. XXXXXXXXXX of the Deed states: “Any reference in this Deed to Units being issued “in respect of” a Sub-fund or “relating” to a Sub-fund shall be construed as a reference to Units which give the holder of them co-ownership of that part of the XXXXXXXXXX Property comprising the Sub-fund in question and the entitlement […..] to exchange co-ownership of that part of the XXXXXXXXXX Property for that part of the XXXXXXXXXX Property comprising any other Sub-fund [....]."
11. The criteria for eligibility to invest in the Fund are set out below:
a. No Units may be issued to anyone other than XXXXXXXXXX, or a person who already holds Units.
b. Unitholders must meet the tax status criteria for the Classes in which they invest as further described below.
c. Unitholders must meet any other investment criteria for the Units in which they invest, which will be set out in the Prospectus from time to time.
12. XXXXXXXXXX of the Deed provides that the Units of a particular Sub-fund may be further broken down into different Classes in respect of the Sub-fund. Each Class participates proportionately in the ownership of the assets of the particular Sub-fund; however, the Classes may differ in other respects (e.g., management fees, functional currency). The Deed also provides that the Manager may create Classes in respect of each Sub-fund to accommodate different Unitholders rights and terms, as well as different entitlements to gross income net of withholding tax which may arise due to different Unitholder tax profiles. Investors with different tax profiles are required to invest in separate Classes such that investors don’t benefit from the tax status/entitlement of others. For example, Country A investors that can benefit from a reduced withholding tax under the Canada-Country A Tax Treaty are required to invest in a separate Unit Class to Country A investors that are not entitled to a reduced withholding rate.
13. The Fund consists of several Sub-funds. Different Sub-funds may be established from time to time by the Manager with the approval of the XXXXXXXXXX.
14. Each Sub-fund holds a separate group of assets to be managed by the Investment Manager in accordance with the investment objectives and policies as set out in the Prospectus. Subsequent to submitting the ruling request, the Fund has launched a number of Sub-funds. The rulings provided below are in regards to the following Sub-funds which may hold Canadian securities:
XXXXXXXXXX
15. XXXXXXXXXX of the Deed provides that the transfer of Units is not permitted.
16. XXXXXXXXXX of the Deed states that “Unitholders are absolutely entitled to the income of the XXXXXXXXXX as it arises irrespective of whether or not a distribution is made”. In the case of income Units, income shall be distributed to Unitholders at such intervals as are stated in the Prospectus; and in the case of accumulation Units, income shall be transferred to (and retained as a part of) the capital assets of the relevant Sub-fund.
The Manager
17. The Manager is a Non-Resident.
18. The Manager is the operator of the Fund for the purpose of the XXXXXXXXXX.
19. Pursuant to XXXXXXXXXX of the Deed, “The Unitholders authorise the Manager to acquire, manage and dispose of the property which is subject to the XXXXXXXXXX from time to time and to enter into contracts which are binding on Unitholders for the purposes of, or in connection with, the acquisition, management and/or disposal of any property which is subject to the XXXXXXXXXX from time to time”.
20. The Manager may from time to time impose such restrictions as it may think necessary for the purpose of ensuring that no Units are acquired or held by any person in breach of the law or governmental regulation (or any interpretation of a law or regulation by a competent authority) of any country or territory or which would result in the Fund incurring any liability to taxation which the Fund is not able to recoup itself or suffering any other adverse consequence.
The Depositary
21. The Depositary is a Non-Resident.
22. The Depositary is responsible for acting as depositary of the Fund in accordance with the Deed and the depositary agreement entered into between the Depositary and the Manager. The Manager and the Depositary deal at Arm’s Length.
23. Pursuant to XXXXXXXXXX of the Prospectus, “The Depositary is responsible for the safekeeping of all of the Fund Property (other than tangible moveable property) of the Fund and has a duty to take reasonable care to ensure that the Fund is managed in accordance with the Deed and the provisions of the XXXXXXXXXX relating to the pricing of, and dealing in, Units and relating to the income and the investment and borrowing powers of the Sub-funds."
Sub-custodian
24. Pursuant to the Custody Agreement, the Depositary has appointed the Custodian to act as custodian of the Fund.
25. The Depositary has delegated its duties and responsibilities to the Custodian that has delegated its Canadian duties and responsibilities (namely its duties and responsibilities described in Paragraph 26) to the Sub-custodian, a Resident.
26. The Sub-custodian maintains relevant books and records with respect to Canadian tax matters and fulfils any obligations imposed under the Act, including the requirements of section 116 and obligations under Part XIII in respect of Non-Resident Unitholders of the Fund, other than in regards to Canadian securities listed on a US stock exchange. Those obligations include obtaining relevant information or documentation regarding the treaty status of Non-Resident Unitholders and the relevant withholding tax rate, withholding and remitting on a timely basis the appropriate amount of Part XIII taxes, and making and filing various information returns and slips (e.g., NR4, T5) in respect of both Resident and Non-Resident Unitholders.
27. From a legal perspective, the Sub-custodian cannot administer the withholding, remittance and reporting in respect of securities that are not held via the Canadian Depository for Securities (“CDS”).
Proposed Transactions
28. Units of the Sub-funds specifically listed in Paragraph 14 will be issued pursuant to the Prospectus to both Residents and Non-Residents.
29. The Sub-funds specifically listed in Paragraph 14 will acquire, hold and dispose of securities issued by corporations resident in Canada, including shares and debt obligations in respect of which amounts will be paid or credited to the Sub-custodian.
Purposes of the Proposed Transactions
30. The Fund and the Sub-funds specifically listed in Paragraph 14 have been established for the purpose of pooling the investments of qualified investors in order to achieve economies of scale and investment diversification. The proposed issuance of Units will enable a number of cost savings to be achieved through economies of scale. These savings would include a reduction in management fees, administration costs and depositary fees.
31. The other objective behind the formation of the Fund, the Sub-funds specifically listed in Paragraph 14 and the requirement in Paragraph 12 is to structure pooled investment portfolios in a manner that would not materially increase the tax costs incurred by the Unitholders relative to direct ownership of the underlying assets (which would be the case if each Unitholder’s investments were not pooled).
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and Purposes of the Proposed Transactions, we rule as follows, in reliance on such statements and subject to the comments below:
A. The Fund, including each of its Sub-funds specifically listed in Paragraph 14, is not a Person or a Taxpayer for the purposes of the Act and as such, the Fund and each of such Sub-funds is treated as fiscally transparent for the purposes of the Act.
B. For the purposes of Part XIII and section 116, any amount paid or credited by a person, to the Sub-custodian, in respect of a property held by a Sub-fund specifically listed in Paragraph 14 under the terms of the Deed on behalf of the Unitholders as described in Paragraph 7, including purchase consideration for such property, will be considered to arise at the time the amount is paid or credited (whether distributed to Unitholders or not) and to have the same character and source in respect of each Unitholder thereunder in proportion to the number of Units held by that Unitholder that represents its participation in such property.
The above-noted rulings are subject to the general limitations and qualifications set out in Information Circular 70-6R7 issued by the CRA on April 22, 2016, and are binding on the CRA provided that the proposed transactions are entered into within six months of the date of this letter.
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.
Caveats
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:
(a) Whether any Unitholder would be considered to be carrying on business in Canada because of the provision of services to them by the Sub-custodian 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) The Canadian tax implications to a Unitholder that has invested in the Fund or any of its Sub-fund;
(c) Whether 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;
(d) Whether a Canadian payer and the Sub-custodian have complied with the withholding requirements under Part XIII (including an obligation under subsection 215(3) and 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-custodian and the amounts paid or credited by the Sub-custodian to Unitholders; or
(e) Whether a payer and the Sub-custodian have complied with the withholding and reporting obligations under section 116 of the Act.
Yours truly,
XXXXXXXXXX
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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