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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1.Are units of funds issued by prospectus exemption considered to be publicly traded?
2.If a fund is not governed by National Policy No. 39, can the units meet the criteria in paragraph 108(2)(a)?
Position TAKEN:
1.Where a fund is exempt from filing a prospectus, the wording in paragraph 4803(2)(a) can still be met if 1) an offering memorandum is filed or 2) a document similar to an offering memordum is filed with a provincial authority in accordance with the Loan and Trust Corporations Act of the province.
2.A fund that does not meet the provincial securities act definition of a mutual fund will not be subject to National Policy No. 39. However, under limited circumstances it is still possible for such a fund to meet the requirements under paragraph 108(2)(a).
Reasons FOR POSITION TAKEN:
1.Rulings and opinions given to that effect. File # 932204, 5-7577, 3-2184A, 3-1993, ARE# 660, #AR E-454
2.Rulings given # 933222
September 29, 1994
Registered Plans Division Manufacturing Industries,
Stella M. Black Partnerships and
Director Trusts Division
C. R. Bowen
Attention: Phil Kohnen 957-8953
940941
Registered Investments
ROD on Prospectus Exemption
We are writing in response to your memorandum of April 13, 1994 which was addressed to the Deferred Income Plans Section of our Directorate and was subsequently forwarded to us for reply. You seek clarification as to the application of paragraph 4801(a) and paragraph 4803(2)(a) of the Income Tax Regulations (the "Regulations"). We apologize for the delay in responding to your request.
Your Questions
1.Are units of a fund issued by prospectus exemption considered to be publicly traded?
2.If a fund is not governed by National Policy No. 39, can its units meet the redeemable on demand criteria in paragraph 108(2)(a) of the Income Tax Act (the "Act")?
3.Would a prospectus exemption be considered a "similar document" for the purposes of paragraph 4803(2)(a) of the Regulations? Please provide examples of other "similar documents".
As you noted in your memorandum, sections 4801 and 4803 of the Regulations must be complied with in order to meet the requirements in paragraph (c) of the definition of mutual fund trust in subsection 132(6) of the Act. In addition, paragraph 4803(2)(a) of the Regulations indicates how the "distribution to the public" criteria contained in paragraph 4801(a) of the Regulations must be met.
1.The requirement to file a prospectus and the exemption therefrom is provided for under the provincial securities acts. For example, section 53 of the Securities Act (Ontario) requires that where the trade in a security, including units of a mutual fund (as defined under that act and indicated below), would be a distribution (as defined in that act) of such security, there must be a preliminary prospectus and a final prospectus filed with and approved by the Ontario Securities Commission.
Two examples of situations where a prospectus may not be required to be filed under a provincial securities act are as follows:
a) under certain circumstances with respect to the operation of a mutual fund that is administered by a trust company registered under the Loan and Trust Corporations Act; and
b) in some cases where there is private placement of securities to sophisticated investors investing a specified minimum dollar amount.
Except as noted in the subsequent paragraph, a review of our correspondence written to date indicates that we have not provided confirmation that a fund that is exempt from filing a prospectus under the relevant provincial securities act will meet the wording in paragraph 4803(2)(a) of the Regulations. In fact, one letter issued in 1980 indicates that where no prospectus or similar document is filed with a public authority, it would appear that the paragraph has not been satisfied. We agree with that statement. In a recent telephone conversation with an individual from a trust company, we were advised that we may be asked to consider representation that fund units issued by prospectus exemption would meet the wording of that paragraph. We will advise you of our conclusion if we receive such a submission.
We have provided favourable rulings that a trust, that has not filed a prospectus, will meet the requirements in paragraph 4803(2)(a) of the Regulations if: a) an offering memorandum, which is similar to but contains less information than a prospectus, is filed with the applicable securities regulators or b) a document similar to that of an offering memorandum, such as a information folder or information memorandum is filed with a provincial authority in accordance with the Loan and Trust Corporations Act of that province. These are the only two "similar documents" accepted in our written correspondence. Should you wish us to consider other fact situations, please refer them to us.
2.It is our understanding that it is the provincial securities acts which define the term "mutual fund" for the purposes of National Policy No. 39. In the Securities Act (Ontario), a "mutual fund":
"includes an issuer of securities that entitle the holder to receive on demand, or within a specific period after demand, an amount computed by reference to the value of a proportionate interest in the whole or part of the net assets, including a separate fund or trust account, of the issuer of the securities."
National Policy No. 39 applies only to mutual funds that offer securities pursuant to a prospectus filed under provincial securities legislation and the requirements imposed under that policy are in addition to those in the provincial securities legislation. The policy covers such areas as allowable investments, computation of net asset value, treatment of funds received upon the sale of units and payment of redemption proceeds, but does not govern other issues such as frequency of redemption of units.
The definition of unit trust in paragraph 108(2)(a) of the Act is not dependent upon the definition of "mutual fund" in a provincial securities act being met. We recently ruled favourably that a trust met the definition of unit trust, even though it did not meet the definition of mutual fund in the Securities Act (Ontario). In that case, even though the units of the fund were traded on a stock exchange, the unitholders had the option of demanding redemption of their units from the fund at a redemption price equal to a percentage of the stock market price (as opposed to the net asset value) of the unit at the time of redemption. The trust was required to file a prospectus with the provincial securities commission since it was distributing securities to the public.
Therefore, under certain circumstances, it is possible for a trust to meet the redeemable on demand criteria in paragraph 108(2)(a) of the Act even though it is not subject to National Policy No. 39.
3.Please see the comments in the last paragraph of paragraph 1 above.
We trust that our comments will be of assistance.
for Director
Manufacturing industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch
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