2021 Ruling 2019-0832651R3 - XXXXXXXXXX

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: Canadian tax treatment of dividends paid on Canadian securities that are part of the assets of a particular XXXXXXXXXX taking the form of a contractual fund.

Position: Such dividends will be exempt from Canadian tax imposed by paragraph 212(2) of the Act by virtue of XXXXXXXXXX of the Treaty.

Reasons: Application of the Act and the Treaty.

XXXXXXXXXX								2019-083265

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in response to your request for an advance income tax ruling as amended (“Rulings Request”) on behalf of XXXXXXXXXX and XXXXXXXXXX. We also acknowledge the information provided in subsequent correspondence in connection with your request.

We understand that, to the best of your knowledge and that of XXXXXXXXXX none of the proposed transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of XXXXXXXXXX or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by the taxpayer or a related person; or

C. the subject of a current or completed court process involving the taxpayer or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise indicated, all statutory references in this letter are to the corresponding provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th supp.), as amended to the date of this advance income tax ruling (“Act”).

For greater certainty, all the documents and information submitted in support of your Ruling 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, the Purpose of the Proposed Transactions and the Additional Information described below.

DEFINITIONS:

“Audit” means the Canada Revenue Agency auditors responsible to audit the tax consequences that may result from the management and administration of the Fund including the Unitholder Liability for Tax, and the Withholding Tax Obligation of the Canadian Sub-Custodian;

“Authority” means the XXXXXXXXXX, which is responsible for the implementation of the XXXXXXXXXX whose object is to regulate the financial markets through various acts including the Foreign Legislation 1;

“Books and Records” means the books and records containing the information described in this letter that the Canadian Sub-Custodian will keep at its Canadian Place of Business;

“Canadian Agreement” means the agreement dated XXXXXXXXXX entered into by XXXXXXXXXX with the Canadian Sub-Custodian; the agreement between XXXXXXXXXX;

“Canadian Place of Business” means an office or place of business situated in Canada at XXXXXXXXXX;

“Canadian Sub-Custodian” means XXXXXXXXXX, which is a Canadian resident whose tax affairs are handled by the XXXXXXXXXX;

“Canadian Securities” means shares of the capital issued by a Canadian resident corporation which are listed on a Designated Stock Exchange or traded on another regulated market open to the public;

“CIS” means a Collective Investment Scheme governed by the Foreign Legislation 1 and refers to assets that are raised from mutually independent investors and aggregated in an investment fund which is managed by fund managers on their behalf for the purpose of collective investments pursuant to the terms of a fund contract;

“CRA” means the Canada Revenue Agency;

“Custodian Bank” means XXXXXXXXXX;

“Designated Stock Exchange” has the meaning assigned by subsection 248(1);

“Derivatives” generally means underlying financial instruments limited to call or put options, swaps, futures and forwards on the Canadian Securities and XXXXXXXXXX;

“Disposing Unitholder” means any Unitholder disposing of Units in the Fund on Redemption Time;

“Existing Unitholders” means the Unitholders in the Fund immediately before a Subscription;

“Foreign Legislation 1” means the XXXXXXXXXX;

“Foreign Legislation 2” means the XXXXXXXXXX enacted in respect of the Foreign Legislation 1;

“Fund” means the XXXXXXXXXX subfund, a CIS established and governed by the Fund Contract which is one of the multiple subfunds of the Umbrella Fund;

“Fund Assets” means the assets governed by the Fund Contract formed of the Subscription proceeds, any assets acquired with such proceeds, with Fund Income that are reinvested or with proceeds of disposition of Fund Assets, XXXXXXXXXX;

“Fund Contract” means the contractual arrangement entered into by the Fund Management Company, the Unitholders and the Custodian Bank in respect of the Fund Assets and governed by Foreign Legislation 1 and the Foreign Legislation 2;

“Fund Income” means the net income derived from the Fund Assets;

“Fund Management Company” means XXXXXXXXXX;

“Fund Unit” means a unit of the Fund conferring an entitlement to the Fund Assets and to the Fund Income proportionate to the fraction it represents of total Fund Units existing at a moment in time;

“Net Asset Value” means the market value of the Fund Assets at a particular time as determined pursuant to the Fund Contract;

“Net Assets Value per Unit” means the market value of the Fund at a particular time as determined pursuant to the Fund Contract divided by the number of issued and outstanding Fund Units;

“Non-Resident” has the meaning provided in subsection 248(1);

XXXXXXXXXX;

“Redemption” means the redemption of a Unit that each Unitholder is entitled to request from the Fund Management Company or that is initiated by the Fund Management Company;

“Redemption Time” means the time when a Redemption occurs;

“Remaining Unitholders” means the Unitholders remaining after a Redemption;

XXXXXXXXXX;

“Subscription” means the contribution in cash or in kind made for the issuance of a Fund Unit;

XXXXXXXXXX;

“Taxpayer” means XXXXXXXXXX;

“TCP” means taxable Canadian property as defined in subsection 248(1);

“Tax Treaty” means a tax treaty as defined in subsection 248(1);

“Treaty” means the XXXXXXXXXX;

“Umbrella Fund” means XXXXXXXXXX, which is an XXXXXXXXXX composed of various subfunds including the Fund;

“Unitholder” means any person holding Fund Units;

“Unitholder Liability for Tax” means the liability for tax, interest and penalty of any Unitholder under the Act that may arise in connection with the holding of Fund Units;

XXXXXXXXXX;

“Withholding Tax Exemption” means the exemption that a resident of XXXXXXXXXX can claim in respect of part XIII withholding tax payable on dividends paid or credited by a resident of Canada pursuant to XXXXXXXXXX of the Treaty; and

“Withholding Tax Obligation” means any legal obligation of the Canadian Sub-Custodian to withhold any amount in application of the Act, or the Canadian Agreement.

FACTS:

General information about the Fund and the Taxpayer

1. The Fund is an XXXXXXXXXX to be constituted by the Fund Contract.

2. The Fund Management Company and the Custodian Bank are responsible for managing the Fund Assets in accordance with the investment policy described in the Fund Contract.

3. The Fund Management Company holds the legal ownership of the Fund Assets and the Fund Units provide an interest in the Fund Assets to the Unitholders.

4. The Fund is an Open Ended contractually based CIS without a distinct legal personality under XXXXXXXXXX law.

5. The Taxpayer qualifies for the Withholding Tax Exemption.

Characteristics of the Fund, the Unitholders, the Fund Management Company and the Custodian Bank under the Foreign Legislation 1, the Foreign Legislation 2 and the Fund Contract

6. The characteristics of the Fund, the Unitholders, the Fund Management Company and the Custodian Bank under the Foreign Legislation 1, the Foreign Legislation 2 and the Fund Contract are as follows:

Fund

a) The Fund is comprised of the Fund Assets.

b) The rights and obligations of the Unitholders, the Fund Management Company and the Custodian Bank in connection with the Fund are governed by the Fund Contract.

c) The Fund Management Company prepared the Fund Contract, which was approved by the Authority.

d) Only XXXXXXXXXX pension schemes that qualify for the Withholding Tax Exemption can subscribe for Fund Units and the price of each Unit is equal to their Net Assets Value per Unit at the moment of its Subscription.

e) The Fund Units may be further divided into classes to accommodate different entitlements in respect of the distribution of Fund Income to Unitholders.

f) The Fund cannot acquire participation rights representing more than XXXXXXXXXX% of the voting rights or that enable it to exert a significant influence on an issuer’s management.

g) Following the deduction of liquid assets, no more than XXXXXXXXXX% of the Funds Assets may be invested in other collective investments.

h) The Fund Income will be added annually to the Fund Assets for reinvestment. The Fund Management Company may also make interim reinvestments of the Fund’s income. This is subject to any taxes and duties that may be levied on the reinvestment of these funds. Capital gains realised on the sale of assets and rights may be distributed by the Fund Management Company or retained for the purpose of reinvestment.

i) Although the Fund is established for an indefinite period of time, it may be dissolved, without notice, by the Fund Management Company or by order of the XXXXXXXXXX.

Unitholders

a) The Unitholders are limited to the Taxpayer and other XXXXXXXXXX pension schemes that qualify for the Withholding Tax Exemption.

b) No Unit shall confer any interest or share in any particular part of the assets of the Fund.

c) Each Unitholder is liable in respect of the liabilities of the Fund to the extent of the market value of their Subscription.

d) The Unitholders are liable to pay XXXXXXXXXX income tax on the Fund Income that accrues to them in accordance with their Fund Units.

e) The Fund Assets and Fund Income is segregated in favour of the Unitholders and does not form part of the assets of the Fund Management Company if it becomes bankrupt.

f) The Unitholders are entitled to request, at all times, the Redemption of a Fund Unit for its Net Asset Value per Unit at the Redemption Time.

g) The Unitholders cannot transfer their Fund Units.

h) The Fund Units do not confer any voting right.

i) Units shall not take the form of actual certificates but shall exist exclusively as book entries and shall be held exclusively in a custody account with the Custodian Bank. The investor is not entitled to request the issue of a registered or bearer unit certificate.

Fund Management Company

a) The Fund Management Company is a Non-Resident.

b) The Fund Management Company manages the Fund at its own discretion and in its own name but for the account of the Unitholders.

c) The Fund Management Company makes decisions relating to the management of the Fund Assets, the Subscription and the Redemption of Fund Units as well as the investment and distribution of the Fund Income.

d) The Fund Management Company implements an investment policy that complies with the terms of the Fund Contract.

e) The Fund Management Company acts independently and exclusively in the interest of the Unitholders.

f) The Fund Units held by Unitholders that no longer meet the contractual requirements for participating in the Fund are subject to forced Redemption.

g) The Fund Management Company is authorized and supervised by the Authority.

h) The Fund Management Company is entitled to receive the fees stipulated in the Fund Contract in consideration for its services.

Custodian Bank

a) The Custodian Bank is a Non-Resident.

b) The Fund Contract provides that “The custodian bank shall ensure that the fund management company complies with the law and the fund contract. It shall check whether the calculation of net asset value, issue and redemption prices of units and investment decisions are being carried out in accordance with the law and the fund contract and whether the net income is appropriated as stipulated in the fund contract. The custodian bank shall not be responsible for any investment selection made by the fund management company within the scope of the investment guidelines.”

c) The Custodian Bank ensures the Fund Management Company’s investment strategy, and Net Assets Value per Unit computation complies with the terms of the Fund Contract, and the requirements stated in the Foreign Legislation 1.

d) The Custodian Bank may delegate its responsibility for the safekeeping of some of the Fund Assets to a third-party including the Canadian Sub-Custodian.

e) The Fund Contract provides that the Custodian Bank acts independently and in good faith in the exclusive interest of the Unitholders.

f) The Custodian Bank is authorized and supervised by the Authority.

g) The Custodian Bank is entitled to receive a fee stipulated in the Fund Contract in consideration for its services.

The responsibilities of the Canadian Sub-Custodian

7. The Custodian Bank has appointed, through their custodian chain, the Canadian Sub-Custodian as custodian of the Canadian Securities pursuant to the Canadian Agreement.

8. The Canadian Agreement provides that the Canadian Sub-Custodian is responsible for withholding any amount of tax under the Act, including the Part XIII tax payable on any amount that a person resident in Canada pays or credits to Unitholders in connection with their holding of Fund Units.

9. The Canadian Agreement also provides that the Canadian Sub-Custodian shall keep Books and Records at the Canadian Place of Business to support:

a) the assessment of any Unitholders for their liability for Tax, interest and penalties that may arise in connection with the Fund Units that they hold; and

b) the determination of any amount that may be subject to the Withholding Tax Obligation, and that should be remitted to the Receiver General in connection with the Fund Units held by the Unitholders.

PROPOSED TRANSACTIONS:

10. The Taxpayer will acquire Units.

11. The Fund will use the contributions received as described in the Paragraph above to invest in Canadian Securities.

12. At no time will the Fund invest in or own property that is TCP.

PURPOSE OF THE PROPOSED TRANSACTIONS:

The purpose of the Proposed Transactions is to provide the Taxpayer and XXXXXXXXXX that qualify for the Withholding Tax Exemption with the opportunity to acquire an interest in Canadian Securities that will form part of the Fund Assets to be managed and administered by the Fund Management Company and the Custodian Bank

ADDITIONAL INFORMATION:

Unitholder Liability for Tax and Withholding Tax Obligation

The Canadian Sub-Custodian will keep at the Canadian Place of Business all the Books and Records containing the information relating to the Unitholder Liability for Tax.

The aforementioned information will be provided by the Canadian Sub-Custodian upon Audit’s request to ensure that such Unitholders are complying with their respective obligations under the Act.

Withholding Tax Obligation: Part XIII tax

It is expected that dividends will be paid or credited on the Canadian Securities that will be acquired by the Fund within six months of the date of this letter.

Subject to Ruling A, as provided in the Canadian Agreement, the Canadian Sub-Custodian will withhold and remit tax under Part XIII to the CRA in connection with any amount that will be paid or credited on the Canadian Securities in its capacity of agent of the Unitholders in compliance with its Withholding Tax Obligation.

In addition, the Canadian Sub-Custodian will keep at its Canadian Place of Business all the Books and Records that are required to determine the appropriate amount of Part XIII Tax to be deducted and remitted to the CRA. On the basis of the information contained in such Books and Records, the Canadian Sub-Custodian will determine the appropriate withholding tax rate applicable to each Unitholder under Part XIII based on the provisions of the Act and the Treaty that apply to a particular Unitholder. The Canadian Sub-Custodian will then withhold the appropriate tax from the amount paid or credited to each Unitholder.

At the end of each month the Canadian Sub-Custodian will compute the total amount withheld on behalf of a Unitholder for that month as determined above and remit that amount to the CRA by the 15th day of the following month. Within 90 days after the end of each year, the Canadian Sub-Custodian will provide each Unitholder with NR4 Summary form reporting the total amount of Part XIII tax withheld and remitted to the CRA on behalf of that Unitholder and will forward to the CRA a copy of that NR4 Summary form for the year.

RULING

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, and the statements in the Additional Information are acknowledged, we rule as follows, in reliance on such statements and subject to the Additional Comments below:

A. To the extent that an amount paid or credited from the Fund Assets to the Taxpayer or reinvested in the Fund Assets under the Fund Contract in the interest of the Taxpayer is paid, credited or reinvested out of a dividend paid or credited on Canadian Securities that are part of the Fund Assets, such dividend will be exempt from Canadian tax imposed by paragraph 212(2) of the Act by virtue of XXXXXXXXXX of the Treaty.

The person who pays, credits or provides such dividend will not be required to deduct and withhold an amount under subsection 215(1) of the Act from such dividend and the Canadian Sub-Custodian will not be required to deduct and withhold under subsection 215(3) in respect of such dividend.

The above-noted ruling is subject to the general limitations and qualifications set out in Information Circular IC70-6R11 issued by the CRA on April 1, 2021, and is binding on the CRA provided that the Proposed Transactions is entered into within six months of the date of this letter.

This Ruling is based on the Act and the Treaty in their present form and do not take into account amendments to the Act or the Treaty which, if enacted into law, could have an effect on the rulings provided herein.

ADDITIONAL COMMENTS:

Nothing in this letter should be construed as implying that the CRA has agreed to or ruled on has agreed to or reviewed any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the ruling 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 of the Unitholders is a resident of any country with which Canada has entered into a Tax Treaty and the manner in which any Article of a Tax Treaty applies to any of the Unitholders;

b) Whether any income referred to herein is taxable under Part I, Part XIII or any other Part of the Act;

c) Whether any Unitholder would be considered to be carrying on business in Canada because of the services that the Custodian Bank or the Canadian Sub-Custodian may provide.

Without restricting the generality of the preceding statements, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has reviewed or made any determinations in respect of the compliance of any Canadian payer concerning its obligations to withhold and remit an amount of tax under Part XIII in respect of any amount paid or credited to a Unitholder through the Fund.

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