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:
Will Gov. of Canada bonds given as security to foreign exchanges be foreign property?
Position: No.
Reasons: Situs is residency of debtor so security will not be foreign property.
XXXXXXXXXX
XXXXXXXXXX 981746
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the relevant facts and proposed transactions is as follows:
RELEVANT FACTS
1. XXXXXXXXXX (the "Corporation") is a taxable Canadian corporation. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
The Corporation files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
2. XXXXXXXXXX ("Fund A") and XXXXXXXXXX ("Fund B") were established as trusts under the laws of XXXXXXXXXX. The name of Fund A was changed to XXXXXXXXXX and the name of Fund B was changed to XXXXXXXXXX is the trustee of each of Fund A and Fund B. Each of Fund A and Fund B is managed by the Corporation.
3. The sole unitholder of each of Fund A and Fund B is the Corporation. The Corporation has been issued XXXXXXXXXX units of each of Fund A and Fund B at a price of $XXXXXXXXXX each.
4. Each of Fund A and Fund B is a registered investment for purposes of the Act. Fund A is registered as XXXXXXXXXX and Fund B is registered as XXXXXXXXXX. The expression "registered investment" has the meaning assigned by subsection 204.4(1) of the Act.
PROPOSED TRANSACTIONS
5. Fund A will restrict its investments to:
(a) a domestic portfolio of marketable, fixed-income securities representative of the marketable Canadian bonds (including Government of Canada, provincial, municipal and corporate bonds) included in the XXXXXXXXXX, and
(b) a global portfolio of exchange-traded futures contracts with respect to foreign government bonds and forward contracts with respect to international currencies.
6. Fund B will restrict its investments to:
(a) a domestic portfolio of marketable, fixed-income securities including Government of Canada treasury bills and Government of Canada bonds, and
(b) a global portfolio of exchange-traded futures contracts with respect to foreign government bonds and forward contracts with respect to international currencies.
7. Exchange-traded futures contracts are standardized contracts entered into on domestic or foreign exchanges which call for the delivery of specified quantities of various commodities, financial instruments, currencies or other properties at a specified time and place. The terms and conditions of futures contracts are standardized and, as such, are not subject to negotiations between the buyer and seller. Contractual obligations, depending on whether one is the buyer or a seller, may be satisfied either by taking or making, as the case may be, physical delivery of the underlying property or by making a sale or purchase of an offsetting futures contract on the same exchange in the same commodity and expiration month prior to the designated date of delivery. That is, "buying" and "selling" of exchange-traded futures contracts occurs not in the traditional sense of a transfer of the contract but rather by taking positions which offset existing positions.
Although exchange-traded futures contracts in respect of foreign government bonds provide for delivery of the underlying instrument, the actual taking or making of delivery is rare. Instead, such contracts are normally closed out or settled by the parties thereto taking offsetting positions. It is the intention of Fund A and Fund B never to take delivery of the underlying instrument.
A party to a futures contract must deposit an amount of funds with its broker, referred to as "initial margin", equal to a small percentage of the total contract price. These funds do not represent payment of the purchase price for the future contract or partial payment for the underlying instrument under the futures contract. Rather, funds deposited as initial margin represent security for the performance of the contractual obligations under the futures contract, and can be regarded as akin to a performance bond. Any initial margin remaining will be returned when the contractual obligations under the futures contract have been fully performed. A party to a futures contract may have to also deposit an amount of funds, referred to as "variation margin" as a "cushion" against possible losses on the futures contract. The initial and variation margins deposited with brokers in or out of Canada by Fund A or Fund B, as the case may be, will only consist of Government of Canada treasury bills, bonds of a Canadian province or municipality, or bonds of a Canadian corporation that are not foreign property by virtue of paragraphs (d.1) or (f) of the definition of "foreign property" in subsection 206(1) of the Act.
The gains and losses on outstanding futures positions are determined by the relevant clearing corporation on a daily basis (this is referred to as "mark-to-market" determination). If a loss exists on a position (as measured from the prior trading session's close), the party to the contract who is in the loss position is required to pay the amount of the loss to the relevant clearing corporation. Once amounts in respect of losses are so paid such funds cease to be the property of the payer and are thus not recoverable by it, and once received, the recipient has the absolute right to retain such funds and is under no restrictions as to its disposition or use.
Amounts of variation margin in excess of amounts required to be paid out will be returned when the contractual obligations under the futures contract have been fully performed. The variation margin and amounts paid in respect of losses under an open futures contract do not represent payment of the purchase price for the futures contract or partial payment for the underlying property under the contract.
8. A forward currency contract is an obligation to buy or sell a specific amount of underlying currency for an agreed upon price at a future date. Forward contracts are generally not traded on organized exchanges nor are they subject to standardized terms and conditions. Rather, forward contracts on currencies are traded in the Interbank Market. Margin is generally not required in respect of forward currency contracts.
The Interbank Market is not a formally organized exchange; it is an informal network of trading relationships among major commercial banks, brokers and dealers, pension funds, multi-national corporations and other sophisticated investors. It is a 24-hour worldwide market, with participants maintaining instantaneous communications with one another through telecommunications devices which provide participants with access to the current prices at which other participants are willing to buy or sell currencies. The Interbank Market for forward currency contracts is far larger and, particularly for larger trades, more liquid than the currency futures markets.
As is the case of exchange-traded futures contracts, "buying" and "selling" of forward contracts occurs not in the traditional sense of a transfer of a contract but rather by establishing offsetting positions. When an investor desires to close out an exchange-traded futures position, it will establish an offsetting position in the contract and will settle and recognize the profit or loss on the two positions at the time that the offsetting position is established. If an investor desires to close out a forward contract position, it will establish an offsetting position in the contract but will settle and recognize the profit or loss on both positions on the delivery date. Delivery of the underlying currency in respect of a forward currency contract can result when initial and offsetting positions in forward contracts are taken with two different brokers. When these contracts are settled on the delivery date, the foreign currency received on one contract will be delivered shortly thereafter on the other contract leaving the Fund with no foreign currency (except for its profit, if any, if settled in another foreign currency).
For example, the Fund may have a contract with Broker A to buy 1,000,000 deutschmarks for $1.3 million U.S. and an offsetting contract with Broker B to sell 1,000,000 deutschmarks for $1.4 million U.S. On the delivery date, the same amount of deutschmarks would be both received and delivered so that the Fund would hold deutschmarks for only a brief period of time. Similarly, the positions in U.S. dollars would move within a short time span leaving the Fund with its profit, being the net difference of $100,000 (U.S.). That is, although there may be deliveries of foreign currencies as part of the settlement process, it is not the intention of the Fund to hold foreign currencies, other than U.S. dollars, to which the forward currency contracts relate. It is recognized that currencies held by the Fund outside of Canada will be considered "foreign property" for the purposes of the Act and the Fund will take steps to ensure that the amount of currency held outside Canada will not result in the Fund becoming subject to tax in respect of excess foreign property holdings under Part XI.
9. The Corporation has appointed XXXXXXXXXX which will manage the domestic portfolio of marketable securities on behalf of each of Fund A and Fund B. The Corporation has appointed XXXXXXXXXX which will manage the global portfolio of futures and forward contracts on behalf of each of Fund A and Fund B.
10. The Corporation will offer to sell units of Fund A and units of Fund B at the net asset value per unit. Subscriptions will be pursuant to a prospectus filed with the XXXXXXXXXX Securities Commission and securities commissions in other provinces. The outstanding units of Fund A and Fund B will be redeemable at the demand of the holder at a redemption price equal to the net asset value per unit determined on the last business day of the week following which notice of redemption is received by Fund A or Fund B, as the case may be. Payment of the redemption proceeds will be made within five trading days following the business day as of which the redemption of the units is effected.
11. Units of Fund A will be issued to no fewer than XXXXXXXXXX beneficiaries of the fund including registered retirement savings plan ("RRSP") trusts under group registered retirement savings plans ("Group RRSPs"), each of whom will hold
(a) not less than one block of units, as defined in subsection 4803(3) of the Income Tax Regulations (the "Regulations"), and
(b) units having an aggregate fair market value of not less than $XXXXXXXXXX.
12. Units of Fund B will be issued to no fewer than XXXXXXXXXX beneficiaries of the fund including RRSP trusts under Group RRSPs, each of whom will hold
(a) not less than one block of units, as defined in subsection 4803(3) of the Regulations, and
(b) units having an aggregate fair market value of not less than $XXXXXXXXXX.
13. Each of Fund A and Fund B will use the funds received on the sale of its units to acquire investments described in paragraphs 5 and 6, respectively. Fund A and Fund B each expect to raise $XXXXXXXXXX through the sale of their respective units.
Purpose of the Proposed Transactions
14. The purpose of the proposed transactions is to have each of Fund A and Fund B qualify as a mutual fund trust for the purposes of the Act and to allow holders of the units of each of Fund A and Fund B to benefit from the growth of the portfolio of Canadian fixed-income securities and from the exposure to global markets for foreign government bonds and international currencies.
15. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or of a person related to the Corporation;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Corporation or of a person related to the Corporation;
(c) is under objection by the Corporation or by a person related to the Corporation;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate, other than ruling 960994 issued XXXXXXXXXX, 1996 for which the proposed transactions were not completed.
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 the proposed transactions are carried out as described herein, we rule as follows:
A. For the purposes of subsections 248(1) and 206(2) of the Act, the "cost amount" to each of Fund A and Fund B of its investments in exchange-traded futures contracts and forward currency contracts will, at the time entered into or acquired by Fund A or Fund B, as the case may be, be equal to the brokerage fees and other costs incidental to entering into the contract and will not include an amount in respect of the contract price or amounts paid, if any, as initial or variation margins.
B. Where units of Fund A and Fund B are acquired by RRSP trusts under a Group RRSP, each RRSP trust under the Group RRSP will be regarded as a beneficiary of Fund A or Fund B, as the case may be, for the purposes of paragraph 4801(b) of the Regulations.
C. The activities that each of Fund A and Fund B propose to enter into in respect of its investments in exchange-traded futures contracts and forward currency contracts through the Interbank Market, will constitute "the investing of its funds in property" for the purposes of subsection 132(6) of the Act.
D. The initial and variation margins provided with respect to the exchange-traded futures contracts by Fund A and Fund B, as the case may be, will not constitute "foreign property" for the purposes of the Act.
The above rulings, which are based on the Act in its present form and do not take into consideration any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada with respect to exchange-traded futures contracts and forward currency contracts entered into or acquired by Fund A or Fund B, as the case may be, between
XXXXXXXXXX.
The above rulings should not be construed as providing the Department's views on whether Fund A or Fund B will qualify as a unit trust or mutual fund trust for purposes of the Act.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
7
.../cont'd
.../cont'd
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