1999 Ruling 9905003 - MUTUAL FUND - REDESIGNATION OF UNITS

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:

The addition of a redesignation feature to the existing units of a group of mutual fund trusts and the redesignation of the existing units to provide for multiple Classes of Units for different investor segments so that the manager of the Fund has the flexibility to charge differing management fees to the various investors depending on the size of the investment. The proposals also allow the management fees to be paid by the Fund or by the investor directly. The proposed transactions can result in investors (unitholders) having a greater percentage interest in the income of the Fund than such investor's percentage interest in the capital of the Fund.

Rulings requested are: 1) whether the proposed transactions result in a disposition of units: 2) will subsections 104(7.1) and 245(2) apply to the proposed transactions.

Position:

1) Unitholders are not considered to have disposedof their units because of the redesignation of the units from one class to another class. Also, the addition of a redesignation feature to the existing units will not result in a disposition of those units.

2) Subsections 104(7.1) and 245(2) will not apply to the proposed transactions.

Reasons:

1) Similar positions taken in 9820753, 9726113 and 9525413.

2) Similar positions taken in 9820753 and 9603753

XXXXXXXXXX
	XXXXXXXXXX	3-990500
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

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 9501163 and 9726133.

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:

Tax Account No

"ACo" means XXXXXXXXXX

"SCo" means XXXXXXXXXX "XCO" means XXXXXXXXXX "YCo" means XXXXXXXXXX

"AA Fund" means XXXXXXXXXX "AB Fund" means XXXXXXXXXX 4'AC Fund" means XXXXXXXXXX "AD Fund" means XXXXXXXXXX

XXXXXXXXXX

"BD Fund" means XXX XXXXXXX

XXXXXXXXXX

"BG Fund" means XXXXXXXXXX "BH Fund" means XXXXXXXXXX

XXXXXXXXXX

"CE Fund" means XXXXXXXXXX "DM Fund" means XXXXXXXXXX

XXXXXXXXXX

"ACO Funds" means XXXXXXXXXX "SCo Funds" means XXXXXXXXXX "Group B Funds" means XXXXXXXXXX "Group C Funds" means XXXXXXXXXX "Group D Funds" means XXXXXXXXXX "Group E Funds" means XXXXXXXXXX

"OSA" means the Ontario 5ecurities Act.

The ACo Funds deal with the XXXXXXXXXX Tax Services Office and the SCo Funds deal with the XXXXXXXXXX Tax Services Office. All of the funds file, or will file, their returns at the XXXXXXXXXX Tax Centre.

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

FACTS

1. The ACo Funds were formed under declarations of trust (each a "Declaration") governed by the laws of the Province of XXXXXXXXXX, The SCO Funds were formed under a master declaration of trust (also a "Declaration") governed by the laws of the Province of XXXXXXXXXX.

2. Each of the ACO Funds and SCo Funds are open-end "mutual fund trusts" as defined in subsection 132(6) of the Act that offer a variety of investment objectives.

3. ACO is the manager and trustee of the ACO Funds. It is XXXXXXXXXX incorporated under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX. ACO has been retained to provide all of the necessary management and administrative services required to operate the business of each of the ACO Funds, including services in connection with the distribution of units of the ACo Funds.

4. The manager and trustee of the SCo Funds is SCo. Originally, this company was incorporated under the laws of the Province of XXXXXXXXXX as YCo. On XXXXXXXXXX, its name was changed to XCo, and on XXXXXXXXXX, XCO became a wholly-owned subsidiary of ACo and changed its name to SCO.

5. Both ACO and SCO are "taxable Canadian corporations" as defined in subsection 89(1) of the Act,

6. The ACO Funds are organized into XXXXXXXXXX fund groups - the Group B, C, D and E Funds. In most cases, ACo has entered into a master management agreement with each group of funds to provide portfolio management, administration and distribution services. Certain of the ACo Funds have entered into individual management agreements which do not vary in any significant fashion from the master management agreements.

7. The remuneration of ACo is described in the management agreement applicable for each group of ACo Funds or for each individual ACO Fund, as the case may be, That remuneration is generally expressed as a management fee calculated as a percentage of the net asset value of each ACO Fund and is paid monthly. The percentage differs depending on the ACo Fund. At present, the management fees range from XXXXXXXXXX% to XXXXXXXXXX%. The same management fee is charged on each unit of an ACo Fund.

8. Generally, with the exception of BD Fund, each ACo Fund is responsible for paying all of its operating expenses, including, but not limited to, legal, audit, custodial and safekeeping fees, taxes, brokerage commissions, interest, and costs of financial and other reports required to be paid during the course of the year. The cost of operating expenses is spread evenly between each unit of the Fund. The management fee is the only expense incurred by the BD Fund, except for brokerage charges on portfolio transactions and taxes. ACo is required to reimburse the CB Fund for operating expenses applicable to units purchased prior to XXXXXXXXXX. ACO pays any excess operating expenses of the CE Fund, the BD Fund, the BG Fund and the DM Fund necessary to ensure that management expense ratios of those ACo Funds do not exceed maximum amounts. The management expense ratio is the total management fees and operating expenses paid by a Fund during the year (excluding such items such as brokerage commissions, taxes, and interest expenses) expressed as a percentage of the Fund's average net assets during the year.

9 SCO has been retained to provide all of the necessary management, administration and distribution services required to operate the business of each of the SCo Funds and has entered into a master management agreement with the SCO Funds to provide these services. SCO distributes the Series A and Series B units and has entered into an agreement whereby ACO distributes the Series C units of the SCo Funds.

10.The remuneration of SCO is described in the master management agreement. That remuneration is generally expressed as a management fee calculated as a percentage of the net asset value of each SCO Fund and is paid monthly. The percentage differs depending on the Series of the SCo Fund as described in 16 below. Each SCO Fund is responsible for paying only certain of its operating expenses, including taxes, brokerage commissions, interest and audit. All other expenses are paid by SCO.

11.Each of the ACo Funds, with the exception of the BH Fund, is divided into an unlimited number of equal units of one class, representing an undivided interest in the assets of the Fund.

12.The net asset value of each ACo Fund is the value of all of the assets of the particular Fund less its liabilities. The net asset value is calculated on each day that the Toronto Stock Exchange is open for trading (a "Business Day"). The net asset value per unit of each ACo Fund, with the exception of the BH Fund, is calculated by dividing the net asset value of the Fund at the close of business on a Business Day by the total number of units of the Fund outstanding at that time. The net asset value per unit is the basis for all purchases and redemptions of units of each ACO Fund and the reinvestment of distributions from such Fund.

13.The BH Fund is divided into Class A units and Class B units. These two classes of units possess the same attributes, with the exception that the Class A units pay a fixed distribution of $XXXXXXXXXX per quarter while the Class B units pay a fixed distribution of $XXXXXXXXXX per quarter. A separate net asset value is calculated for each class of units. The net asset value of each class is equal to its proportionate share of the assets of the BH Fund, less its proportionate share of the common expenses and less the liabilities of the Fund attributable only to such class.

14.The net asset value per unit of each class of units of the BH Fund is computed by dividing the net asset value of the class by the number of units of that class outstanding at the time. The net asset value is determined as at the close of business on each Business Day. The two classes of units of the BH Fund rank on a parity with each other with respect to return of capital on liquidation based on the relative net asset value per unit of each class of units, At the option of the unitholder, each class of units may be changed into the other class at the then current unit price.

15.Each of the SCo Funds is divided into an unlimited number of units issuable in series. The AB Fund and the AD Fund are divided into Series A, Series B and Series C units. The AC Fund and the AA Fund have only Series C units.

16.The Series A, Series B and Series C units of the SCo Funds share the same attributes with the exception of the following:

(a) Series A units are no longer offered to the public and are only available for purchase under systematic purchase programs established prior to XXXXXXXXXX. After XXXXXXXXXX, Series A units will only be available through the automatic reinvestment of distributions to existing unitholders. Series A unitholders pay a combined management and investment counsel fee of XXXXXXXXXX%.

(b) Series B units are no longer offered to the public and are only available for purchase by unitholders who hold Series B units on XXXXXXXXXX. After XXXXXXXXXX, Series B units will only be available through the automatic reinvestment of distributions to existing unitholders. Series B unitholders pay a combined management and investment counsel fee of XXXXXXXXXX%.

(c) Series C units are offered to the public on a continuous basis. Series C unitholders pay a combined management and investment counsel fee of XXXXXXXXXX%.

17.Separate net asset values are calculated daily for each series of units of an SCO Fund. The net asset value of each series of units is the value of the series' proportionate share of all the assets of the Fund, less that series' proportionate share of the common expenses and less the liabilities of the Fund attributable only to such series. The net asset value per unit of each series of units of an SCO Fund is computed by dividing the net asset value of the series by the number of units of that series outstanding at the time and is determined as at the close of business on each Business Day. The net asset value per unit is the basis for all purchases and redemptions of units of each SCo Fund and the reinvestment of distributions from such Fund. The three series of units rank on a parity with each other with respect to return of capital on liquidation based on the relative net asset value per unit of each series of units.

18.Generally, ACo and SCo Fund units may be purchased on either a sales charge basis (the investor pays a commission to the distributor at the time of purchase) or a redemption charge basis (the investor does not pay a commission to the distributor at the time of purchase, it is paid by the fund manager, but if the units are redeemed within seven years from the date of purchase, the investor is required to pay a redemption charge) . Units of the BG Fund may not be purchased on a sales charge basis and units of the BD Fund may not be purchased on a redemption charge basis.

19.On XXXXXXXXXX, as part of the annual prospectus renewal process for the SCO Funds, the existing and outstanding Series A, Series B and Series C units of those Funds were redesignated as Class A, Class B and Class C units, respectively, and have the same attributes as the series of units of the SCO Funds described in 16 above.

PROPOSED TRANSACTIONS

20.ACO proposes to call special meetings of the unitholders where necessary to approve the proposed transactions described below. A unitholder meeting will be necessary for most of the Group B Funds and, as part of the process', these Group B Funds will adopt and approve a new Declaration. As a unitholder meeting is not required for the other ACo Funds, ACO has or will provide notice of the proposed transactions and the amendments to the Declaration within the time period required under the applicable Declaration. $Co will also provide notice of the proposed transactions and the amendments to the Declaration to the unitholders of the SCo Funds within the time period required under the applicable Declaration. The implementation of the proposed transactions will be completed as soon as possible after the granting of this ruling and in any event within six months of the date of this ruling (the "Effective Date").

Creation of additional classes of units

21.It is proposed that a new master Declaration will be created for the Group B Funds, and the existing master Declaration for the other ACO and SCO Funds will be amended (collectively referred to hereafter as the "New Declarations"), to provide for the creation of additional classes of units as follows:

(a) Class I units and Class 0 units for the ACo Funds (other than BD Fund and BG Fund) and the SCo Funds,

(b) Class 0 Units only for the BD Fund, and

(c) Class I Units only for the BG Fund.

22.Class I and Class 0 units will only be available on a sales charge basis and will have certain minimum investment requirements (the "Investment Requirement") as follows:

(a) Class I units will be available initially to investors who are investing a minimum of ~XXXXXXXXXX in ACO-sponsored Funds on behalf of one beneficial holder (which, for example, would include the amount invested in a person's own account and his or her RRSP), and

(b) Class 0 units will be available initially to investors who are investing a minimum of $XXXXXXXXXX in ACO-sponsored Funds on behalf of one beneficial holder, or a single large account (such as a pension plan)

23. All of the ACo and SCO Funds having multiple classes of units are collectively referred to herein as the "Multi-Class Funds". It is also proposed that the basic attributes of each class of units of a Multi-Class Fund will be similar in all respects, except that the management fees charged to the Class I units will be reduced and no management fee will be charged by the Multi-Class Fund to the Class 0 units. The unitholders will, however, still have an undivided interest in the same pool of assets proportionately equal to the relative net asset value of each class of units they hold. The Class I units will be available to investors who meet the Investment Requirement and the Class 0 units will be available to investors who meet the Investment Requirement and have entered into an agreement with either ACo or SCo. Such agreement will provide for the payment of a fee by the investor to either ACo or SCO, the amount of which fee will be negotiated by each Class 0 investor and either ACo or SCO.

24.The units of each class will be fully transferable and will be redeemable at the option of the unitholder at the net asset value per unit calculated for the relevant class of units, less any applicable redemption charge charged to a unitholder who purchased units on a redemption charge basis. Each unit of a class of a Multi-Class Fund will entitle the unitholder to one vote. Unitholders of each class of units will rank on a parity with the unitholders of all other classes of units with respect to property received on a liquidation of a Multi-Class Fund, based on the relative net asset value of each class of units.

Redesignation of units

25.It is proposed that the New Declarations for the Multi-Class Funds will provide that on the Effective Date:

(a) The existing issued and outstanding units of the ACo Funds (other than the BH Fund) acquired prior to the Effective Date will be redesignated as Class A units on a one-for-one basis, unless such units are redesignated as Class I units. Existing units will be redesignated as Class I units, on a one-for-one basis, if the unitholder meets the Investment Requirement and elects to have those existing units redesignated as Class I units

(b) The existing units of the BH Fund will remain as issued (i.e., this Fund has already authorized and issued Class A and Class B units with the attributes described in 13 above) unless the unitholder meets the Investment Requirement and elects to have those existing units redesignated as Class I units. In these circumstances, such units will be redesignated as Class I units on a one-for-one basis.

(c) The existing Class C units of the SCo Funds will remain as issued unless the unitholder meets the Investment Requirement and elects to have those existing units redesignated as Class I units. In these circumstances, such units will be redesignated as Class I units on a one-for-one basis.

26.The New Declarations for the Multi-Class Funds will provide that the outstanding units of one class (other than Class A and Class B units of an SCo Fund) may, at the option of the unitholder, be changed or redesignated (hereinafter referred to as "redesignated") as either Class I or Class 0 units of the same Multi-Class Fund having a net asset value equal to the net asset value of the units being redesignated provided that where units are being redesignated as Class I or Class 0 units, the unitholder meets the Investment Requirement. In the case of a redesignation into Class 0 units, the unitholder must have entered into an agreement with either ACO or SCO (see 23 above). Similarly, there may be circumstances where a unitholder redesignates Class I or Class 0 units into another class of units of the same Fund. However, the New Declarations will also provide that Class A and Class B units of the SCo Funds cannot be redesignated as Class I or Class 0 units at any time.

27.Since Class I and Class 0 units will only be available on a sales charge basis under the proposals, where any Fund units that were acquired on a redemption charge basis are redesignated as Class I or Class 0 units, an amount equal to any redemption charges that would otherwise be owing in respect of those units, if there had been a redemption, will become payable by the unitholder and, as a consequence, may reduce the number of Class I or Class 0 units issued on such redesignation.

28.At XXXXXXXXXX, there were XXXXXXXXXX unitholders of ACO Funds who met the Investment Requirement for Class I units. ACO expects that such unitholders will either elect to redesignate their existing units as Class I units on the Effective Date or redesignate the Class A Units they receive into Class I units within six months of the Effective Date.

29.It is also proposed that the Class I or Class 0 units of a unitholder who no longer meets the Investment Requirement because of a voluntary redemption by such unitholder may be redeemed (subject to 26 above) by the Multi-Class Fund after 30 days' notice has been given to the uhitholder. Such a redemption of units by the Fund will result in a taxable disposition to the unitholder.

30.On any redesignation of units the unitholder will not be entitled to proceeds of disposition for the units and the redesignated units will not be cancelled or redeemed. The only change to the attributes of the redesignated units will be the difference in the amount of the management fee and other administrative expenses borne by the unitholder. The rights, privileges and conditions attached to the redesignated units, the method of calculating the net asset value and the distributions payable in respect of each class of units, the nature of the investments underlying such units and the investment objectives and portfolios of each Fund will not be affected by the redesignation.

Class expenses and Management Fee Reductions

31.The expenses of ea~h Multi-Class Fund will be allocated among the classes of units on a class-by-class basis. Expenses solely related to one class of units will be allocated only to that class. Common expenses may be allocated among all units of all classes (in the case of expenses such as audit, custody and brokerage fees), based on the amount of such expenses calculated by ACO or SCo to have been actually incurred in respect of the class (in the case of expenses such as financial printing and mailing, transfer agent expenses and account administration) or allocated in such other manner as ACo or SCO considers appropriate and equitable.

32.The timing and the amounts received or paid by a Multi-Class Fund in respect of purchases and redemptions of units of each class will vary. As a result, a separate net asset value will be calculated for each class of units of a Multi-Class Fund, equal to its proportionate share of the assets of the Multi-Class Fund less its proportionate share of the common expenses and less the expenses attributable only to such class. The net asset value per unit of each class of units will be computed by dividing the net asset value of the class by the number of units of that class outstanding at the time. The net asset value of each class of units of a Multi-Class Fund will continue to be determined as at the close of business on each Business Day.

33.The New Declarations for the Multi-Class Funds (other than the SCo Funds) will provide for management fee reductions to be given to selected categories of unitholders in the Multi-Class Funds, such as pension plans. The Declaration for the SCo Funds already provides for the payment of management fee reductions. These management fee reductions will be achieved by either ACO or SCo agreeing to accept a management fee with respect to any units of a Multi-Class Fund (other than Class 0 units) that is less than that otherwise payable on the condition that an amount equal to such reduction is distributed (the "Management Fee Distribution") to the unitholder. A unitholder will receive a Management Fee Distribution in the form of an additional distribution of units unless a cash distribution option is described in the disclosure document for the Multi-Class Fund and the unitholder requests payment in cash.

34.The Management Fee Distribution will be calculated on each Business Day and distributed at such intervals as are prescribed from time to time by ACo or SCo, The Management Fee Distribution will be payable out of the net income and net capital gains of the Multi-Class Fund and otherwise as a return of capital.

PURPOSE OF PROPOSED TRANSACTIONS

35.Currently, each Fund charges the same management fee to all of its unitholders and divides operating expenses equally amongst all units. The proposed transactions are designed to allow ACO and SCo the flexibility to charge differing management fees depending on the nature of the unitholder. Attracting new investors to a Multi-Class Fund with account holdings that meet the Investment Requirement for the Class I or Class 0 units will increase the Multi-Class Fund's asset base, which in turn should result in lower per unit costs and a lower management expense ratio for the Multi-Class Fund and increase management fees paid to ACO and SCo. A larger total asset base will enable ACO to provide enhanced services to all Multi-Class Fund unitholders on a more cost-effective basis. Having multiple classes of units will allow the operating expenses of the Multi-Class Funds to be allocated more equitably between different types of unitholders.

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. The redesignation on the Effective Date of each existing unit of an ACo Fund as a Class A unit or Class I unit, or the redesignation of an existing Class C unit of an SCo Fund as a Class I unit, and the addition of a redesignation feature to such existing units, will not, in and by themselves, result in a disposition of the existing units for purposes of the Act.

B. The implementation of the proposed transactions described herein, will not, in and by themselves, cause subsection 104(7,1) of the Act to apply so as to deny the ACo or SCO Funds a deduction under paragraph 104(6)(b) of the Act in computing their income

C. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A and B 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 New Declarations are signed and effective within six months of the date of this letter. These rulings based on the law as it currently reads and do not take into account any proposed amendments to the Act, which if enacted law, could have an effect on the rulings provided herein.

COMMENTS

We are of the opinion that where units of any class are redesignated as units of any other class of units of the same Multi-Class Fund as described in 26 above, the unitholder will not be considered to have disposed of those units.

The above comments are an expression of opinion only and are not binding on Revenue Canada.

Yours truly,

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