17 May 1995 External T.I. 9503895 - SECOND RELEVANT YEAR FOR POOLED FUND TRUST TESTS

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:

Impact of 1994 amendments to definition of "pooled fund trust" in Regulation 5000(7).

Position TAKEN:

Provides additional time in which to meet the asset and income tests.

Reasons FOR POSITION TAKEN:

Wording of amendments.

XXXXXXXXXX 950389

Attention: XXXXXXXXXX

May 17, 1995

Dear Sirs:

Re: Definition of "Pooled Fund Trust"

This is in reply to your letter of February 3, 1995, in which you ask us to provide some hypothetical examples of how the amendments to the above-noted definition as contained in subsection 5000(7) of the Income Tax Regulations (the "Regulations") affect the investment decisions of a trust attempting to comply with the conditions in that Regulation.

The amendments to the definition were promulgated June 23, 1994, and have affect after 1989. The significant change is the addition of a second year as an alternative period of time throughout which the trust can try to satisfy the limits on investments which are imposed on a pooled fund trust.

Under the old rules, a pooled fund trust was required to satisfy what you have termed the "80% asset test" throughout the "relevant year", which was defined as the taxation year of the trust in which the taxpayer acquired the interest in the trust.

Under the new rules, the trust may satisfy this test in either or both the "first relevant year" or the "second relevant year"; the "first relevant year" is the taxation year of the trust in which the taxpayer acquired the interest and the "second relevant year" is the first taxation year commencing more than one year after the taxpayer acquired the interest.

You referred also to the similar amendments made to paragraphs (b), (c) and (d) of the definition and asked how these subsections were intended to function.

We point out that the references now made in paragraphs (b), (c) and (d) (old subparagraphs (ii) and (iii) and paragraph (b), respectively) to "first relevant year" and "second relevant year" were necessitated by the restructuring of old clauses (a)(i)(A) and (B). Since new paragraph (a) applies only to the 80% asset test, it is necessary to again refer in the subsequent paragraphs to the periods of time throughout which the tests in (b), (c) and (d) must be met. Under the old rules, the reference in old paragraph (a) to the "relevant year" pertained to each of the 10% limit on the cost amount of securities of one issuer contained in subparagraph (ii), the 10% limit on the cost amount of a single real property contained in subparagraph (iii), and the 95% income test contained in paragraph (b).

The tests themselves have not substantially changed from the old tests. The addition of the taxation year subsequent to the taxation year in which the taxpayer acquired the interest in the trust gives the trust more time (to the end of the calendar year after the year in which the taxpayer acquired the interest) in which to acquire those properties described in paragraph (a) or dispose of those properties described in paragraphs (b) and (c) in order to achieve the asset and income balances prescribed in the definition of a "pooled fund trust".

We trust this explanation assists. Since, as we pointed out, the tests themselves have not substantially changed, we have not provided examples of how the provisions function.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch