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 forward contracts considered marketable securities fo the Act?
2)Will Gov. of Canada bonds given as security to foreign exchanges be foreign property?
Position:
1) No
2) No
Reasons:
1)Contract between two parties not a marketable security; however will not reverse current position w.r.t futures contracts with an exchange.
2)Situs is residency of debtor so security will not be foreign property.
XXXXXXXXXX 960994
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your letter of XXXXXXXXXX, you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts and proposed transactions is as follows:
Facts
XXXXXXXXXX is a taxable Canadian corporation and its tax returns are filed with the XXXXXXXXXX Tax Services office. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
Proposed Transactions
XXXXXXXXXX will be established as trusts under the laws of XXXXXXXXXX. XXXXXXXXXX will be the trustee of each of XXXXXXXXXX. Each of XXXXXXXXXX will be managed by the Manager.
XXXXXXXXXX will restrict its investments to:
a domestic portfolio of XXXXXXXXXX, and
a global portfolio of exchange-traded futures contracts with respect to XXXXXXXXXX and forward contracts with respect to XXXXXXXXXX.
XXXXXXXXXX will restrict its investments to:
a domestic portfolio of XXXXXXXXXX, and
a global portfolio of exchange-traded futures contracts with respect to foreign government bonds and forward contracts with respect to XXXXXXXXXX.
Exchange-traded futures contracts are standardized contracts entered into on domestic or foreign exchanges which call for the delivery of specified quantities of various commodities, financial instruments, currencies or other properties at a specified time and place. The terms and conditions of futures contracts are standardized and, as such, are not subject to negotiations between the buyer and seller. Contractual obligations, depending on whether one is the buyer or a seller, may be satisfied either by taking or making, as the case may be, physical delivery of the underlying property or by making a sale or purchase of an offsetting futures contract on the same exchange in the same commodity and expiration month prior to the designated date of delivery. That is, "buying" and "selling" of exchange-traded futures contracts occurs not in the traditional sense of a transfer of the contract but rather by taking positions which offset existing positions.
Although exchange-traded futures contracts in respect of XXXXXXXXXX provide for delivery of the underlying instrument, the actual taking or making of delivery is rare. Instead, such contracts are normally closed out or settled by the parties thereto taking offsetting positions. It is the intention of the XXXXXXXXXX never to take delivery of the underlying instrument.
A party to a futures contract must deposit an amount of funds with its broker, referred to as "initial margin", equal to a small percentage of the total contract price. These funds do not represent payment of the purchase price for the futures contract or partial payment for the underlying instrument under the futures contract. Rather, funds deposited as initial margin represent security for the performance of the contractual obligations under the futures contract, and can be regarded as akin to a performance bond. Any initial margin remaining will be returned when the contractual obligations under the futures contract have been fully performed.
A party to a futures contract may have to also deposit an amount of funds, referred to as "variation margin" as a "cushion" against possible losses on the futures contract. The gains and losses on outstanding futures positions are determined by the relevant clearing corporation on a daily basis (this is referred to as "mark-to-market" determination). If a loss exists on a position (as measured from the prior trading session's close), the party to the contract who is in the loss position is required to pay the amount of the loss to the relevant clearing corporation. Once amounts in respect of losses are so paid such funds cease to be the property of the payer and are thus not recoverable by it, and once received, the recipient has the absolute right to retain such funds and is under no restrictions as to its disposition or use. Amounts of variation margin in excess of amounts required to be paid out will be returned when the contractual obligations under the futures contract have been fully performed. The variation margin and amounts paid in respect of losses under an open futures contract do not represent payment of the purchase price for the futures contract or partial payment for the underlying property under the contract. The initial and variation margins deposited by the XXXXXXXXXX, as the case may be, will consist of XXXXXXXXXX that are not foreign property by virtue of paragraphs (d.1) or (f) of the definition of "foreign property" in subsection 206(1) of the Act.
A XXXXXXXXXX contract is an obligation to buy or sell a specific amount of underlying XXXXXXXXXX for an agreed upon price at a future date. Forward contracts are generally not traded on organized exchanges nor are they subject to standardized terms and conditions. Rather, forward contracts on XXXXXXXXXX. Margin is generally not required in respect of XXXXXXXXXX contracts.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
The Manager will appoint XXXXXXXXXX to manage the domestic portfolio of marketable securities on behalf of each of XXXXXXXXXX. The Manager will appoint XXXXXXXXXX to manage the global portfolio of futures and forward contracts on behalf of each of XXXXXXXXXX.
The Manager will offer to sell units of XXXXXXXXXX and units of XXXXXXXXXX initially at $XXXXXXXXXX per unit and thereafter at the net asset value per unit. Subscriptions will be pursuant to a prospectus filed with the XXXXXXXXXX. The outstanding units of XXXXXXXXXX will be redeemable at the demand of the holder at a redemption price equal to the net asset value per unit determined on the last business day of the week following which notice of redemption is received by XXXXXXXXXX, as the case may be. Payment of the redemption proceeds will be made within XXXXXXXXXX trading days following the business day as of which the redemption of the units is effected.
Units of XXXXXXXXXX will be issued to no fewer than XXXXXXXXXX beneficiaries of the fund including registered retirement savings plan ("RRSP") trusts under group registered retirement savings plans ("Group RRSPs"), each of whom will hold
not less than one block of units, as defined in subsection 4803(3) of the Income Tax Regulations (the "Regulations"), and
units having an aggregate fair market value of not less than $XXXXXXXXXX.
In the case where units of XXXXXXXXXX are held by a single trust on behalf of several annuitants, XXXXXXXXXX will rely on Revenue Canada's administrative position that, for purposes of paragraph 4801(b) of the Regulations, the number of beneficiaries of the mutual fund trust will be at least equal to the number of annuitants of the Group RRSP.
Units of XXXXXXXXXX will be issued to no fewer than XXXXXXXXXX beneficiaries of the fund including RRSP trusts under Group RRSPs, each of whom will hold
not less than one block of units, as defined in subsection 4803(3) of the Regulations, and
units having an aggregate fair market value of not less than $XXXXXXXXXX.
In the case where units of XXXXXXXXXX are held by a single trust on behalf of several annuitants, XXXXXXXXXX will rely on Revenue Canada's administrative position that, for purposes of paragraph 4801(b) of the Regulations, the number of beneficiaries of the mutual fund trust will be at least equal to the number of annuitants of the Group RRSP.
Each of XXXXXXXXXX will apply to become a registered investment under Part X.2 of the Act.
Each of XXXXXXXXXX will use the funds received on the sale of its units to acquire investments described in paragraphs 3 and 4, respectively.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to have each of XXXXXXXXXX qualify as a mutual fund trust for purposes of the Act and to allow holders of the units of each of XXXXXXXXXX to benefit from the XXXXXXXXXX the portfolio of XXXXXXXXXX and from the exposure to global markets for XXXXXXXXXX.
To the best of your knowledge and the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.
Rulings Given
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the terms of the Plan are as set out in your submissions, we rule as follows:
For the purposes of subsections 248(1) and 206(2) of the Act, the "cost amount" to each of XXXXXXXXXX of its investments in exchange-traded futures contracts and forward currency contracts will, at the time entered into or acquired by XXXXXXXXXX, as the case may be, be equal to the brokerage fees and other costs incidental to entering into the contract and will not include an amount in respect of the contract price or amounts paid, if any, as initial or variation margins.
Where units of XXXXXXXXXX are acquired by RRSP trusts under a Group RRSP, each RRSP trust under the Group RRSP will be regarded as a beneficiary of XXXXXXXXXX, as the case may be, for the purposes of paragraph 4801(b) of the Regulations.
The activities that each of XXXXXXXXXX propose to enter into in respect of its investments in exchange-traded futures contracts and forward XXXXXXXXXX contracts XXXXXXXXXX, will constitute "the investing of its funds in property" for the purpose of subsection 132(6) of the Act.
The initial and variation margins provided with respect to the exchange-traded futures contracts by XXXXXXXXXX, as the case may be, will not constitute "foreign property" for the purposes of the Act.
The above rulings, which are based on the Act in its 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 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, customs, Excise, and Taxation with respect to exchange-traded futures contracts and forward currency contracts entered into or acquired by XXXXXXXXXX, as the case may be, between XXXXXXXXXX.
The above rulings should not be construed as providing the Department's views on whether XXXXXXXXXX will qualify as a unit trust, mutual fund trust or registered investment for purposes of the Act.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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