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) Whether the securities lending arrangement and short sale will be considered to be “the investing of funds in property” by XXXXXXXXXX for the purposes of subparagraph 131(8)(b)(i) of the definition of a Mutual Fund Corporation.
(2) Will XXXXXXXXXX be able to elect capital gains treatment under subsection 39(4) with respect to the short sale of borrowed shares (XXXXXXXXXX).
Position TAKEN:
(1) Yes.
(2) Yes on the assumption that XXXXXXXXXX is a Mutual Fund Corporation and that the XXXXXXXXXX securities are Canadian securities as described in 39(6).
Reasons FOR POSITION TAKEN:
(1) Previous positions.
(2) Legislation.
XXXXXXXXXX
XXXXXXXXXX 3-980534
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sir:
Re: Advanced Income Tax Ruling Request - XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advanced income tax ruling (the “Ruling request”) on behalf of XXXXXXXXXX.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (herein referred to as the “Act”) and unless otherwise expressly stated:
a) XXXXXXXXXX.
b) “XXXXXXXXXX Shares” means the common shares of XXXXXXXXXX.
c) “Board of Directors” means the board of directors of XXXXXXXXXX.
d) “Borrowed XXXXXXXXXX Shares” means the XXXXXXXXXX Shares borrowed under the “Share Loans”.
e) “Class XXXXXXXXXX Shares” means a particular Class of shares of XXXXXXXXXX.
f) “Final Redemption Date” means a date anticipated to be 10 years from the first date of issue of Class XXXXXXXXXX Shares.
g) “Mutual Fund Corporation” has the meaning assigned by subsection 131(8) of the Act.
h) “Net Asset Value per Class XXXXXXXXXX Share” means the value of the assets of XXXXXXXXXX, on a particular date, including in particular:
(i) the market price of the XXXXXXXXXX Shares held by XXXXXXXXXX;
(ii) the net proceeds from the sale of XXXXXXXXXX Shares;
(iii) any dividends and interest income due to XXXXXXXXXX;
(iv) any refundable tax previously paid by XXXXXXXXXX which, in the opinion of the Board of Directors, will be currently refundable;
(v) other assets, including cash
less the aggregate of:
(vi) its liabilities including:
(A) accrued administration, custodial, listing, accounting, audit and legal fees;
(B) taxes which, in the opinion of the Board of Directors, will not be currently refundable;
(C) the amount of all declared but unpaid dividends payable by XXXXXXXXXX where the record date for the payment of such dividends has passed and the amount has been set aside for the payment of such dividends;
(vii) the amount required to purchase (in the market) XXXXXXXXXX Shares equal to the number of outstanding borrowed XXXXXXXXXX Shares for delivery to the Lender under the Share Loans described in paragraph 7 below; and
(viii) the amount paid-up on the Class XXXXXXXXXX Shares;
all as determined by the Board of Directors, divided by the number of Class XXXXXXXXXX Shares outstanding before giving effect to the retraction or redemption for which a calculation is being made.
i) “XXXXXXXXXX Share” means the common shares of XXXXXXXXXX.
j) “Outstanding Borrowed XXXXXXXXXX Shares” means any Borrowed XXXXXXXXXX Shares outstanding from time to time.
k) “Securities Lending Arrangements” has the meaning assigned by subsection 260(1) of the Act.
l) “Share Loans” mean the borrowing of XXXXXXXXXX Shares by XXXXXXXXXX pursuant to Securities Lending Arrangements and the XXXXXXXXXX Shares borrowed under such loans will be referred as “Borrowed XXXXXXXXXX Shares”.
m) “Taxable Canadian Corporation” has the meaning assigned by subsection 89(1) of the Act.
You advise that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved in the Ruling request has been considered by a Taxation Services Office or Taxation Centre in connection with a return already filed, and none of the issues involved in the Ruling request is the subject of any notice of objection or is under appeal.
Our understanding of the facts, proposed transactions and their purposes is as follows.
FACTS
1. XXXXXXXXXX, a Taxable Canadian Corporation, was incorporated, XXXXXXXXXX, under the laws of the province of XXXXXXXXXX has not (as of the date of this letter) selected a fiscal year end, filed tax returns or obtained a tax account number. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX a Taxable Canadian Corporation, the common shares of which are owned XXXXXXXXXX.
2. The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX Class XXXXXXXXXX shares, issued for an amount of $XXXXXXXXXX per share, all of which are held by XXXXXXXXXX, as indicated in paragraph 1 above. Class XXXXXXXXXX shares are entitled to one vote per share and are entitled to dividends if, as and when declared by the Board of Directors, except that holders of Class XXXXXXXXXX Shares are not entitled to receive dividends as long as any Class XXXXXXXXXX Shares are outstanding. Subject to applicable law, Class XXXXXXXXXX shares are retractable at any time. The retraction price of a Class XXXXXXXXXX Share will be equal to either $XXXXXXXXXX per share at a time when there are outstanding Class XXXXXXXXXX Shares or the net asset value (not expected to exceed $XXXXXXXXXX per Class XXXXXXXXXX Share) of XXXXXXXXXX in any other case. Class XXXXXXXXXX shares are redeemable at the option of XXXXXXXXXX at any time for a redemption price equal to their paid-up amount of $XXXXXXXXXX per share.
PROPOSED TRANSACTIONS
3. XXXXXXXXXX will issue Class XXXXXXXXXX Shares to the public for cash proceeds pursuant to a prospectus that will be filed with provincial securities authorities. You advise that between $XXXXXXXXXX is anticipated to be raised from this issuance. The terms and conditions of the Class XXXXXXXXXX Shares will be substantially as follows:
a) Dividends: Holders of the Class XXXXXXXXXX Shares will be entitled to receive cash dividends in each quarter if, as and when declared by the Board of Directors. The Board of Directors will indicate that its policy will be to pay quarterly dividends on the Class XXXXXXXXXX Shares equal to the full amount of the quarterly cash dividends paid by XXXXXXXXXX on the XXXXXXXXXX Shares acquired and owned by XXXXXXXXXX (as described in paragraph 4 below), less the dividend compensation payment made in respect of the outstanding borrowed XXXXXXXXXX Shares (as described in paragraph 5 below) and XXXXXXXXXX administration and operating expenses for the quarter.
b) Retraction: Class XXXXXXXXXX Shares are retractable at any time, upon 30 days’ prior written notice provided to XXXXXXXXXX. Retraction payments for Class XXXXXXXXXX Shares will be made, by XXXXXXXXXX, on the 30th day after receipt of such notice (the “retraction payment date”). Upon retraction, a holder of Class XXXXXXXXXX Shares will receive, for each Class XXXXXXXXXX Share, a cash retraction price equal to XXXXXXXXXX% of the Net Asset Value per Class XXXXXXXXXX Share on the retraction payment date.
c) Redemption: Any Class XXXXXXXXXX Shares outstanding on the Final Redemption Date will be redeemed by XXXXXXXXXX on such date. Each holder will receive a cash amount per Class XXXXXXXXXX Share equal to the Net Asset Value per Class XXXXXXXXXX Share on that Final Redemption Date.
d) Votes and Other: Except as provided by law, holders of Class XXXXXXXXXX Shares will not be entitled to receive notice of, to attend or to vote at any meeting of shareholders of XXXXXXXXXX other than meetings of the holders of Class XXXXXXXXXX Shares. The Class XXXXXXXXXX Shares will rank subsequent to the Class XXXXXXXXXX shares with respect to distributions upon a redemption or retraction and distributions upon a dissolution, liquidation or winding-up of XXXXXXXXXX.
In addition, all, but not less than all, of the outstanding Class XXXXXXXXXX Shares may be redeemed at the option of XXXXXXXXXX, at the Net Asset Value per Class XXXXXXXXXX Share, if the Board of Directors in its sole discretion determines that any event, circumstance or cause (whether or not reasonably foreseeable) beyond the reasonable control of XXXXXXXXXX will occur or has occurred which will have or has had a material adverse effect on the ability of XXXXXXXXXX to perform or fairly perform its obligations with respect to the Class XXXXXXXXXX Shares.
4. XXXXXXXXXX will enter into a credit facility to be provided by XXXXXXXXXX Under the terms of the credit facility XXXXXXXXXX will lend XXXXXXXXXX an amount approximately equal to the proceeds to be raised on the issue of the Class XXXXXXXXXX Shares. The funds received under the credit facility will be used, by XXXXXXXXXX, to fund the acquisition, in the market, of XXXXXXXXXX Shares prior to the closing of the issue of the Class XXXXXXXXXX Shares. The only significant assets of XXXXXXXXXX will be the XXXXXXXXXX Shares owned by it. XXXXXXXXXX will repay the amount borrowed from XXXXXXXXXX. under the credit facility with the proceeds raised from the issuance of Class XXXXXXXXXX Shares. Accordingly the loan under the credit facility will be outstanding for a short term anticipated to be less than two weeks. On the closing of the offering of Class XXXXXXXXXX Shares, XXXXXXXXXX will own one XXXXXXXXXX Share for each Class XXXXXXXXXX Share issued and outstanding..
5. Prior to the closing of the issuance of the Class XXXXXXXXXX Shares, XXXXXXXXXX will enter into a Share Loan agreement with the XXXXXXXXXX as the stock lender, a person with whom it deal’s at arm’s length for purposes of the Act, to borrow a specified number of XXXXXXXXXX Shares owned by the XXXXXXXXXX. The specified number will be determined by applying, to the number of Class XXXXXXXXXX Shares which will be issued and outstanding, a ratio based upon the number of XXXXXXXXXX Shares owned by XXXXXXXXXX to the number of XXXXXXXXXX Shares issued and outstanding. There are currently approximately XXXXXXXXXX Shares issued and outstanding and XXXXXXXXXX owns approximately XXXXXXXXXX Shares. The current ratio can be expressed as XXXXXXXXXX. The maintenance of this ratio will require XXXXXXXXXX to effect adjustments in the number of Borrowed XXXXXXXXXX Shares. The funding for such events will require XXXXXXXXXX to either sell XXXXXXXXXX Shares it owns and to use a portion of such proceeds to acquire XXXXXXXXXX Shares in the market for delivery to reduce the Outstanding Borrowed XXXXXXXXXX Shares to restore the specified ratio or to borrow additional XXXXXXXXXX Shares as the case may be. In certain limited circumstances the stock lender has the right to require XXXXXXXXXX to return the Borrowed XXXXXXXXXX Shares. In these circumstances XXXXXXXXXX will return the Borrowed XXXXXXXXXX Shares and borrow an equal number of identical shares from one or more stock lenders. In addition, under the terms of the Share Loan, which will mature on the Final Redemption Date, at which time XXXXXXXXXX will be obligated to deliver to the lender a number of XXXXXXXXXX Shares equal to the number of Outstanding Borrowed XXXXXXXXXX Shares, XXXXXXXXXX will be required to pay an amount per Outstanding Borrowed XXXXXXXXXX Common Share equal to the per share dividend paid by XXXXXXXXXX on XXXXXXXXXX Shares from time to time (“dividend compensation payment”). XXXXXXXXXX will also be required to deliver as collateral to XXXXXXXXXX Shares with a fair market value of not less XXXXXXXXXX% of the fair market value of the Borrowed XXXXXXXXXX Shares. XXXXXXXXXX will sell the Borrowed XXXXXXXXXX Shares in the market for cash proceeds which will be used to fund the acquisition, in the market, of XXXXXXXXXX Shares.
6. XXXXXXXXXX intends to qualify as a Mutual Fund Corporation throughout each taxation in which any Class XXXXXXXXXX Shares are outstanding.
PURPOSE OF THE PROPOSED TRANSACTIONS
7. XXXXXXXXXX was created for the purpose of holding XXXXXXXXXX Shares to enable its Class XXXXXXXXXX Shares to (i) benefit from any capital appreciation in XXXXXXXXXX Shares that will be held by XXXXXXXXXX, apart from the appreciation attributable to XXXXXXXXXX Shares held by XXXXXXXXXX, and (ii) initially receive an enhanced dividend yield compared with the dividend yield on XXXXXXXXXX Shares. This economic objective is achieved through the acquisition of XXXXXXXXXX Shares in combination with a securities lending arrangement the subject of which is the XXXXXXXXXX Shares.
RULINGS GIVEN
Provided the above descriptions of facts, proposed transactions and purposes of the 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, we confirm the following:
A. The activities of XXXXXXXXXX described in paragraphs 4 and 5 above will be considered to be the investing of XXXXXXXXXX funds in property for the purposes of subparagraph 131(8)(b)(i) of the Act.
B. Provided that the XXXXXXXXXX Shares are “Canadian Securities”, within the meaning assigned by subsection 39(6) of the Act, XXXXXXXXXX has elected in prescribed form pursuant to subsection 39(4) of the Act and XXXXXXXXXX is a Mutual Fund Corporation throughout the year in which a disposition of XXXXXXXXXX Shares occurs, we confirm the subsection 39(4) of the Act will apply to deem the XXXXXXXXXX Shares acquired and disposed of by XXXXXXXXXX, as described in paragraph 5, to be capital property to XXXXXXXXXX.
This advance income tax ruling should not be construed as agreement by the Department that XXXXXXXXXX will qualify for any particular taxation year as a Mutual Fund Corporation. Such determination is a question of fact that is required to be made with respect to each taxation year of XXXXXXXXXX.
This ruling is provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and is binding upon the Department provided that the proposed transactions are completed by XXXXXXXXXX. This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendment thereto.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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