30 November 1996 Ruling 9729263 - TRUST DISTRIBUTIONS TO NON-RESIDENT BENEFICIARIES

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:

Application of Articles XXI and XXII of Canada-U.S. Treaty in respect of distributions of income by a Canadian resident trust to U.S. resident beneficiaries (which beneficiaries are U.S. "tax exempts") where the income arises outside of Canada.

Position:

Subject to a proviso regarding the trust not carrying on business in Canada, favorable rulings were given.

Reasons:

see detailed issue sheet (and consistent with rulings in prior years).

XXXXXXXXXX							972926
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX (the "Fund")
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the Fund. In your letter dated XXXXXXXXXX you provided additional information in respect of the facts and the proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the Trustee of the Fund, none of the issues involved in this request:

(a)is involved in an earlier return of the Fund or a related person,

(b)is being considered by a tax services office or taxation centre in connection with a tax return already filed by the Fund or a related person,

(c)is under objection, and

(d)is before the courts or, if a judgment has been issued, the time limit for appeal has not expired.

Definitions

In this letter the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b)"the Fund" is XXXXXXXXXX.

(c)"Fund Manager" means XXXXXXXXXX;

(d)"Investment Advisor" means XXXXXXXXXX;

(e)"Securities Commission" means the Ontario Securities Commission; and

(f)"Trustee" means XXXXXXXXXX.

Facts

1.The Fund was established on XXXXXXXXXX by a trust indenture between the Trustee and a predecessor of the Fund Manager, which trust indenture was amended by a First Supplemental Indenture made between the Fund Manager and the Trustee as of XXXXXXXXXX and which has been amended and restated by an Amended and Restated Trust Indenture dated XXXXXXXXXX. The Amended and Restated Trust Indenture is referred to herein as the "Trust Indenture". The Trustee is a trust company resident in Canada for the purposes of the Act. The Fund Manager is a Canadian investment dealer.

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.The Fund Manager provides certain administrative services to the Fund and arranges for the investment management of the Fund. It has no direct responsibility for managing the investment portfolio or investment operations of the Fund or making any decisions with respect to the purchase or sale of securities.

4.The Fund Manager has appointed the Investment Advisor to, among other things, manage the investment portfolio and investment operations of the Fund, make all decisions with respect to the purchase and sale of portfolio securities and to comply with certain requirements under the Employee Retirement Income Security Act of 1974 of the United States. The Investment Advisor is a U.S. corporation and a non-resident of Canada for purposes of the Act. (When the Fund was established in XXXXXXXXXX, the policies of the Securities Commission did not permit a non-resident to provide investment advice directly to the Fund; as a result, the Fund Manager was then responsible for all investment decisions. The Securities Commission now permits such arrangements.) The Investment Advisor deals at arm's length with both the Trustee and the Fund Manager.

5.The Fund is required to pay a single monthly management fee to the Fund Manager (computed with reference to the Fund's Net Asset Value at that time, in accordance with the Trust Indenture ) as consideration for the services provided by both the Fund Manager and the Investment Advisor. The Trust Indenture provides that the Fund Manager shall advise the Trustee as to the allocation of such monthly fee between itself and the Investment Advisor. Pursuant to an agreement between the Fund Manager, the Trustee and the Investment Advisor (the Investment Advisory Agreement) the monthly management fee will be allocated XXXXXXXXXX% to the Investment Advisor and XXXXXXXXXX% to the Fund Manager or in such other proportion as the Investment Advisor and the Fund Manager may agree in writing from time to time. The Fund Manager shall cause notice to be given to the unitholders of the Fund of any changes in the allocation of the management fee. To date, no changes have been made to the management fee allocation.

6.The investment objective of the Fund is to seek risk diversification and long-term capital appreciation through investment in equity and equity-related securities traded in the securities markets of XXXXXXXXXX. Assets may be invested in other investment funds established to invest in XXXXXXXXXX. Assets of the Fund may temporarily be invested in money market instruments denominated in Canadian dollars or other international currencies.

7.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 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.

8.Units of the Fund were, and will be, purchased by investors on a private placement basis. The minimum initial subscription is units having a net asset value of $XXXXXXXXXX (U.S.). It was originally intended by the Fund Manager and the Investment Advisor that units of the Fund would primarily be marketed to Canadian investors. After the October, 1987 stock market crash, only U.S. investors remained interested in acquiring units of the Fund. For business reasons (i.e., to avoid the time and expense involved in restructuring), it was determined to continue with the structure outlined above rather than to proceed with a new structure (e.g., a trust or other pooled fund vehicle established in the United States). Accordingly, XXXXXXXXXX units were issued to a total of XXXXXXXXXX investors and one unit was issued to the Fund Manager. With the exception of the Fund Manager, all of the investors were resident in the United States.

9.Under the Trust Indenture, units may be purchased on the first business day of each calendar quarter at a price equal to the net asset value per unit on the last business day of the preceding calendar quarter.

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.).

Proposed Transactions

10.It is anticipated that additional units of the Fund will be issued on the first business day of each calendar quarter in 1998. 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 (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 the Proposed Transactions

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

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, 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 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 U.S. 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 above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 with respect to the proposed issuances of units of the Fund in 1998 as described in paragraph 10 above.

These rulings are based on the Act in its present form 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.

Yours truly,

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