14 May 1998 External T.I. 9806055 - MUTUAL FIND CORPORATION, RETRACTION

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: meaning of "at demand of " in 131(8)(c)(i);

whether corporation precluded from being mutual fund corporation where the first valuation date and payment of the redemption price is delayed for 180 days after the first mutual fund share is issued?

Position:

"at the demand of" in 131(8)(c)(i) could be satisfied in these circumstances

Reasons:

wording of Act broad enough to permit

980605
Denise Dalphy
XXXXXXXXXX Resource Industries
Section

Attention: XXXXXXXXXX

May 14, 1998

Dear Sirs:

Re: Definition of a Mutual Fund Corporation
Subparagraph 131(8)(c)(i) of the Income Tax Act (the “Act”)

This is in reply to your letter of March 11, 1998 where you requested our interpretation of the above-noted provision in the Act in connection with a hypothetical fact situation. In particular, you have requested our views on the requirement in subparagraph 131(8)(c)(i) of the Act that the issued shares of a mutual fund corporation include shares “having conditions attached thereto that included conditions requiring the corporation to accept, at the demand of the holder thereof and at the prices determined and payable in accordance with the conditions, the surrender of the shares...”.

If your query relates to completed transactions of a particular taxpayer, it would be appropriate that a determination be made by the relevant Tax Services Office, or if the interpretation sought is on transactions that are seriously contemplated in the near future, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular IC-70R3 dated December 30, 1996. Notwithstanding the foregoing, we are prepared to offer the following general comments.

You have advised us that limited partnerships formed to invest in flow-through shares quite often transfer all of their assets, consisting of flow-through shares, to a newly incorporated mutual fund corporation in exchange for shares of the mutual fund corporation (“mutual fund shares”) having a value equal to the transferred assets. After the issue of the mutual fund shares to the limited partnership, the limited partnership is dissolved and the mutual fund shares are distributed among the partners in accordance with their respective interests in the partnership.

You advise that the conditions attaching to the mutual fund shares generally include the following. The mutual fund shares are redeemable at the demand of the holder at the net asset value (as defined in the mutual fund share provisions) determined on a valuation day in each week and the redemption price is paid within 5 business days after the valuation date. In most cases, there is a further condition that the first valuation day for determining net asset value will not occur until 180 days after the first mutual fund share is issued. The first mutual fund share would be issued at the time the assets are acquired from the limited partnership. The redemption price is payable within 5 business days after such first valuation date.

The effect of postponing the first valuation date for 180 days is to defer payments for redemptions during the first 180 days after the corporation acquires flow-through shares from the limited partnership. You advise that it is not unusual for such a corporation to receive requests for redemption of up to 50% or more of its shares during the first 180 days and that such a deferral is necessary in order to permit the mutual fund corporation to liquidate a part of its flow-through share holdings in an orderly manner to obtain funds to satisfy initial requests for redemptions.

In our opinion the above deferral would not, in and of itself, preclude a corporation from satisfying the requirements of subparagraph 131(8)(c)(i) of the Act.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

.../cont’d

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