1998 Ruling 9818043 - MUTUAL FUND TRUST

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.

XXXXXXXXXX
XXXXXXXXXX 981804
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of XXXXXXXXXX.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is being considered by a tax services office or a taxation centre in connection with any tax return already filed and none of the issues is under objection or appeal.

Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:

Definitions

In this letter, the following terms have the meanings specified:

(a) unless otherwise indicated, all references to statute are to the Income Tax Act (the "Act");

(b) "the Fund(s)" is/are any, or all of, the XXXXXXXXXX. The business number of each is XXXXXXXXXX respectively;

(c) "the Group" is the XXXXXXXXXX, as described in paragraph 2 below, and includes the Funds and the Special Fund;

(d) "the Special Fund" is the XXXXXXXXXX;

(e) "the New Units" are the Series I Units;

(f) "Manageco" is XXXXXXXXXX;

(g) "mutual fund corporation" has the meaning assigned by subsection 131(8) of the Act;

(h) "mutual fund trust" has the meaning assigned by subsection 132(6) of the Act;

(i) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

Facts

1. Manageco is a taxable Canadian corporation and the trustee of each of the Funds and the Special Fund. Manageco, as agent, is the primary wholesale distributor of units for each of the Funds and the Special Fund. Pursuant to management agreements between Manageco and each of the Funds and the Special Fund, Manageco provides management services that includes the day-to-day management of their respective affairs and the management of their respective investment portfolios.

2. The Group reflects a variety of investment objectives. Some of the funds in the Group are mutual fund corporations, or consist of classes of securities of a mutual fund corporation, whereas the remaining funds in the Group are mutual fund trusts.

3. Each of the Funds is a mutual fund trust established by declaration of trust. Under its declaration of trust, each of the Funds is authorized to issue an unlimited number of units of a single class, issuable in series. Manageco, as trustee, is entitled to create, determine the attributes of, and authorize for issue, one or more new series of units for each Fund. An unlimited number of Series A units, mutual fund units, and Series C units of each Fund have been created and authorized for issue. In each Fund, however, only mutual fund units (the "Mutual Fund Series Units") are currently outstanding. Each of the Funds deals with the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Taxation Centre.

4. The Special Fund is a mutual fund trust authorized to issue an unlimited number of units of a single class. The unitholders of the Special Fund have authorized Manageco, as trustee of the Special Fund, to

(a) change the jurisdiction of the governing law of the Special fund.

(b) amend the declaration of trust for the Special Fund to provide for the issue in series of the single class of units of the fund and to provide the trustee of the fund with the power to determine the attributes of, and authorize for issue, one or more new series of units;

(c) create a first series of units to be known as the Units; and

(d) re-classify the issued and outstanding units of the Special Fund as Units;

Under the terms of the authorization granted to Manageco by the unitholders of the Special Fund, Manageco can only make the amendments described in paragraphs 4(a) to (d) above after a satisfactory advance income tax ruling is issued by Revenue Canada.

5. Under the declaration of trust for each Fund, each series of units of a Fund shares equally, in the proportion determined by the method described in paragraphs 6 and 7 below, with the other series of that Fund in any payment of distributions and any return of capital in the event of the liquidation, dissolution or winding up of the Fund. All series of units of a Fund rank equally in the payment of distributions and on a return of capital.

6. Under its declaration of trust, each Fund is required to distribute at the end of a taxation year to the holders of units in each series of the Fund the amount, if any, by which its net income and realized capital gains (net of any realized capital losses of the Fund in such year or prior years) exceeds any non-capital loss of the Fund and certain adjustment amounts to be determined by the Fund trustee, including in respect of taxable dividends received by the Fund from taxable Canadian corporations and capital gains realized by the Fund (in particular, the non-taxable portion of such gains and any capital gains refund to which the Fund may be entitled), each computed in accordance with the relevant provisions of the Act. The portion of the distribution to which a series is entitled is determined by taking its proportionate share of the adjusted net income of the Fund less the expenses of the Fund that are allocable to the series, using the method described in paragraph 8 below, and management fee distributions in respect of that series, to the extent that they were not previously charged during the calendar year to a distribution to all holders of that series. Adjusted net income is a Fund's net income adjusted for expenses related to a specific series and which have not been charged, in a calendar year, to a distribution to holders of that specific series.

7. Units of each series of each Fund are issued or redeemed at their respective net asset values. The net asset value per unit of a series of a Fund is computed by dividing the total net asset value of the series (calculated in accordance with the declaration of trust of each Fund) by the total number of units of the series of the Fund outstanding at the time. The net asset value of each series of a Fund is the value of that series' proportionate share of the Fund's assets less the series' proportionate share of the Fund's liabilities including the expenses of the Fund that are allocated to the series using the method described in paragraph 8 below. In general, a series' share of the Fund's assets and liabilities (other than those expenses specifically allocated to the series using the method described in paragraph 8 below) will be determined by reference to the proportion that the total net asset value of the series bears to the total net asset value of the Fund as at the close of business on the previous day. The net asset value per unit of a series of a Fund is normally determined on a daily basis.

8. Each Fund and the Special Fund must pay specified expenses incurred by them or on their behalf, including brokerage commissions on the purchase and sale of portfolio investments and administration costs. Manageco allocates the various administration costs among the funds in the Group by reference to one of three criteria; the net asset value of, the number of unitholder transactions (ie. purchases and redemptions of units) entered into by, and the number of unitholder accounts in, each Fund. The declaration of trust for each Fund provides that the expenses allocated to a Fund are to be allocated among each series according to two criteria; a series' proportionate share of the common expenses of the Fund and the expenses referable to a series. To the extent that a category of administration costs is allocated to a Fund based on unitholder transactions or the number of unitholder accounts, such costs constitute expenses referable to a series and as such are allocated to each series based on the number of unitholder transactions or unitholder accounts in such series.

9. Under the declaration of trust for the Special Fund, the share of each unit in the net income and realized capital gains, the amount to be distributed in each taxation year to unitholders and the net asset value per unit are determined as set out in paragraphs 6, 7 and 8 above except that it is currently unnecessary to allocate income or expenses as between different series of units of the Special Fund.

10. In return for the management services provided by Manageco, each Fund or the Special Fund is required to pay management fees at specified annual rates which are computed on the average daily net asset value of each series of units or class of units of each Fund and the Special Fund, as the case may be. The management fee is computed daily and payable monthly. The management and advisory fees payable by the Funds and the Special Fund range from XXXXXXXXXX% to XXXXXXXXXX% annually.

11. The units of each Fund and the Special Fund have historically been sold to investors, herein referred to as an account, in separate transactions and the size of each account has generally not been large. These accounts are commonly referred to as retail accounts. In order to encourage holdings by groups, such as a group registered retirement savings plans, a defined contribution pension plan or a group of investors receiving services, including investment selection services, from a third party provider and large investors, Manageco sometimes negotiates a reduction of the effective management fee payable by an investor or group. The goal of such reduced fee arrangements is to achieve fees which are competitive for such large holdings. Such fee reductions are fully negotiable between Manageco and the investor or group and are based, among other factors, on the size of the holdings of the investor or group. These groups or large investors are commonly referred to as institutional accounts. Manageco reduces the effective management fee payable by an institutional account of a Fund or the Special Fund by reducing the management fee charged to the fund on condition that the fund make a special distribution to the institutional account in an amount equal to the amount of the management fee reduction negotiated with the institutional account.

Proposed Transactions

12. Manageco, as trustee of the Special Fund, proposes to

(a) change the jurisdiction of the governing law of the Special fund.

(b) amend the declaration of trust for the Special Fund to provide for the issue in series of the single class of units of the fund and to provide the trustee of the fund with the power to determine the attributes of, and authorize for issue, one or more new series of units;

(c) create a first series of units to be known as the Units; and

(d) re-classify the issued and outstanding units of the Special Fund as Units;

13. Manageco proposes to create an additional series of units ("New Units"), as described in paragraph 14 below, for each of the Funds and the Special Fund which will only be offered to "Institutional Accounts", as described in paragraph 14 below. No other mutual fund trust in the Group will create a new series of units.

14. The rights, privileges, restrictions and conditions of the New Units will be substantially the same as those of the existing series of units of each Fund and the Special Fund except that the New Units will only be issuable to "Institutional Accounts" and the holder of the New Units will receive the reduction in management fees as cash unless the holder requests reinvestment of the management fee in additional units of the Fund/Special Fund, as the case may be. An account will qualify as an "Institutional Account" after it satisfies certain criteria related to the total net asset value of the units held by the account and certain other matters which will be established from time to time, both before and after the initial issuance of New Units, by Manageco as trustee of each Fund and the Special Fund.

15. Each Fund and the Special Fund will continue to be responsible for the payment of the expenses allocated to it in accordance with the criteria discussed in paragraph 8 above. Each series of units of each Fund and the Special Fund, including the New Units, will be responsible for the payment of the expenses allocated to it in accordance with the criteria discussed in paragraph 8 above.

16. The net asset value of each series of units of a Fund and the Special Fund, including the New Units, will be computed separately for each series of which there are units outstanding in accordance with the terms of the existing declaration of trust, and the unitholders of each series, including the series of New Units, will continue to be allocated distributions of the Fund as described in paragraph 6 above.

17. Existing Mutual Fund Series Units of each Fund and units of the Special Fund which are beneficially owned by Institutional Accounts may be re-classified, upon the request of the holder thereof, as New Units of that Fund or the Special Fund from time to time commencing with the offering of the New Units. The re-classification, in and of itself, will not result in any change to the investment objectives or portfolios of any of the Funds or the Special Fund and there will be no change to the effective management fee charged to a unitholder whose Mutual Fund Series Units are re-classified as New Units.

18. Manageco, as trustee, may require New Units held by a particular Institutional Account to be re-classified as Mutual Fund Series Units if the Institutional Account ceases to meet the qualifications for holding New Units.

19. Manageco intends to market the New Units to Institutional Accounts using a offering memorandum that is separate from the document, usually a prospectus, used to market the other series of units to retail accounts of the Funds and the Special Fund.

20. The declarations of trust for the Funds and the Special Fund will be amended to reflect the foregoing rights.

Purpose of the Proposed Transaction

21. The purpose of the proposed transactions is to permit Manageco to more effectively market the Funds and the Special Fund to Institutional Accounts by offering them a separate series of units.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The re-classification of the units of the Special Fund to Units, as described in paragraph 12(d) above, will not, in and by itself, result in a disposition by the holder of the units.

B. The re-classification of Mutual Fund Series Units to New Units, as described in paragraph 17 above, will not, in and by itself, result in a disposition by the holder of the Mutual Fund Series Unit.

C. The re-classification of New Units to Mutual Fund Series Units or Units, as the case may be, as described in paragraph 18 above, will not, in and by itself, result in a disposition by the holder of the New Units.

D. In computing the income for a taxation year of a Fund and the Special Fund, each will be entitled, pursuant to paragraph 104(6)(b) of the Act, to deduct its respective amount of income (including taxable capital gains) that is paid or payable to its respective unitholders in such taxation year pursuant to the amended and restated "Declaration of Trust" governing the respective Fund or Special Fund, as the case may be.

E. The provisions of subsection 104(7.1) of the Act will not apply by virtue only of the implementation of the proposed transactions described in paragraph 14 above.

F. The amount of income of a Fund and the New Fund (including taxable capital gains) paid or payable to a unitholder must be included in computing the income of the respective unitholder pursuant to paragraph 104(13)(a) of the Act.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. They are also subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding provided that the proposed transactions described in paragraphs 12 and 13 above are completed 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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