1999 Ruling 9904643 - QUALIFYING EXCHANGE - CORP TO 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.

PRINCIPAL ISSUE:

Will subsection 245(2) apply to the proposed transactions?

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX 990464
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs/Mesdames:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

(a) in an earlier return of the taxpayers or related persons;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

(c) under objection by the taxpayers or related persons;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons with the exception of ruling 3-2117 and its supplements 1-796 and 1-879.

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:

"BCo" means XXXXXXXXXX

"Fund" means XXXXXXXXXX

"Manager" means XXXXXXXXXX

"PCo" means XXXXXXXXXX

"OSA" means the Ontario Securities Act.

"OSC" means the Ontario Securities Commission.

"OBCA" means the Business Corporations Act (Ontario).

"TSE" means the Toronto Stock Exchange.

The Fund and BCo deal with the XXXXXXXXXX Centre Tax Services Office and file their returns at the XXXXXXXXXX Tax Centre.

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

FACTS

1. BCo is a corporation duly incorporated under the laws of Ontario. It was incorporated on XXXXXXXXXX. BCo offered its Class A shares to the public by a prospectus dated XXXXXXXXXX. At all times since the initial public offering, the Class A shares of BCo have been listed on the TSE.

2. BCo is both a "taxable Canadian corporation" and a "public corporation" as defined in subsection 89(1) of the Act.

3. BCo's only undertaking was the investing of its funds in property (other than real property or an interest in real property) (the "Investing Operation") until it was reorganized in XXXXXXXXXX (the "Reorganization"). The Reorganization was undertaken to effectively convert BCo from a closed-end investment company to a closed-end trust so that the market price of its publicly traded securities would more closely reflect the value of its underlying assets as well as to allow the investors to have the tax benefits inherent in a trust on future income generated by the Investing Operation.

4. As part of the Reorganization, the Fund (an inter vivos trust) was established and PCo was appointed as trustee. Units (the "Fund Units") were offered to the Class A shareholders in the same proportion as they held Class A shares of BCo. Pursuant to the terms of a prospectus exemption order obtained under the OSA, the Fund Units were offered and the transaction was generally completed in accordance with a Management Information Circular containing prospectus level disclosure. The Management Information Circular was filed with the OSC and the TSE and provided to the Class A shareholders of BCo so that the shareholders were able to make an informed decision as to the merits of the Reorganization. The Management Information Circular was not required by law to be accepted for filing by the OSC and TSE. The Fund purchased all of the assets held by BCo for their fair market value (FMV). The purchase price was satisfied by a demand non-interest bearing promissory note (the "Note"). Following the foregoing transactions, one Class A share of BCo and one Fund Unit were listed on the TSE as one notional unit in the Fund (a "Unit").

5. At all times since the Reorganization the Fund has been resident in Canada and has carried on the Investing Operation.

6. Pursuant to the Fund's Declaration of Trust, and BCo's Articles of Arrangement, a Unit will be redeemable by the holders thereof (the "Unitholders") at the Combined Net Asset Value (being the net asset value of the Fund and BCo, computed as described in 7 below) per Unit on or after XXXXXXXXXX.

7. The Net Asset Value will be determined in Canadian currency no less frequently than weekly, on the last business day of each month and at such other times as the Manager of the Fund determines. Net Asset Value means the total assets (including all cash and cash equivalents, valued at market value) less total liabilities, in the aggregate, of BCo and the Fund each determined in accordance with generally accepted accounting principles in Canada applied on a consistent basis.

8. The Fund meets the prescribed condition set out in paragraph 4801(b) of the Income Tax Regulations.

PROPOSED TRANSACTIONS

9. A Management Information Circular (the "1999 Offering Document") will be issued to the Unitholders. The 1999 Offering Document will be similar in format and in disclosure to the Management Information Circular issued in XXXXXXXXXX and will provide the Unitholders with information about the proposed transactions described below so that they will be able to make an informed decision as to the merits of the proposed transactions. As required by the OSA and the Regulations of the TSE, the 1999 Offering Document will be filed with, and where required by law, accepted for filing by the OSC and the TSE.

10. BCo's Articles of Arrangement will be amended to provide that the Class A shares will be redeemable, at the option of the holder or the corporation, as of XXXXXXXXXX.

11. The Fund's Declaration of Trust will be amended to provide that the Fund Units will be redeemable, at the option of the holder, as of XXXXXXXXXX and to provide that the Fund may issue additional Fund Units for FMV. Payment of the redemption price will be made within five business days after the date of redemption.

12. The Fund and BCo will renegotiate the terms of the Note so that interest will be payable on the outstanding amount of the Note at a rate equal to the Revenue Canada prescribed rate in effect at that time. Interest will commence from the date of the renegotiated arrangement and will accrue on a quarterly basis until such time as the Note is paid in full.

13. To effect a "qualifying exchange" pursuant to section 132.2 of the Act BCo will:

(a) Transfer its assets, the Note and any interest receivable on the Note, to the Fund in exchange for a certain number of Fund Units having a FMV equal to the FMV of the Note, and the interest receivable, based on the net asset value of the Fund Units on the day immediately prior to the transfer.

(b) Immediately following the transfer of the Note from BCo to the Fund (and in any event within 60 days following the time of said transfer), BCo will repurchase all of the issued Class A shares of BCo. As consideration for such repurchase BCo will distribute to the Class A shareholders the Fund Units received on the transfer of the Note. The only consideration received by the Class A shareholders for their Class A shares will be the Fund Units received by BCo on the transfer of the Note.

(c) Within six months after the time of the transfer of the Note to the Fund, BCo and the Fund will jointly elect, in prescribed form, to have section 132.2 of the Act apply with respect to the transfer.

14. Subsequent to the proposed transactions described in 13(a) and (b) above, the Units will be de-listed from the TSE.

15. Following the transactions described in 13 above, BCo will have no assets and no liabilities and will therefore be dissolved.

16. Prior to the proposed transactions described above, the issued Units represented the FMV of the Fund and BCo. However, as a result of the proposed transactions, the FMV of the Fund will be represented by an increased number of Fund Units (see 13(a) and (b) above). It is proposed that the number of Fund Units outstanding after the above proposals are implemented will be consolidated on such a basis so that the number of Fund Units will be equal to the number of Units outstanding immediately before the proposed transactions were undertaken. All of the Fund Units will be consolidated on the same basis and there will be no change in the total capital of the Fund or to the rights of the unitholders or their percentage interest in the Fund as a consequence of the consolidation.

17. The proposed transactions described above are subject to the approval of the Unitholders.

PURPOSE OF PROPOSED TRANSACTIONS

18. Significant ongoing administrative cost and effort is required to maintain both BCo and the Fund. Accordingly, significant savings will arise if BCo and the Fund were merged and continued as a mutual fund trust. That is, administrative costs will be reduced because there will be less accounting and financial statement preparation required and there will also be a reduction in the number of security filings required which will also result in less costs being incurred. In addition, there will be a substantial reduction in the administrative effort related to maintaining two entities and dealing with the security regulators with regard to these entities. Therefore, the overall objective of the proposed transactions is to merge the two entities and continue them as a mutual fund trust in accordance with section 132.2 of the Act.

RULINGS GIVEN

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, our advance income tax rulings are as follows:

A. At the time immediately following the completion of the proposed transactions described in 9 to 12 above, subject to subsection 131(8.1) of the Act, BCo will be a "mutual fund corporation" within the meaning of subsection 131(8) of the Act and, subject to subsection 132(7) of the Act, the Fund will be a "mutual fund trust" within the meaning of subsection 132(6) of the Act.

B. The proposed transactions described in 13 above will constitute a "qualifying exchange" for the purposes of section 132.2 of the Act provided that:

i) at the time BCo transfers its assets to the Fund, BCo is a mutual fund corporation and the Fund is a mutual fund trust, and

ii) joint elections are filed in prescribed form within the time set forth in paragraph 132.2(2)(c) of the Act.

C. The consolidation of the units as described in 16 above will not, in and of itself, result in a disposition by the unitholders of all or part of their units in the Fund for the purposes of the Act.

D. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A and C above solely as a result of the implementation of the proposed transactions described herein.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on Revenue Canada provided that the proposed transactions are completed within six months of the date of this letter.

COMMENTS

The determination of whether a corporation (or a trust) qualifies as a mutual fund corporation (or a mutual fund trust) at a particular time is a question of fact which can only be made following a review of the corporation's (or trust's) activities at that time. Such a determination is a matter for which the local Tax Services Office is responsible. However, it is our opinion that as long as BCo and the Fund continue to meet the requirements contained in subsection 131(8) of the Act and subsection 132(6) of the Act, respectively, BCo will qualify as a mutual fund corporation and the Fund will qualify as a mutual fund trust.

Yours truly,

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

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