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:
Issue has been seen several times before as it involves a mutual fund reorganization, the issue of new multi -class units, and the conversion of currently single class units to multi-class units. Generally rulings have been given that there would be no disposition by the unitholders provided that the rights of the unitholders have not been changed. The outstanding units of a single XXXXXXXXXX fund will be reclassified as XXXXXXXXXX in order to distinguish them from new units of another XXXXXXXXXX which will be issued in the future. XXXXXXXXXX
1) Does the reclassification of the existing units result in a disposition?
2) Will there be a disposition when units of a XXXXXXXXXX are “converted” to units of a different class XXXXXXXXXX given that it is not a unit-for unit exchange?
3) Will subsection 104(7.1) apply to the proposed transactions?
Position TAKEN:
There is no disposition and subsection 104(7.1) does not apply.
Reasons FOR POSITION TAKEN:
Upon conversion from one class to another the basic difference will be the XXXXXXXXXX however as all rights & privileges of the unitholder have remained the same with respect to units held before & after reclassification occurs, there is no disposition. Similar no disposition rulings were given in XXXXXXXXXX The rationale for the non-application of subsection 104(7.1) contained in XXXXXXXXXX is also relevant in this case XXXXXXXXXX . The proposed reclassification of the existing units can result in the existing unitholders percentage share of the Fund's income being greater than their percentage interest in the property of the Fund, however, this result was not one of the main purposes of the transactions. The paragraph 104(6)(b) and 104(13)(a) rulings were straight forward and it was clear that GAAR should not apply to the proposed transactions.
XXXXXXXXXX
XXXXXXXXXX 982075
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX. and the existing and proposed XXXXXXXXXX. investment funds referred to below. We also acknowledge the additional material sent to us on XXXXXXXXXX, the amended ruling request dated XXXXXXXXXX, and your further submission dated XXXXXXXXXX.
We understand that to the best of your knowledge and that of the taxpayers, none of the issues involved in this ruling request:
(a) are in an earlier return of the taxpayers or a related person;
(b) are being considered by a tax service office or taxation centre in connection with apreviously filed tax return of the taxpayers or a related person;
(c) are under objection by the taxpayers or a related person;
(d) are before the courts; or
(e) are the subject of a ruling previously issued by this Directorate to the taxpayers or a related person.
In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
“InvestCo” means XXXXXXXXXX
“TrusteeCo” means XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Facts
1. The Group 1 Funds and the Group 2 Funds are collectively referred to herein as the “Existing Funds”. The Group 1, Group 2 and the New Funds are collectively referred to herein as the “Funds”. The only undertaking of each of the Funds is to invest its assets for the benefit of its investors in accordance with its investment objectives.
2. InvestCo is the manager of each of the Funds. TrusteeCo is the trustee of each of the Funds. Each of InvestCo and TrusteeCo is a taxable Canadian corporation within the meaning of subsection 89(1) of the Act.
3. Each Fund was established by declaration of trust under the laws of the province of XXXXXXXXXX . Each Existing Fund is a “mutual fund trust” within the meaning of subsection 132(6) of the Act. It is expected that each of the XXXXXXXXXX New Funds XXXXXXXXXX will qualify as a “mutual fund trust” within the meaning of subsection 132(6) of the Act XXXXXXXXXX. Apart from the New Fund’s investment objectives, the terms of the trust document governing each New Fund are substantially identical to the terms of the trust document governing each Group 1 Fund.
4. XXXXXXXXXX.
5. Currently, the capital of each Group 1 Fund and each New Fund is represented by one XXXXXXXXXX class and each unitholder’s XXXXXXXXXX interest in such Fund is based on the number of units of the existing Fund held by the unitholder. Each unit of such a Fund represents an equal undivided interest in the Fund and is entitled to participate in all distributions made by the Fund, and in its net assets on any liquidation of the Fund, XXXXXXXXXX , each unit of a Group 1 Fund and a New Fund bears its XXXXXXXXXX share of all expenses of such Fund.
6. Each Group 2 Fund since its creation has been permitted to issue more than one XXXXXXXXXX class, the attributes of which are determined by InvestCo XXXXXXXXXX and set out in the trust document governing each Group 2 Fund.
XXXXXXXXXX
7. Units in a Fund may be purchased or redeemed at any time by an investor at a price equal to the net asset value thereof.
XXXXXXXXXX
8. Under each trust document governing a Fund, the Fund is obligated to distribute to its unitholders on or before the end of each taxation year of the Fund the amount (the “Distribution 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 InvestCo (including, for example, any amount retained by the Fund in respect of capital gains realized by it for purposes of claiming a capital gains refund in accordance with the Act), each as determined under the Act.
XXXXXXXXXX
Proposed Transactions
9. Proposed Amendments to the Trust Documents
a) It is proposed that the trust document governing each Group 1 Fund and each New Fund will be amended to permit each Fund to issue more than one XXXXXXXXXX of units, XXXXXXXXXX.
b) It is proposed that the trust document governing each Group 2 Fund will be amended to permit XXXXXXXXXX units in addition to XXXXXXXXXX units to be issued XXXXXXXXXX.
c) XXXXXXXXXX.
d) It is proposed that the trust document of each Fund will be amended to provide for the reclassification feature XXXXXXXXXX.
10. Creation of Additional XXXXXXXXXX Units
a) It is proposed that after the proposed amendments are made each Fund may issue additional XXXXXXXXXX units XXXXXXXXXX; however, initially, each Fund will offer XXXXXXXXXX units, being XXXXXXXXXX The main distinction between each XXXXXXXXXX units of a Fund will be
XXXXXXXXXX
b) The level of XXXXXXXXXX payable by the Fund will differ for each XXXXXXXXXX units and will form part of the Fund’s expenses attributable to that XXXXXXXXXX units of the Fund.
XXXXXXXXXX.
Reclassification of units
11. Pursuant to the trust document governing each Fund, units of one or more XXXXXXXXXX may be reclassified into units of another XXXXXXXXXX of the Fund ( XXXXXXXXXX) upon meeting and ceasing to meet the Criteria of each XXXXXXXXXX as determined by InvestCo XXXXXXXXXX.
XXXXXXXXXX.
An investor will not be entitled to proceeds of disposition upon any reclassification and the reclassified units will not be redeemed, converted or cancelled upon any reclassification. Moreover, the only change to the attributes of the units will be XXXXXXXXXX. The rights, privileges and conditions attached to reclassified units, the method of calculating the net asset value and the distributions payable in respect of each XXXXXXXXXX units, the nature of the investments underlying such units and the investment objectives and portfolios of each Fund will not be affected by the reclassification.
12. It is proposed that the Funds will enter into XXXXXXXXXX management agreements with InvestCo to set out the terms of the relationship between the parties and the rights and obligations of InvestCo as manager and administrator of each Fund. The management agreements will set out any management and administration fees payable by the Funds to InvestCo for its services thereunder, equal to a percentage of the net asset value of the relevant XXXXXXXXXX units of the Fund
XXXXXXXXXX
13. Each Fund will be responsible for the payment of the general expenses of the Fund XXXXXXXXXX (collectively, “XXXXXXXXXX Expenses”). Each Fund will also be responsible for paying its expenses which are specifically referable to a particular XXXXXXXXXX units of the Fund XXXXXXXXXX (“XXXXXXXXXX Expenses”).
14. XXXXXXXXXX.
15. The Distribution Amount in respect of each Fund as a whole, and the allocation of the Distribution Amount among each XXXXXXXXXX units of the Fund outstanding (in terms of distributions payable by the Fund to each XXXXXXXXXX at the end of the year) will be determined in each taxation year of the Fund XXXXXXXXXX.
16. The net asset value of each XXXXXXXXXX units of a Fund will be computed separately XXXXXXXXXX. Units of each XXXXXXXXXX of a Fund may be purchased or redeemed by investors at any time at a price equal to the net asset value per unit of such XXXXXXXXXX.
17. XXXXXXXXXX.
Purpose of Proposed Transactions
18. The purpose of the proposed transactions is to enable InvestCo
XXXXXXXXXX.
Rulings Requested and Given
19. Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, we confirm the following:
A. Existing unitholders of a Fund will not be considered to have disposed of their units by virtue only of the implementation of the proposed transactions;
B. Each Fund will be entitled under paragraph 104(6)(b) of the Act to deduct in computing its income for a taxation year of the Fund amounts of Fund income (including taxable capital gains of the Fund) that are paid or payable by the Fund to unitholders of the Fund in such taxation year pursuant to the trust documents (as amended) governing the Fund and the provisions of subsection 104(7.1) of the Act will not apply to the Fund by virtue only of the implementation of the proposed transactions;
C. A unitholder of any XXXXXXXXXX units of a Fund will not be considered to have disposed of units of such XXXXXXXXXX upon the reclassification thereof as units of another XXXXXXXXXX; and
D. The provisions of subsection 245(2) of the Act will not apply by virtue only of the implementation of the proposed transactions.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, Advance Income Tax Rulings, and are binding on Revenue Canada provided that the amended trust documents, amended prospectuses and amended management agreements are signed and effective within six months from the date of this letter.
Yours truly,
for Director
Resources, Partnership and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
SCHEDULE A
XXXXXXXXXX
XXXXXXXXXX
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© Her Majesty the Queen in Right of Canada, 1998
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© Sa Majesté la Reine du Chef du Canada, 1998
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