30 November 1995 Ruling 9635823 - SOURCING OF INCOME - BUSINESS, PROPERTY, CAPITAL GAINS

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:

Source of income - business, property, and capital gains.

Position:

Business income is sourced to the jurisdiction in which the business is carried on. Recharacterization of property income and capital gains as income from a business could change the source of the income for example from a foreign jurisdiction to Canada.

Reasons:

XXXXXXXXXX 963582

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you request an advance income tax ruling on behalf of the Fund. We also acknowledge your letter of XXXXXXXXXX.

All terms used herein that are defined in the Canadian Income Tax Act the ("Act") have the meaning given in such definition unless otherwise indicated, and all references herein to sections or components thereof are references to the Act unless otherwise indicated.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1.The Fund was established on XXXXXXXXXX by a trust indenture between

XXXXXXXXXX

2.Although the Trust Indenture provides that the interest of each beneficiary in the Fund (a "unitholder") is described by reference to units, the Fund may not continuously qualify as a unit trust within the meaning of subsection 108(2) and will not qualify as a mutual fund trust within the meaning of subsection 132(6).

3. XXXXXXXXXX

4. XXXXXXXXXX

It is anticipated that, if the proposed amendments are approved, they will be incorporated in an amended and restated trust indenture.

5. XXXXXXXXXX

6.The Fund will make payable in each year to unitholders, within the meaning of subsection 104(24), such amount as would, but for subsection 104(6), be its income for the year. Such amount will include dividends and interest on investments made by the Fund in XXXXXXXXXX and income from the disposition of such investments including net capital gains if any, realized by the Fund. Unless a unitholder otherwise requests in writing, all net income payable to the unitholder (net of any Canadian withholding tax) is automatically reinvested in additional units.

7.Units of the Fund were, and will be, purchased by investors on a private placement basis. The minimum initial subscription was XXXXXXXXXX units and is now units having a net asset value of $XXXXXXXXXX (U.S.). XXXXXXXXXX Accordingly, on XXXXXXXXXX units were issued to a total of XXXXXXXXXX investors and one unit was issued to XXXXXXXXXX. With the exception of XXXXXXXXXX, all of the investors were resident in the United States.

8.Under the Trust Indenture, units may be purchased XXXXXXXXXX each calendar quarter at a price equal to the net asset value per unit on XXXXXXXXXX.

Additional units of the Fund have been issued since XXXXXXXXXX pursuant to subscriptions by Canadian and foreign investors and on the reinvestment of distributions. The net asset value of the Fund as at XXXXXXXXXX was approximately $XXXXXXXXXX (U.S.).

9.To the best of your knowledge and that of the Trustee, none of the issues involved in this advance income tax ruling is being considered by a Taxation Services Office or Taxation Centre in connection with an income tax return previously filed and none of the issues contained herein is under objection or appeal.

PROPOSED TRANSACTIONS

10.It is anticipated that additional units will be issued on XXXXXXXXXX each calendar quarter in XXXXXXXXXX. Units of the Fund may be acquired by Canadian investors and by five types of U.S. investors as follows:

(a) Trusts created in the United States which are the funding media for certain pension and profit-sharing plans and retirement accounts organized in the United States which qualify for tax exemption under the United States Internal Revenue Code ("U.S. Pension Funds"). Such U.S. Pension Funds are generally exempt from tax in the United States unless they engage in an unrelated trade or business or borrow to make investments. Distributions to beneficiaries of U.S. Pension Funds are taxable in the United States;

(b) Trusts which are resident in the United States, and which are constituted and operated exclusively to earn income for the benefit of U.S. Pension Funds ("Master Trusts"). Such Master Trusts are generally exempt from tax in the United States unless they engage in an unrelated trade or business or borrow to make investments;

(c) Religious, scientific, literary, educational or charitable organizations ("Charitable Organizations") that are resident in the United States and which are generally exempt from tax in the United States unless they engage in an unrelated trade or business or borrow to make investments;

(d) Other persons who are "residents of the United States" for the purposes of the Canada-U.S. Income Tax Convention (1980) (the "Convention") in accordance with Article IV of the Convention ("U.S. Taxable Investors"); and

(e) Partnerships, whether limited or general, organized under the laws of the United States ("U.S. Partnerships").

PURPOSE OF PROPOSED TRANSACTIONS

11.The purpose of the proposed issuances of units is to increase the assets of the Fund available to be invested in securities of issuers in XXXXXXXXXX.

RULINGS

Provided that the preceding statements of fact and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set out herein, our rulings are as follows:

A.Subject to Ruling E below, a U.S. Pension Fund, Master Trust or Charitable Organization which is constituted in the United States will pursuant to subparagraph (1)(b) of Article IV of the Convention, be considered to be a resident of the United States for the purposes of the Convention.

B.Subject to Ruling E below, income derived by the Fund from investments in XXXXXXXXXX and income from the disposition of such investments including taxable capital gains if any, which is paid or credited to unitholders that are residents of the United States for the purposes of the Convention will, to the extent that paragraph 1 of Article XXI of the Convention does not apply to such income, be exempt from Canadian tax imposed by paragraph 212(1)(c) by virtue of paragraph 2 of Article XXII of the Convention, except to the extent that amounts relate to income (including taxable capital gains) arising in Canada.

C.Subject to Ruling E below, provided that the provisions of paragraph 3 of Article XXI of the Convention do not apply, income distributed by the Fund to Charitable Organizations and taxable capital gains, if any, realized on the disposition of units of the Fund by Charitable Organizations will be exempt from tax in Canada by virtue of paragraph 1 of Article XXI of the Convention to the extent that such distributions and taxable capital gains realized by such Charitable Organization are exempt from tax in the United States.

D.Where income from the Fund is paid to a US Partnership (other than a Canadian partnership as defined in section 102), it will be subject to 25% withholding tax pursuant to paragraphs 212(13.1)(b) and 212(1)(c). Subject to Ruling E below, where a partner in the partnership is a resident of the United States for purposes of the Convention, the provisions of the Convention will apply to the partner's share of partnership income derived from the Fund and gains from dispositions of units in the Fund as if such income and gains had been received directly by the partner rather than the partnership.

E.Provided that a U.S. investor that acquires units of the Fund or a U.S.investor who is a member of a partnership that acquires units of the Fund, did not become a resident of the United States for the purpose of obtaining the benefits of the Convention and can reasonably be considered the beneficial owner of the income distributed by the Fund, the benefits of the Convention will not be denied to the investor as contemplated by paragraph 7 of Article XXIXA of the Convention.

The rulings outlined above are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Customs, Excise and Taxation with respect to the proposed issuances of units of the Fund in XXXXXXXXXX as described in paragraph 10 above.

The above rulings are based on law as it presently reads and do not take into account any proposed amendments to the Act which if enacted into law could have an effect on the rulings provided herein.

Comments

Carrying on Business

As to whether the activities of the Fund or any investor in the Fund constitute carrying on business is a question of fact and as such determination can only be made after considering what the Fund or a particular investor actually does, nothing in this ruling should be construed as a determination of, or a ruling in respect of, that issue. However, should such activities constitute carrying on business in Canada, the income from such a business will be considered to arise in Canada.

Part XIII Withholding Tax

The above Rulings apply in determining the ultimate tax liability of the U.S. investors; however, they do not apply to the withholding tax requirements. The procedures to be followed in connection with reduced withholding taxes are as follows:

-In order to ensure whether a particular trust or organization qualifies for exempt status under paragraph 2 of Article XXI of the Convention or under paragraph 1 of Article XXI of the Convention, as the case may be, and to determine the withholding obligation, the procedures in paragraph 78(d) (in respect of U.S. pension Funds and Master Funds) and paragraph 78(c) (in respect of Charitable Organizations) of Information Circular 77-16R4 must be followed.

- Where the Fund makes payments to a partnership that has both exempt and non-exempt U.S. partners which are beneficial owners of income from the Fund, the Chief of Source Deductions in the Tax Services Office where the Fund resides should be contacted in order to determine what the withholding tax obligations will be in respect of payments to such partnerships. As indicated in paragraph 1 of Information Circular 76-12R4, it is the payer's responsibility to withhold and remit Part XIII tax at the appropriate rate and the payer is liable to the Crown for any deficiency.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch