2023 Ruling 2022-0958681R3 - Conversion to open-end unit 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: 1. Will the proposed amendments to the Declaration of Trust result in a disposition by Fund of its XXXXXXXXXX? 2. Will the proposed amendments to the Declaration of Trust to provide for the Right of Redemption result in a disposition by the existing Unitholders of their Units? 3. Will Fund qualify as an open-end unit trust after the amendment to the Declaration of Trust? 4. Will the Proposed Transactions affect the qualification of Fund as a mutual fund trust?

Position: 1. No. 2. No. 3. Yes. 4. No.

Reasons: 1. This is similar to several previous rulings. There is no resettlement under provincial law and there is not a fundamental change in the terms of the trust. There are no actual dispositions of XXXXXXXXXX by the Fund. 2. The amendments to the DOT will not cause any person to become a beneficiary, nor will any person cease to be a beneficiary. There will be no resulting redemption or cancellation of units, and no material change to the rights of unitholders. 3. Fund will meet the requirements of paragraph 108(2)(a). 4. The Proposed Transactions will not cause subsection 132(7) to apply and will not impact on whether the Fund continues to meet paragraphs 132(6)(a), (b) and (c).

XXXXXXXXXX									2022-095868

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer, which was the subject of our file XXXXXXXXXX. In your subsequent submission of XXXXXXXXXX, you provided updated information concerning the facts and proposed transactions described in your original letter. We also acknowledge the additional information provided in your email correspondence, as well as the information provided during our telephone conversations.

You have advised us that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

i. in a previously filed tax return of the taxpayer or a related person;

ii. being considered by the CRA in connection with a previously filed tax return of the taxpayer or a related person;

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

iv. 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, other than in document XXXXXXXXXX.

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”), or, where appropriate, the Income Tax Regulations C.R.C., c.945, as amended, (the “Regulations”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions. Unless otherwise indicated, all references herein to monetary amounts are in Canadian dollars.

Definitions

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

(a) “XXXXXXXXXX Trust” means XXXXXXXXXX;

(b) “BCA” means the Business Corporations Act XXXXXXXXXX, as amended;

(c) “closed-end unit trust” means a trust that qualifies as a unit trust under paragraph 108(2)(b);

(d) “CRA” refers to the Canada Revenue Agency;

(e) “Declaration of Trust” means the declaration of trust establishing the Fund under the laws of XXXXXXXXXX;

(f) “Exchangeable Securities” means any securities of any trust other than the Fund, or of any limited partnership (including LP), or corporation that are convertible or exchangeable directly for Units without additional payment;

(g) “Fund” or “Trust” means XXXXXXXXXX, a closed-ended unit trust formed under the laws of XXXXXXXXXX pursuant to the Declaration of Trust;

(h) “Fund Unit” means a unit of any class of the Fund, including a Unit and a Special Unit;

(i) “Fund Unitholder” means a holder of any unit of the Fund, including a holder of a Unit and a holder of a Special Unit;

(j) “LP” means XXXXXXXXXX limited partnership;

(k) “LP Class A Unit” means a unit of interest in LP designated as a XXXXXXXXXX LP Unit and described in the limited partnership agreement of LP;

(l) “LP Class B Unit” means a unit of interest in LP designated as a XXXXXXXXXX LP Unit and described in the limited partnership agreement of LP;

(m) “Manager GP Co” means XXXXXXXXXX, a corporation incorporated under the BCA;

(n) “Manager LP” means XXXXXXXXXX, XXXXXXXXXX limited partnership;

(o) “Notes” means Subsidiary Notes or promissory notes of the Fund;

(p) “open-end unit trust” means a trust that qualifies as a unit trust under paragraph 108(2)(a);

(q) “Paragraph” refers to a numbered paragraph in this letter;

(r) “Proposed Transactions” means the transactions described in Paragraphs 17-22 below;

(s) “Redemption Price” means the price to be paid per Unit upon redemption, as described in Paragraph 18 below;

(t) “Right of Redemption” means the right of redemption, described in Paragraph 18 below, to be added to the Units as part of the Proposed Transactions;

(u) “Special Unit” means a unit of the class of Fund Units designated as “Special Voting Units” in the Declaration of Trust;

(v) “Stock Exchange” means the XXXXXXXXXX;

(w) “Sub GP Co” means the wholly-owned subsidiary of the Fund that is the sole general partner of LP;

(x) “Subsidiary Notes” means promissory notes of LP, a trust all the units of which, or a corporation all the shares of which, are owned directly or indirectly by the Fund or by another entity that would be consolidated with the Fund under International Financial Reporting Standards;

(y) “Unit” means a unit of the Fund other than a Special Unit; and

(z) “Unitholder” means a holder of a Unit.

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

Facts

1. The Fund is a closed-end unit trust, a “mutual fund trust” as defined in subsection 132(6), and a “real estate investment trust” as defined in subsection 122.1(1). The Fund has a XXXXXXXXXX year-end. The Units are listed for trading on the Stock Exchange under the symbol “XXXXXXXXXX” The Fund was established to invest in income-producing XXXXXXXXXX. As of XXXXXXXXXX, there were XXXXXXXXXX Units issued and outstanding. Based on the current market price per Unit at that time, the Fund’s market capitalization was approximately $XXXXXXXXXX. Also at that time, the Fund had total assets of over $XXXXXXXXXX, including XXXXXXXXXX valued at approximately $XXXXXXXXXX and XXXXXXXXXX under development valued at approximately $XXXXXXXXXX.

2. The head office of the Fund is located at XXXXXXXXXX. The Fund’s trust account number is XXXXXXXXXX and its tax centre is XXXXXXXXXX. To the best of its knowledge, the Fund is not aware of any current or ongoing tax audit or tax dispute matters, and the tax filings of the Fund and its subsidiaries are up to date.

3. Under XXXXXXXXXX of the Declaration of Trust, the Fund may issue an unlimited number of Units and an unlimited number of Special Units. The Fund is not authorized to issue any other class of Fund Units.

4. As provided by the Declaration of Trust, Units have the following attributes:

a. Units represent a Unitholder’s proportionate undivided beneficial interest in the Fund.

b. Each Unit confers (i) the right to one vote at any meeting of Fund Unitholders and (ii) the right to participate pro rata in any distributions by the Fund and, in the event of termination of the Fund, in the net assets of the Fund remaining after the satisfaction of all liabilities.

c. No Unitholder has or is deemed to have any right of ownership in any of the assets of the Fund.

d. Units are transferable.

e. No Unit has preference or priority over another.

5. As provided by the Declaration of Trust, the Special Units have the following attributes:

a. a Special Unit shall only be issued in connection with the issuance of Exchangeable Securities, including one or more LP Class B Units;

b. each Special Unit shall entitle the holder thereof to a number of votes at each meeting of Fund Unitholders equal to the number of Units for which the Exchangeable Securities with which the Special Unit was issued may be exchanged;

c. Special Units do not confer any rights other than voting rights on their holders and do not represent any entitlement to income of the Fund, net assets of the Fund in the event of termination or winding-up of the Fund, or any other economic interest;

d. Special Units may not be transferred separately from the Exchangeable Securities with which they were issued;

e. when Exchangeable Securities issued with a Special Unit are transferred, that Special Unit will automatically be transferred to the transferee of the Exchangeable Securities; and

f. when the Exchangeable Securities issued with a Special Unit are exchanged, converted, redeemed, or cancelled, that Special Unit will be automatically cancelled for no consideration.

6. XXXXXXXXXX of the Declaration of Trust precludes non-residents of Canada from being the beneficial owners, at any time, of more than XXXXXXXXXX% of the Units on the basis of either (i) all of the Units issued and outstanding at that time or (ii) all of the Units issued and outstanding at that time and all Units issuable upon the surrender or exchange of Exchangeable Securities at that time. The Fund is not maintained primarily for the benefit of non-resident persons, and to the knowledge of the trustees of the Fund, non-residents of Canada beneficially own, in aggregate, less than XXXXXXXXXX% of the issued and outstanding Units on either of the bases set out in (i) and (ii) above. To the knowledge of the trustees and officers of the Fund, as at XXXXXXXXXX, no person beneficially owns, or controls or directs, directly or indirectly, voting securities of Fund carrying XXXXXXXXXX% or more of the voting rights attached to the Units.

7. In addition to the outstanding Units described in Paragraph 1 above, there are XXXXXXXXXX Special Units issued and outstanding. These Special Units were issued in connection with the transaction described in Paragraph 14 below.

8. In XXXXXXXXXX of the Declaration of Trust, paragraph (b) restricts the Fund from making any investment or taking any action that would result in Units not being units of a mutual fund trust, being disqualified for investment by registered plans, or that would cause the Fund not to qualify as a unit trust or a real estate investment trust.

9. Manager LP provides XXXXXXXXXX management and related services to the Fund on a fee-for-service basis. Manager GP Co is the sole general partner of Manager LP and XXXXXXXXXX Trust is the sole limited partner. The Fund is the sole shareholder of Manager GP Co and is the sole unitholder of XXXXXXXXXX Trust.

10. The assets owned by the Fund include (but are not limited to):

a. XXXXXXXXXX;

b. XXXXXXXXXX;

c. loans receivable;

d. the limited partnership interest in Manager LP;

e. XXXXXXXXXX% of the shares of Sub GP Co;

f. XXXXXXXXXX% of the shares of Manager GP Co;

g. all of the units of XXXXXXXXXX Trust; and

h. subsidiary entities.

11. XXXXXXXXXX of the Declaration of Trust contains a number of investment restrictions with respect to what the Fund may own and invest in and XXXXXXXXXX provides certain operating guidelines. Among other aspects, in XXXXXXXXXX, paragraph (a) provides that the Fund XXXXXXXXXX:

XXXXXXXXXX.

12. In accordance with paragraph 108(2)(b), subsections 132(6) and 132(7) of the Act, and the relevant provisions of the Declaration of Trust, the Fund qualifies as a closed-end “unit trust” and a “mutual fund trust” because:

a. it is an inter vivos trust resident in Canada the interest of each beneficiary under which is described by reference to units;

b. it limits its undertaking to the investing of its funds in XXXXXXXXXX (other than XXXXXXXXXX), and to acquiring, holding, maintaining, improving, leasing or managing XXXXXXXXXX XXXXXXXXXX that is a capital XXXXXXXXXX of the Fund, or a combination of any of the foregoing activities;

c. it complies with the prescribed conditions in section 4801 of the Regulations;

d. it was not established and has not been maintained primarily for the benefit of non-residents of Canada;

e. it invests more than XXXXXXXXXX% of its XXXXXXXXXX in XXXXXXXXXX described in clauses 108(2)(b)(iii)(A) to (G);

f. it earns more than XXXXXXXXXX% of its income in respect of any year or relevant period, as computed without regard to subsections 39(2), 49(2.1) and 104(6), from XXXXXXXXXX described in clauses 108(2)(b)(iii)(A) to (G); and

g. it does not invest more than XXXXXXXXXX.

13. The sole general partner of LP is Sub GP Co. The limited partnership interests of LP are divided into the LP Class A Units and the LP Class B Units. The LP Class B Units:

a. are intended to be economically equivalent to Units;

b. receive distributions equal to the distributions paid on the Units; and

c. are each exchangeable, at the option of the holder, for one Unit. In this respect, the value of the LP Class B Units will correspond to the value of the Units based on the exchange right.

14. There are currently XXXXXXXXXX LP Class B Units issued and outstanding. LP issued these LP Class B Units as partial consideration for the acquisition of a portfolio of XXXXXXXXXX from a third-party vendor. This transaction took place in XXXXXXXXXX.

15. The LP Class A Units are not exchangeable for Units. Fund is the sole holder of the LP Class A Units.

16. The purpose of the existence of LP is to facilitate XXXXXXXXXX acquisitions by the Fund by providing potential vendors with the ability to transfer their XXXXXXXXXX to LP on a tax deferred basis under subsection 97(2). This is common practice among real estate investment trusts (REITs) in general and allows the Fund to have more flexibility with investing in a diversified portfolio of investments since it ensures that the Fund can make offers to purchase XXXXXXXXXX from potential vendors that are comparable to offers that may be made by other REITs.

Proposed Transactions

17. The Declaration of Trust will be amended, inter alia, to provide the Right of Redemption for the Units, as described in Paragraph 18 below.

18. XXXXXXXXXX.

19. In addition to the foregoing, the following consequential amendments will be made to the Declaration of Trust:

XXXXXXXXXX

20. XXXXXXXXXX of the Declaration of Trust will also be amended to remove and/or modify various investment restrictions and limits on its operating guidelines, such as are described in Paragraph 11 above, where these restrictions will no longer be required upon classifying the trust as an open end unit trust. As well, XXXXXXXXXX will be added to the Declaration of Trust.

21. The amendments to the Declaration of Trust will also include minor amendments to paragraph (a) in XXXXXXXXXX.

22. In addition to the above-noted proposed amendments, and any grammatical or numbering corrections to be made, the following sections of the Declaration of Trust will also be amended in support of the above-noted amendments and to make various administrative changes:

(a) Definitions for the terms XXXXXXXXXX therein will be modified.

(b) XXXXXXXXXX will be amended to refer to Fund as “an unincorporated open-end investment trust”.

Additional Information

23. The amendments to the Declaration of Trust will not result in a resettlement of the Fund or in the creation of a new trust under the laws of XXXXXXXXXX.

24. It is expected that the maturity date for the Notes described in Paragraph 18 above will be XXXXXXXXXX years from the date of issuance, and in any event, will not exceed XXXXXXXXXX years from the date on which they are issued.

Purpose of the Proposed Transactions

25. The overall purpose of the Proposed Transactions described above is to maximize Unitholder value and to increase the value and diversification of the Fund’s XXXXXXXXXX.

26. The purpose of the creation of the Right of Redemption is to allow the Fund to qualify as an open-end unit trust. An open-end unit trust is a preferable vehicle compared to a closed-end unit trust because an open-end unit trust is not subject to many of the restrictions and limitations imposed on closed-end unit trusts with respect to the investments that the Fund may hold. Thus, the amendment will allow the Fund, through its subsidiary partnerships and corporations, more flexibility with investing in a diversified portfolio of investments.

27. The addition of the Right of Redemption will also provide Unitholders with an additional means of disposing of their investment in the Fund. It is expected that the investors’ primary source of liquidity for Units will continue to be through their sale on the Stock Exchange. However, under certain circumstances a redemption may be a preferred alternative to public trading. For example, at times when Units are thinly traded, a redemption may be preferred for Unitholders to realize the value of their investment in the Fund.

Rulings Given

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, the Proposed Transactions are completed in the manner described above, and there are no other transactions that may be relevant to the rulings requested, our rulings are as follows:

A. The proposed amendments to the Declaration of Trust described herein will not, in and by themselves, result in a disposition by the Fund of its XXXXXXXXXX or in a resettlement of the Fund for purposes of the Act.

B. The proposed amendments to the Declaration of Trust to provide for the Right of Redemption will not, in and by themselves, result in a disposition by the existing Unitholders of their Units.

C. The Fund will qualify as an open-end unit trust pursuant to paragraph 108(2)(a) at the time immediately after the amendment to the Declaration of Trust providing for the Right of Redemption.

D. The Proposed Transactions will not affect the qualification of the Fund as a mutual fund trust within the meaning of subsection 132(6) or as a real estate investment trust as defined in subsection 122.1(1).

Comments

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above, or acceptance, approval or confirmation of any other income tax implications of the facts or Proposed Transactions described herein. In particular, but without affecting the generality of the foregoing, we express no opinion with respect to:

1. the tax consequences of any amendments made to the Declaration of Trust before the date of this letter;

2. whether any entity described herein is a mutual fund trust within the meaning of subsection 132(6) or a unit trust within the meaning of subsection 108(2) at any particular time prior to the Proposed Transactions;

3. whether any entity described herein is a “real estate investment trust” within the meaning of subsection 122.1(1) at any particular time; and

4. whether subsection 97(2) will apply in respect of any transfer of XXXXXXXXXX to LP as described in Paragraph 16 above.

The above advance income tax rulings, which are based on the Act and Regulations 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 70-6R12 Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

Yours truly,

XXXXXXXXXX
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch