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:
Does the wording of the "Payment on Redemption" provision of a particular trust document satisfy the requirement in paragraph 108(2)(a) that "the issued units of the trust included units having conditions attached thereto that included conditions requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units".
Position TAKEN:
Yes
Reasons FOR POSITION TAKEN:
The Payment on Redemption provision only indicates that payment will be made "promptly" and does not specify a set number of days in which payment for redeemed units has to be made. Considering the ordinary meaning of the word prompt, the fact that the fund is primarily investing in assets that are liquid and that the Valuation Day for the fund is weekly, a good argument can be made that the wording of this provision meets the requirement of paragraph 108(2)(a).
May 27, 1997
Registered Plans Division Trusts Section
Stella M. Black G.W. Keable
Director 957-2046
Attention: Carl Finniss
970727
Registered Investments
Redeemable on Demand - Paragraph 108(2)(a)
This is in reply to your memorandum dated March 4, 1997 concerning the redeemable on demand requirement of paragraph 108(2)(a) of the Income Tax Act.
You have asked us to review the trust document of a fund which has applied for registration as a Registered Investment on the basis that it is a "quasi-mutual fund trust" described in paragraph 204.4(2)(d). In particular, you have requested our views on whether the "Payment on Redemption" provision (Article XXXXXXXXXX) of the trust document satisfies the redeemable on demand requirement of paragraph 108(2)(a). In part, Article XXXXXXXXXX provides that "The manager shall pay to each unitholder who has requested redemption....an amount equal to the Net Asset Value per Unit....multiplied by the number of units redeemed.....The payment shall be made promptly after receipt of a redemption request in proper form...." (emphasis added). As we understand it, you are concerned with the use of the word "promptly" in this provision and whether it is specific enough to meet the redeemable on demand requirement.
We have reviewed the trust document and the offering memorandum (a copy of which is attached for your reference) related to the fund. Our comments are as follows.
As indicated in our response to Question 6 of the Revenue Canada Round Table in the 1991 Conference Report of the Canadian Tax Foundation, a unit trust which complies with the conditions for redemption imposed by the applicable securities commission in the province where the fund is registered will generally meet the requirements of paragraph 108(2)(a). Based on the type of fund involved, the securities commissions have established conditions for the redemption of units which include time limits for the payment of redemption proceeds, the frequency of valuation dates, and the maximum notice period to be given.
With regard to your concern on whether the wording in the "Payment on Redemption" provision of the trust document satisfies the requirement of paragraph 108(2)(a) that the issued units of the trust included "...units having conditions attached thereto that included conditions requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units," we note the following. The word prompt is not defined in the Act, however, the Concise Oxford Dictionary (Seventh Edition) defines prompt as "readily or at once (prompt reply, decision, payment)" and Black's Law Dictionary (Sixth Edition) states that "The meaning of the word depends largely on the facts in each case, for what is prompt in one situation may not be considered such under other circumstances or conditions. To do something promptly is to do it without delay and with reasonable speed." Considering the ordinary meaning of the word prompt, the fact that the fund is primarily investing in assets that are liquid (i.e.; Canadian equity securities) and that the Valuation Day for the fund is weekly, a good argument can be made that the wording of this provision meets the redeemable on demand requirement even though the provision does not specify a set number of days in which payment for redeemed units has to be made. In this regard, it is our view that the requirements of paragraph 108(2)(a) have been satisfied.
However, we would also draw your attention to Article XXXXXXXXXX of the trust document which allows the fund manager to require a unitholder to provide up to 90 days written notice of an intention to redeem any units. As discussed (Finniss/Keable), such a notice period may not be consistent with the requirements of paragraph 108(2)(a) and you may wish to consider the basis for the inclusion of this notice period in the trust document. In addition, since a "put option" is a non-qualified investment for a plan that is a registered investment, you may wish to consider the comments contained in the offering memorandum which imply that the fund will be purchasing put options to achieve its investment objectives. (XXXXXXXXXX)
We trust our comments are of assistance.
T. Murphy
A/Section Chief
Trust Section
Resources, Partnerships and
Trust Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Attachment
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