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.
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Attention: XXXXXXXXXX
Dear Sirs:
RE: Unit Trust
This is in reply to your letter dated June 29, 1993 wherein you request our views with respect to the definition of a "unit trust" contained in subsection 108(2) of the Income Tax Act (the "Act").
We hope that the following general comments explaining our interpretation of the definition for "unit trust" are of assistance to you.
Whether or not a trust qualifies as a "unit trust" is substantially a question determined on the facts and circumstances that are particular to that trust during the period of time relevant to the determination.
Subsection 108(2) provides two preliminary qualifications both of which must be met in order for the trust to qualify as a "unit trust". First the trust must be an inter vivos trust. The second condition is that the trust beneficiaries hold units of the trust. In addition to the above conditions, requirements described in either paragraph 108(2)(a) or 108(2)(b) must be satisfied.
According to paragraph 108(2)(a) of the Act, the trust is required to accept at the demand of the unitholder the surrender of fully-paid and issued trust units for a price that is determined and payable in accordance with terms included in the trust agreement. Trust units representing no less than 95% of the fair market value of all the issued units must be eligible to be redeemed and purchased by the trust. Normally this condition is satisfied when the trust document includes the necessary provisions to facilitate the trust unit redemptions.
Alternative to the conditions contained in 108(2)(a) of the Act, paragraph 108(2)(b) provides the conditions, which if met qualify the trust as a "unit trust". The following describes these requirements:
(i) The trust must be resident in Canada throughout the taxation year.
(ii) The only undertaking of the trust throughout the taxation year is investing the funds of the trust. This condition is interpreted to preclude the trust from engaging in any business activity.
(iii) Throughout the taxation year no less than 80% of the trust property consisted of shares, bonds, mortgages, marketable securities, cash, or rights to or interests in rents or royalties computed by reference to the value or volume of oil, gas or minerals produced in Canada.
(iv) Not less than 95% of the trust income for the taxation year was from investments that were shares, bonds, mortgages, marketable securities, cash, or rights to or interests in rents or royalties computed by reference to the value or volume of oil, gas or minerals produced in Canada.
(v) At no time during the taxation year was more than 10% of any shares, bonds or securities held by the trust those of a single corporation or debtor. Bonds, securities, etc. that were issued by Her Majesty in the right of Canada, a province or a municipality are not subject to this 10% restriction.
(vi) prescribed conditions relating to the number of unit holders, dispersal of ownership of units or public trading of units and other transactions and holdings of units.
In summary, whether or not a trust qualifies as a "unit trust" is dependent on the facts and circumstances particular to the trust and the nature of the investments it holds.
We should emphasize that a trust holding an interest in mineral rights or a right to take its share of the minerals produced should be especially attentive to the requirement described above in (ii). Where the trust has the right to undertake business activities with respect to a mineral interest, we are of the view that whether or not throughout the relevant taxation year the trust undertakes more than the investing of funds of the trust is a question of fact. Should the trust participate in a business activity where its role is more than that of an investor, the requirement in subparagraph 108(2)(b)(ii) described above in (ii) is not satisfied.
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The above comments are the expressions of the opinion of those Revenue Canada officials named herein and as such should not be construed as advance tax rulings, nor are they binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion. We refer you in this respect to paragraphs 21 and 22 of Information Circular 70-6R2.
Yours truly,
for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993