30 April 1997 External T.I. 9529225 - PROSPECTUS OR SIMILAR DOCUMENT

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) Is a mutual fund "Trust Indenture and Statement of Portfolio Transactions" similar to a "prospectus" or "registration statement" for the purposes of paragraph 4803(2)(a).?

2) Are the units of a mutual fund trust distributed pursuant to a "Prospectus Exemption Order" (e.g. ss. 74(1), OSA) "qualified for distribution to the public" under paragraphs 4801(a) and 4803(2)(a) of the Regulations?

Position TAKEN:

1) No. 2) Generally, No.

Reasons FOR POSITION TAKEN:

1) In Canada a "trust indenture" is the charter document for a mutual fund trust and is a document the purpose of which is to provide an operating framework for a trust. A "statement of portfolio transactions" is a document that details the investments held by a mutual fund during a reporting period. However, a prospectus, offering memorandum, or registration statement is a document prepared for the purpose of providing prospective investors with information about a proposed issue of securities and the business of the issuer so that a prospective investor may make an informed decision as to the merit of such an investment. Neither a trust indenture nor a statement of portfolio transactions, by itself or in conjunction with one another, fulfils this purpose and is not a prospectus, registration statement, or similar document for the purposes of paragraph 4803(2)(a).

2) The essential requirement of paragraph 4803(2)(a) is that a prospectus or similar document be filed with a public authority in Canada, that such document be accepted for filing where required by law, and that there be a lawful distribution in accordance with that document. Since the various provincial Acts do not specify the information or documents that have to be submitted to obtain a prospectus exemption order, there is no assurance that all exemption orders considered or granted would satisfy this requirement. As a result, even though the units of a mutual fund distributed in accordance with a prospectus exemption order may constitute a lawful distribution under Provincial legislation, for income tax purposes, such a distribution may not satisfy the requirement paragraph 4803(2)(a).

	                                	5-952922
XXXXXXXXXX		                               G.W. Keable
(613) 957-2046

Attention: XXXXXXXXXX

April 30, 1997

Dear XXXXXXXXXX

Re: Paragraphs 4801(a) and 4803(2)(a) of the Income Tax Regulations

This in reply to your letter of November 7, 1995, wherein you requested our comments regarding several issues related to the above noted provisions of the Income Tax Regulations (the "Regulations".) We apologize for the delay in responding.

As indicated in your letter, to qualify as a "mutual fund trust" as defined in subsection 132(6) of the Income Tax Act (the "Act") a trust must meet certain prescribed conditions. These include the conditions contained in paragraphs 4801(a) and 4803(2)(a) of the Regulations that a class of units of a trust will be "qualified for distribution to the public" only if a prospectus, registration statement or similar document has been filed with, and where required by law, accepted for filing by, a public authority in Canada pursuant to and in accordance with the law of Canada or of any province and there has been a lawful distribution to the public of shares or units of that class in accordance with that document.

The issues outlined in your letter and our comments thereon are as follows:

Issue # 1

Would a typical mutual fund trust indenture and statement of portfolio transactions filed with a provincial securities commission be considered a document similar to a prospectus or registration statement for the purposes of paragraph 4803(2)(a) of the Regulations?

Although the Act does not define a "prospectus" or "registration statement", these terms have been defined as follows:

PROSPECTUS. n, Any prospectus, notice, circular, or advertisement of any kind whatsoever, whether of the kind hereinbefore enumerated or not, whether in writing or otherwise offering to the public for purchase or subscription any shares or debentures of any company. See OFFERING MEMORANDUM.

OFFERING MEMORANDUM. A document that: (i) sets forth information concerning the business and affairs of an issuer; and (ii) has been prepared primarily for prospective purchasers to assist those purchasers to make an investment decision with respect to securities being sold pursuant to a trade that is made in reliance on an exemption. (Dictionary of Canadian Law, Second Edition, Carswell 1995.)

Registration statement A statement disclosing financial data and other items of interest to potential investors, which must be filed by companies wishing to issue securities to the public or to trade in public markets. See securities, disclosure. (West's Legal Thesaurus/Dictionary, William Statsky, 1985.)

Several provinces also define the term "offering memorandum" in their securities legislation. In part, these definitions indicate that an offering memorandum is ".....a document purporting to describe the business and affairs of an issuer that has been prepared primarily for delivery to and review by prospective investors so as to assist those investors to make an investment decision in respect of securities being sold in a distribution.....". (For example, see subsection 32(1) of the Regulations to the Ontario Securities Act.)

A prospectus, offering memorandum, or registration statement can therefore be described as a document prepared for prospective investors to provide them with information about a proposed issue of securities and the business of the issuer so that the prospective investor may make an informed decision as to the merit of such an investment.

Consequently, we are of the view that to be considered a "similar document" for the purposes of paragraph 4803(2)(a) of the Regulations, a document should contain information similar to, and be prepared for the same purpose as, a prospectus or registration statement. This was the case in those rulings where we indicated that a mutual fund trust, which had prepared and delivered an offering memorandum to prospective investors and the applicable securities commission but had not filed a prospectus, would meet the requirements of that paragraph.

A "mutual fund trust indenture" and a "statement of portfolio transactions" are terms that are also not defined in the Act. A trust indenture is the charter document for a mutual fund trust and contains provisions which govern the operation of the fund and detail the rights of an investor. Its purpose is to provide an operating framework for a mutual fund trust. A "statement of portfolio transactions" is a document that under provincial securities legislation forms part of a mutual fund's financial statements that are required to be filed annually. Such a statement details the investments held by the mutual fund during the reporting period.

Therefore, based on the foregoing, it is our view that a typical mutual fund trust indenture and statement of portfolio transactions would not be a "prospectus, registration statement or similar document" as contemplated by paragraph 4803(2)(a) of the Regulations.

Issue # 2

Are the units of a mutual fund trust distributed pursuant to a prospectus exemption order under provincial securities legislation (e.g., subsection 74(1) - Exemption order, of the Ontario Securities Act) "qualified for distribution to the public" for the purposes of paragraph 4803(2)(a) of the Regulations?

In general terms, the essential requirements of paragraph 4803(2)(a) of the Regulations are that a prospectus or similar document be filed with a public authority in Canada, that such document be accepted for filing where required by law, and that there be a lawful distribution in accordance with that document.

We understand that provincial securities legislation dealing with prospectus exemption orders are all similar in operation. In Ontario, for example, subsection 74(1) of the Ontario Securities Act provides that the Ontario Securities Commission may, upon the application of an interested party, rule that a prospectus is not required for any trade or intended trade of a security where it is satisfied to do so would not be prejudicial to the public interest and may impose such terms and conditions as are considered necessary. Subsection 74(3) of the Ontario Securities Act further provides that a decision of the Commission in this regard is final and is not subject to appeal. Generally, applications for an exemption under this provision are considered on a case by case basis by the Commission. Applications should include the applicant's reasons for requesting the exemption and the argument or rationale in support of such an exemption, however, there are no specific requirements contained in this legislation concerning the information or documents that must be submitted.

Since there are no specific information requirements, an applicant could provide the provincial securities authority with a document, such as an offering memorandum, which is similar to a "prospectus" (for example, see the comments in Gupta v. MNR, 92 DTC 1542). In such a case, a distribution of the units of a mutual fund trust in accordance with a prospectus exemption order could satisfy the essential requirements of paragraph 4803(2)(a) of the Regulations and be qualified for distribution to the public. However, there is no assurance that this would be the case for all exemption orders considered or granted. Therefore, even though the units of a mutual fund distributed in accordance with a prospectus exemption order may constitute a lawful distribution of securities pursuant to provincial securities legislation, for income tax purposes, such a distribution may not satisfy the other requirements of paragraph 4803(2)(a) of the Regulations.

Issue # 3

Would the comments expressed in respect of Issues 1 and 2 above differ based on the type of investor involved in the distribution?

In our view, the type of investor involved would not affect the comments given.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch