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: pledging of assets to secure loan for foreign sub -will this put the unit trust offside it's foreign investment restrictions?
Position: No - relevant amount is cost amount of investment
Reasons: complied with technical wording of the Act
XXXXXXXXXX
XXXXXXXXXX 972615
XXXXXXXXXX XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge your letters of XXXXXXXXXX.
We understand that none of the issues involved in the ruling request, to the best of your knowledge and that of the taxpayers involved:
i) is in an earlier return of the taxpayers or a related person,
ii) is being considered by an office of Revenue Canada in connection with a previously filed tax return of the taxpayers or a related person,
iii) is under objection by the taxpayers or a related person,
iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired, and
v) is the subject of a ruling previously to the taxpayers or a related person issued by the Directorate.
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:
"A Co." refers to XXXXXXXXXX
"Trust" refers to XXXXXXXXXX
"B Co." refers to XXXXXXXXXX
"Manager" refers to XXXXXXXXXX
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows.
Facts and Proposed Transactions
1. A Co. is a wholly-owned subsidiary of B Co. A Co. provides management, administrative and portfolio advisory services to mutual funds, segregated funds and pooled investment funds. Each of A Co. and B Co. is a taxable Canadian corporation, as defined in subsection 89(1) of the Act.
2. On XXXXXXXXXX, B. Co. established a new subsidiary corporation, Manager, which is a taxable Canadian corporation, as defined in subsection 89(1) of the Act. The Manager will establish the Trust, pursuant to a trust agreement (the "Trust Agreement") to be entered into between the Manager and a Canadian financial institution, which deals at arm's length with the Manager and A Co., who will act as trustee.
3. The capital of the Trust will be represented by transferable units (the "Units") of beneficial interest in the Trust, the terms and conditions of each of which are identical. Units will be offered for sale to the public in Canada by way of prospectus filed with the applicable securities regulators in Canada. A Co. filed the preliminary prospectus with all securities regulators in Canada on XXXXXXXXXX. It is expected that the closing of this offering will occur by XXXXXXXXXX (the "Closing Date"). The Trust will apply to XXXXXXXXXX for listing of the Units.
4. The Trust will issue Units at a price of $XXXXXXXXXX per Unit. Each Unit will represent an undivided interest in the net assets of the Trust. The Trust will have a term of approximately XXXXXXXXXX years and will terminate on or about XXXXXXXXXX. Upon termination, the net assets will be distributed pro rata to the Unitholders, unless an alternative later termination date is approved by the Unitholders.
5. The Trust will be managed by the Manager and A Co. will act as investment advisor to the Trust.
6. The investment objectives of the Trust are: (i) to generate a relatively stable increase in the net asset value of the Trust; (ii) to ensure that the performance of the Trust is substantially independent of the major fixed income and equity markets; (iii) to achieve a low volatility; and (iv) to distribute to Unitholders at least XXXXXXXXXX ¢ per Unit of the net assets of the Trust at each quarter end. The Trust seeks to achieve these objectives, while at the same time ensuring its Units are not "foreign property", as defined in the Act, to taxpayers listed in paragraphs 205(a) to (f) of the Act.
7. The Trust intends to qualify as a "unit trust", as defined in paragraph 108(2)(b) of the Act. To that end, the Trust will invest at least 90% of the cost amount of its property in property of Canadian resident issuers or debtors described in subparagraph 108(2)(b)(iii) of the Act and not more than 10% of the cost amount of such property will consist of bonds, securities or shares in the capital stock of any one corporation or debtor other than Her Majesty in right of Canada or a province or a Canadian municipality. Such property will generally consist of Canadian money market investments. Also, at least 95% of the income of the Trust will be derived from, or from the disposition of, investments described in subparagraph 108(2)(b)(iii) of the Act.
8. The Trust will invest up to 10% of the cost amount of its property in common shares of a newly established wholly-owned corporation created under the laws of XXXXXXXXXX ("Subco"). Subco's board of directors elected by the Trust will not be the agents of the Trust in managing the business and affairs of Subco. The rights of the directors to manage the affairs of Subco under XXXXXXXXXX law will not be governed by any contract or other agreement involving the Trust. Subco may contract with A Co. for investment advisory services. The Subco shares will be capital property to the Trust.
9. Subco will be resident in XXXXXXXXXX and will not be resident in Canada for purposes of the Act.
10. Subco will borrow from an arm's length financial institution (the "Lender") money (the "Loan") which will be secured by the assets of Subco and the Trust. The Trust's assets will be pledged by virtue of a guarantee by the Trust of the Loan. The amount of the Loan and the terms of the security will be the subject of negotiation between Subco, the Trust and the Lender. It is currently anticipated that the maximum amount of the Loan will not exceed XXXXXXXXXX% of the fair market value of the security pledged for the Loan. The Loan will bear interest at reasonable commercial rates.
11. Subco will invest the amount it receives from the Trust on the subscription of Subco common shares and the amount of the Loan in a diversified portfolio of hedge funds established outside Canada. Hedge funds are pooled investment portfolios that are generally privately offered funds. The hedge funds in which Subco intends to invest will be substantially market-neutral in character. Some hedge funds will be non-traditional private investment corporations and other such investment vehicles (the "Private Funds").
12. Subco will be a "controlled foreign affiliate", as defined in subsection 95(1) of the Act, of the Trust. Certain Private Funds in which Subco will invest will be in property which may constitute "offshore investment fund properties", in respect of which Subco may be required to include certain amounts computed under section 94.1 of the Act in computing its foreign accrual property income ("FAPI").
13. An amount equal to the income and capital gains of Subco will be distributed by Subco to the Trust as dividends in the taxation year of Subco in which they are earned or realized, as the case may be. In addition, Subco will have the discretion to distribute, as dividends or a return of capital, up to the amount, if any, by which its FAPI exceeds its income and capital gains earned and realized in the taxation year.
14. In determining whether the conditions in subparagraphs 108(2)(b)(iii) and (v) of the Act are met, the Trust will measure its properties at the "cost amount" of each property as defined in subsection 248(1) of Act.
Purpose of Proposed Transactions
15. The purpose of the proposed transactions is to permit the Trust to invest in properties that will allow it to achieve its investment objectives.
Ruling Requested and Given
Provided that the preceding statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and the purpose thereof, and the proposed transactions are carried out as described above we confirm the following:
A. The pledging of its assets as security for Subco's Loan will not in and by itself result in the Trust acquiring or holding "foreign property" as defined in subsection 206(1) of the Act.
B. Notwithstanding the fair market value of the Subco shares, provided the adjusted cost base of the shares of Subco represents not more than 10% of the aggregate cost amount of all properties owned by the Trust, the investing by the Trust in shares of Subco and the pledging of the Trust's assets as security for Subco's Loan will not in and by itself result in the Trust property consisting of more than 10% in the capital stock of any one corporation or debtor for purposes of subparagraph 108(2)(b)(v) of the Act.
C. Provided the Trust qualifies as a "mutual fund trust" as defined in subsection 132(6) of the Act and provided cost amount of foreign property held by the Trust in any particular month, including it's investment in Subco, does not exceed 20% of the cost amount of all the property held by it, subsection 5000(1) of the Income Tax Regulations will apply to prescribe Units of the Trust not to be foreign property.
D. Subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given above.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada provided the Trust Agreement is entered into by XXXXXXXXXX.
Yours truly,
for Director
Resources, Partnerships,
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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.../cont'd
.../cont’d
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