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)Will the units of a Fund be "qualified for distribution to the public" within the meaning of paragraph 4801(a) of the Regulations if a prospectus has not been filed but an Offering Memorandum has been delivered to the Ontario Securities Commission in accordance with the rules concerning a private placement prospectus exemption under paragraph 72(1)(d) of the OSA.
2)For purposes of paragraph 4801(b) of the Regulations, when calculating the number of beneficiaries of the Fund, will each annuitant of a group RRSP be considered a beneficiary of the Fund.
Position TAKEN:
1)Yes.
2)Yes.
Reasons FOR POSITION TAKEN:
1)An Offering Memorandum has been accepted as a "similar document" for the purposes of paragraph 4801(a) of the Regulations in various rulings and opinions in cases where a prospectus exemption was available under paragraph 72(1)(d) of the OSA and securities were sold on a private placement basis. (See 960375, 9523123, 9511803, 9409416, & 9322041.)
2)Individual annuitants of a group RRSP were considered to be one beneficiary for the purposes of paragraph 4801(b) of the Regulations (See 932040, 970897, 9604755, 9609941, & 9609943).
XXXXXXXXXX 3-970979
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers in respect of the income tax consequences arising out of the proposed transactions described below.
We understand that to the best of your knowledge and that of the fund, none of the issues involved in this ruling request:
(a)are in an earlier return of the taxpayers or a related person;
(b)are being considered by a tax service office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person
(c)are under objection by the taxpayers or a related person;
(d)are before the courts; and
(e)are the subject of a ruling previously issued by this Directorate to the taxpayers or a related person.
The fund has no outstanding tax liabilities; therefore, the proposed transactions will have no impact on such liabilities.
In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
"Fund" means XXXXXXXXXX.
"Banco" means XXXXXXXXXX.
"Investment Manager" means XXXXXXXXXX.
"Trustee" means XXXXXXXXXX.
"OSA" means the Securities Act (Ontario).
"Parentco" means XXXXXXXXXX.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
FACTS
1.The Fund was established by a declaration of trust, governed by and construed in accordance with the laws of the Province of Ontario, dated XXXXXXXXXX. The Fund has not completed its first taxation year, and therefore, does not have a tax account number. Its returns will be filed with the XXXXXXXXXX Taxation Centre of Revenue Canada.
2.The Custodian of the Fund is Banco.
3.The Trustee and Investment Manager of the Fund is a "taxable Canadian corporation" within the meaning of subsection 89(1) of the Act. This corporation acts as trustee and investment manager for several other funds.
4.The Fund is a unit trust pursuant to subparagraph 108(2)(a)(i) of the Act and is resident in Canada. The Fund has applied for registration as a registered investment under paragraph 204.4(2)(d) of the Act. The Fund is not established or maintained primarily for the benefit of non-resident persons as described under subsection 132(7) of the Act.
5.The only undertaking of the Fund is to invest its assets for the benefit of its unitholders in accordance with the investment objectives of the Fund. The Fund has, as its primary objective, the achievement of a balance between long term growth of capital and reasonable income through investments in Canadian debt obligations and equities or, if the Investment Manager considers it in the best interests of the Fund to do so, in such other securities as the Investment Manager in its discretion shall from time to time determine. Such securities may include securities of other mutual or pooled funds managed by the Investment Manager or an affiliated company. The Fund may use "permitted derivatives" which are consistent with its primary objective, within the limits provided for in National Policy No. 39 of the Canadian Securities Administrators. At all times, the investments of the Fund shall be such that the units are not classified as "foreign property" under the Act and, while the Fund is considered to be registered under paragraph 204.4(2)(d) of the Act, will be limited to qualified investments for registered retirement savings plans ("RRSPs"), registered retirement income funds and deferred profit sharing plans.
6.The Fund is divided into equally ranking units of participation. An unlimited number of units may be issued. The units may be purchased or redeemed at their net asset value per unit. The net asset value per unit of the Fund is equal to the total value of the net assets of the Fund divided by the number of units of the Fund outstanding at that time. The total value of the net assets of the Fund is equal to the value of all of the assets held by the Fund less all liabilities of the Fund, due or accrued.
7.The minimum aggregate initial acquisition cost of the units and units of the other pooled funds managed by the Investment Manager is $XXXXXXXXXX. The units of the Fund are offered for investment to the public in Canada on a private placement basis. The units of the Fund are promoted for distribution to the public by employees of the Investment Manager through personal contacts with high net worth investors and direct mail campaigns. The only unitholder of the Fund is Parentco, the parent company of the Investment Manager, which purchased XXXXXXXXXX units for $XXXXXXXXXX per unit on XXXXXXXXXX.
8.Units of the Fund may be distributed to the public based on an exemption from prospectus requirements provided to Investment Manager in a ruling by the Ontario Securities Commission dated XXXXXXXXXX. This ruling exempts sales of units of the Fund by the Investment Manager from prospectus requirements so long as there is no advertising for the Fund in printed media of general and regular paid circulation, radio or television.
9.Units of the Fund may also be distributed to purchasers in reliance on prospectus and registration exemptions set out in the OSA, in particular, relying on the private placement prospectus exemption (sales to purchasers whose aggregate acquisition cost of securities is not less than $150,000) provided by paragraph 72(1)(d) of the OSA.
PROPOSED TRANSACTIONS
10.Utilizing the prospectus and registration exemption for private placements provided by paragraph 72(1)(d) of the OSA the Investment Manager proposes to prepare an offering memorandum in respect of the Fund, within the meaning of subsection 32(1) of the OSA Regulations. Although the securities legislation in Ontario does not require the Fund to provide the offering memorandum to investors therein, the Fund will provide the offering memorandum to at least one investor therein. Under the OSA, if an investor is provided with a copy of the offering memorandum and purchases securities of the issuer pursuant to the exemption provided by paragraph 72(1)(d), the offering memorandum must contain a "contractual right of action" against an issuer for rescission or damages which is available to an investor in the event that there is a material misstatement contained in or omission from the offering memorandum. As required under the OSA, the Investment Manager will deliver an offering memorandum for the Fund to the Ontario Securities Commission containing a contractual right of action. Such an offering memorandum is not required by law to be accepted by the Ontario Securities Commission. Units of a Fund will be distributed to the public both before and after the offering memorandum in respect of the Fund is so delivered and such distributions will be lawful and those made after the delivery will be made under the specific terms, conditions and requirements described in the offering memorandum.
11.The offering memorandum referred to in 10 above will include the following information:
- name and date of formation of issuer;
- description of securities offered; minimum initial subscription;
- manager and investment advisor of the Fund;
- management fees and other expenses;
- price of securities on sale or redemption;
- method of distribution of units;
- investment objectives;
- investment risks;
- responsibility for principal functions; and
- eligibility for investment by deferred income plans.
12.In addition to other marketing, the Fund intends to market its units to group RRSPs. The Fund proposes to consider each annuitant of a group RRSP as a beneficiary for purposes of paragraph 4801(b) of the Regulations.
PURPOSE OF THE PROPOSED TRANSACTIONS
13.The Investment Manager has two alternative securities law exemptions under which it may market the Fund units without a prospectus. The first of these is the ruling received from the Ontario Securities Commission which requires the Investment Manager to refrain from advertising the Fund. However, the Investment Manager may choose to advertise the Fund in the future and, as a result of this, the ruling would not apply. Further, recent developments with respect to the regulation of the mutual fund industry, in particular the 1995 Stromberg Report and responses to that report, make it unclear whether the Investment Manager will continue to have the benefit of the ruling in the future. The second alternative, using the private placement prospectus exemption provided by paragraph 72(1)(d) of the OSA for sophisticated investors, frees the Investment Manager from the restrictions contained in the ruling, although it does require that an offering memorandum be delivered to the Ontario Securities Commission to the extent that the Investment Manager wishes to provide any disclosure document to a prospective purchaser or wishes to advertise the Fund. Accordingly, in order to give itself maximum flexibility, the Investment Manager wishes to prepare and deliver an offering memorandum to the Ontario Securities Commission in respect of the Fund.
14.The Investment Manager believes that the investment focus of the Fund will be attractive to the group RRSP market. For purposes of this market, it is essential that units of the Fund be qualified investments for RRSPs. While it is intended that the Fund will be a registered investment and thus a qualified investment, unless the Fund qualifies as a mutual fund trust, it will be restricted in its investments to investments that are themselves qualified for RRSPs. Accordingly, it is highly advantageous to qualify as a mutual fund trust.
RULINGS GIVEN
Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:
A.The units of the Fund distributed after the offering memorandum in respect of that Fund has been delivered to the Ontario Securities Commission will be qualified for distribution to the public for the purpose of paragraph 4801(a) of the Income Tax Regulations.
B.For the purposes of paragraph 4801(b) of the Income Tax Regulations, when calculating the number of beneficiaries of the Fund, each annuitant of a group RRSP which has acquired units of the Fund, will be regarded as a beneficiary of the Fund.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on Revenue Canada provided that an offering memorandum for the Fund, as described in 10 and 11 above, is delivered to the Ontario Securities Commission within six months of the date of this letter.
Yours truly,
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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© Sa Majesté la Reine du Chef du Canada, 1996
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