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 3-971404 / 3-990693
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs/Madams:
Re: Advance Income Tax Rulings
XXXXXXXXXX
We are writing in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling under the Income Tax Act (Canada) (the "Act") on behalf of XXXXXXXXXX in respect to the facts and proposed transactions described below.
In this ruling, XXXXXXXXXX is defined as the Fund and XXXXXXXXXX is defined as the Specific Investment Advisor to the Fund.
FACTS AND PROPOSED TRANSACTIONS
1. XXXXXXXXXX (the "Trustee") is a taxable Canadian corporation within the meaning of the Act and is a trust company licensed to carry on the business of providing trust services in Canada. This business includes, among other things, establishing pooled investment trusts under the laws of Canada or a province thereof and acting as trustee thereof for the benefit of unitholders of such trusts.
2. The Trustee proposes to establish the Fund in 1999 as a pooled investment trust and a "unit trust" within the meaning of paragraph 108(2)(a) of the Act, by declaration of trust under the laws of the province of Ontario. The only undertaking of the Fund will be to invest its assets for the benefit of its unitholders in accordance with the Fund's investment objective set out in its declaration of trust. The principal investment objective of the Fund will be to provide investors with long-term capital appreciation through investment in equity and common stock equivalent securities of XXXXXXXXXX. Accordingly, units of the Fund are expected to be foreign property within the meaning of Part XI of the Act.
3. It is proposed that the capital of the Fund be represented by multiple classes of units. Under the declaration of trust, the Fund will be authorized to issue units of an unlimited number of classes, the attributes of which will be determined by the Trustee and set out in the Fund's declaration of trust from time to time. Initially, the Trustee will designate class A, class B and class C units. Each designated class of units of the Fund is intended to be offered for investment to a particular segment of the Canadian investor market and to bear its proportionate share of common expenses of the Fund and all of the expenses of the Fund which are referable specifically to such class of units. Units with the designation class A will be offered for sale to individuals and corporations. Units with the designation class B will be offered for sale to registered pension plans and certain other tax-exempt institutional investors. Units with the designation class C of the Fund will be offered to registered retirement savings plan investors (including group plans).
4. It is proposed that classes of units of the Fund will be issued with the designation class A, class B or class C, together with a number to designate the particular class. Initially, these classes will be class XXXXXXXXXX units. For the purposes of this letter, the particular classes within a designated class of units of the Fund will be referred to as "subclasses." The main distinction between each designated class (and subclass within each designated class) of units of the Fund will be the level of expenses of the Fund attributable thereto and the extent, if any, to which expenses relating to units will be paid by unitholders directly or by the Fund. For example, in the case of class B designated units (and subclasses thereof), fees payable for investment advisory services, trustee services and certain administrative services, may be paid by the unitholders directly, not by the Fund. However, for class A designated units, such fees may be payable by the Fund.
As described below, the manner in which distributions are made by the Fund to unitholders of each class is also proposed to be different. Units of a subclass of a designated class will be issued by the Fund to an investor depending primarily on the amount of an investor's investment in the Fund. The higher the amount invested in the Fund by a unitholder, the lower will be the various fees applicable in respect of that investment (whether such fees be payable by the investor directly or by the Fund). There may be other distinctions between the designated classes (and subclasses) of units of the Fund as determined by the Trustee from time to time.
5. It is proposed that the Fund's declaration of trust will provide for the automatic reclassification of units of a particular subclass (for example, XXXXXXXXXX) into units of another subclass of the same designated class (for example, XXXXXXXXXX) if the total amount invested by the particular investor in the Fund falls within a certain range stipulated by the Trustee from time to time. In addition, it is proposed that the Fund's declaration of trust will provide that units of a class (for example, class C) in respect of which investment advisory, trustee and certain other fees are payable by the Fund will be automatically reclassified into units of another class (for example, class B) in respect of which such fees are payable by the unitholder directly, and vice versa, if the method of payment of such fees is changed accordingly. Hereafter, except as otherwise expressly indicated, references to a class of units includes a subclass of units.
6. It is proposed that units of a class of the Fund may be purchased or redeemed at a price equal to the net asset value thereof as determined under the Fund's declaration of trust on the valuation date next following the date on which the purchase or redemption order is received by the Fund. A valuation date for this purpose will be such date or dates determined by the Trustee provided that there is at least one valuation date in each calendar month.
7. As stated above, it is proposed that under the Fund's declaration of trust, general expenses and liabilities of the Fund such as portfolio costs and auditing fees (collectively, "Common Expenses" or "Common Liabilities") will be allocated on a proportionate basis to each class of units of the Fund. However, expenses and liabilities of the Fund which are specifically referable to a particular class of units of the Fund, such as fees payable by the Fund for the services of the Trustee or an investment advisor to the Fund and certain administration costs of the Fund (collectively, "Class Expenses" or "Class Liabilities") will be allocated to the relevant class of units of the Fund. These allocations will be accomplished by way of one or a combination of the computation of the net asset value of each class of the Fund and the distribution of income and capital gains of the Fund to its unitholders.
8. Under the Fund's declaration of trust, the net asset value per unit of a class of the Fund will be equal to the net asset value of such class divided by the number of units of such class outstanding. The net asset value of a class of units of the Fund is determined separately generally as follows. The net asset value of a particular class of units of the Fund is computed by subtracting the Class Liabilities of the Fund referable to that class from that class' proportionate share of the difference between the assets of the Fund and the Common Liabilities of the Fund. This calculation is intended to ensure that unitholders of each class of units of the Fund effectively will bear the cost of Class Expenses incurred by the Fund referable to such class, but effectively will bear the cost of Common Expenses incurred by the Fund on a proportionate basis together with unitholders of all other classes of units of the Fund. The proportionate share of each class of units of the Fund will be determined for purposes of these calculations generally based on the net asset value of the class relative to the net asset value of the Fund as a whole. The net asset value of the Fund, per class of units of the Fund and per unit of a class of the Fund will be determined at least monthly.
9. Under the declaration of trust governing the Fund, the Fund will be required to distribute to its unitholders at 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 the Trustee (including, for example, any capital gains refund to which the Fund may be entitled), each as determined under the Act. The Distribution Amount will be allocated by the Fund to unitholders of each class taking into account the Class Expenses referable to that class. However, where the Class Expenses of a class of units of the Fund exceed that class' proportionate share of the Fund's Distribution Amount (net of any Class Expenses), these excess Class Expenses may be applied to reduce the amount of Fund distributions made to another class of units of the Fund. Under the Fund's declaration of trust, all unitholders of the Fund will be entitled to enforce payment of distributions required to be made by the Fund thereunder.
10. It is proposed that the Fund's declaration of trust will provide that distributions payable by the Fund to class A unitholders will be reinvested in additional units of such class on the date of the distribution, unless a particular unitholder requests the Fund to pay his or her distributions in cash. However, it is also proposed that the Fund's declaration of trust permit the Fund to "capitalize" its liability to pay such portion of the Distribution Amount as is required to be paid to class B unitholders and class C unitholders of the Fund, respectively, without issuing additional units of the Fund to such unitholders. Accordingly, it is proposed that the declaration of trust provide that the amount of distributions required to be made by the Fund to all class B unitholders and all class C unitholders of the Fund be added in computing the net asset value of class B units and class C units, respectively, without issuing any additional class B or class C units, promptly after the relevant date on which such distribution is required to be made by the Fund, thereby effecting payment to the class B unitholders and class C unitholders of such distributions and discharging the Fund's liability to pay the amount of such distributions. However, it is proposed that each class B unitholder and class C unitholder will have the right under the Fund's declaration of trust to direct that distributions payable to such unitholder be paid in cash by the Fund, in which case distributions payable to all class B unitholders or class C unitholders, as the case may be, will be paid in cash (rather than be "capitalized" as described above).
11. As trustee of the Fund, the Trustee will be responsible for the business and affairs of the Fund, including the investment of its assets in accordance with its investment objectives, the calculation of the Fund's net asset value and the net asset value of each class of units of the Fund, the determination of the Distribution Amount for the Fund each year and the allocation thereof among unitholders of each class of units of the Fund and related matters, all as set out in the Fund's declaration of trust. The Trustee will be permitted to retain advisors on behalf of the Fund and it is proposed that the Specific Investment Advisor be retained by the Trustee to act as investment advisor to the Fund pursuant to an investment advisory agreement between the Specific Investment Advisor and the Fund. The Specific Investment Advisor is a corporation which is incorporated and resident in the XXXXXXXXXX . It is proposed that, under this agreement, the services to be provided by the Specific Investment Advisor to the Fund will include making investment decisions regarding the Fund's investment portfolio, reporting to the Trustee regarding all investment activity of the Fund, arranging for execution of portfolio transactions of the Fund and various related services, all subject to the overall supervision and responsibility of the Trustee pursuant to the declaration of trust governing the Fund.
12. It is proposed that the Fund prepare an offering memorandum within the meaning of the Ontario Securities Act (the "OSA") which, as required under such Act, will describe the Fund, its business and affairs and the terms of one or more of the class A, class B and class C units offered by the Fund for investment pursuant thereto. The Fund is not required under applicable securities laws to provide the offering memorandum to investors therein. However, the Fund will provide the offering memorandum to at least one investor therein. Under the OSA, if an investor is provided with a copy of the offering memorandum and purchases securities of the Fund pursuant to certain private placement exemptions from the prospectus requirements of the OSA, the investor must be provided with contractual rights of rescission and damages by the issuer if there is a material misstatement or omission in the offering memorandum. The Trustee will deliver such offering memorandum to the Ontario Securities Commission as required under the OSA. Currently, under the OSA, an offering memorandum delivered to the Ontario Securities Commission is not required to be reviewed by the Commission. Units of the Fund will be distributed to the public both before and after the offering memorandum in respect of the Fund is so delivered and such distributions made after the offering memorandum is so delivered will be made in accordance with the specific terms, conditions and requirements described in the offering memorandum. In addition, the Trustee will file a "Form 20" with this securities commission to the extent required under the OSA in respect of each investor who acquires units of the Fund whether such investor received a copy of the offering memorandum or not. Each Form 20 will identify the Fund, the investor's broker or dealer (and any applicable commission payable in respect of the trade), the class of units of the Fund acquired, the dollar value of the investor's investment in such units and related information in respect of the investor's investment in the Fund.
13. The Fund proposes to offer for investment to the public in Canada, on a private placement basis, class A, class B and class C units of the Fund to individuals and corporations, to registered pension plans and certain other tax-exempt investors and to registered retirement savings plans, respectively both before and after the offering memorandum described in paragraph 12 above is delivered to the Ontario Securities Commission.
PURPOSE OF PROPOSED TRANSACTIONS
14. The purpose of the proposed transactions is to enable the Trustee to offer an international equity pooled fund to different segments of Canadian investor markets (for example, institutional investors and high net worth individuals), to tailor the fees and expenses applicable, investment management services offered and method of Fund distributions to each of such segments in a manner which is consistent with industry practices in Canada and to qualify units of the Fund for investment by registered retirement savings plans and other registered plans on the basis that the Fund will qualify as a mutual fund trust within the meaning of the Act. The distribution methodology of the Fund is designed to ensure that distributions of Fund income (including taxable capital gains) to class A unitholders who hold their units as capital property within the meaning of the Act will increase the adjusted cost base of the unitholder's units upon the re-investment of such distributions in additional units and that such distributions to class B and class C unitholders which are "capitalized" without the issuance of additional units by the Fund will not affect the adjusted cost base of class B and class C units held by such unitholders, respectively, as capital property.
15. We understand that, to the best of your knowledge, none of the issues described herein is :
(a) being considered by an office of Revenue Canada in connection with any tax return already filed; or
(b) the subject of any notice of objection or is under appeal.
As the Fund is proposed to be established, it does not have a tax account number. The Fund will file its tax returns through the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre of Revenue Canada.
RULINGS GIVEN
Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, and assuming that the proposed transactions are carried out as described above, our rulings in respect of the proposed transactions are as follows:
A. The 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 Fund's declaration of trust 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.
B. The amount of distributions required to be paid by the Fund under the declaration of trust to class B and to class C unitholders of the Fund will be considered to be "payable" within the meaning of subsection 104(24) of the Act notwithstanding that the Fund will be permitted to "capitalize" such distributions without issuing additional class B or class C units as described in paragraph 10 above.
C. The provisions of section 80 of the Act will not apply to the Fund by virtue of the capitalization of distributions required to be made by the Fund to class B or class C unitholders without the issuance of additional class B or class C units, as the case may be, as described in paragraph 10 above.
D. For a unitholder who holds class B or class C units of the Fund as capital property within the meaning of the Act, the amount of Fund income (including taxable capital gains of the Fund) that is required to be distributed by the Fund and is capitalized without the issuance of additional class B or class C units, as applicable, as described in paragraph 10 above will not affect the amount of the unitholder's adjusted cost base of his or her class B or class C units, as applicable, of the Fund.
E. The amount of income of the Fund (including taxable capital gains of the Fund) paid or payable to a unitholder must be included in computing the income of the unitholder pursuant to paragraph 104(13)(a) of the Act.
F. Each class of units of the Fund, distributed after the offering memorandum in respect of a class of units of the Fund has been delivered to the Ontario Securities Commission as described in 12 above, will be qualified for distribution to the public for the purpose of paragraph 4801(a) of the Income Tax Regulations.
G. The provisions of subsection 245(2) of the Act will not apply to redetermine the tax consequences of Rulings A to F 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 dated December 30, 1996, issued by Revenue Canada and is binding on Revenue Canada provided that the proposed transactions described in paragraph 13 above are completed on or before XXXXXXXXXX.
We are of the opinion that a unitholder of any subclass of a particular class of units of the Fund will not be considered to have disposed of units of such subclass upon the reclassification thereof as units of another subclass of such class as described in paragraph 5 above. Similarly, a unitholder of any class of units of the Fund will not be considered to have disposed of units of such class upon the reclassification thereof as units of another class of the Fund as described in paragraph 5 above.
On December 23, 1998, the Minister of Finance issued legislative proposals which, if enacted as proposed, would affect Ruling D above such that the capitalization of income would be reflected in the computation of the adjusted cost base of a beneficiary's interest in the trust under proposed subsection 107(2.11) of the Act. Generally, these proposed amendments will apply to issues of units and increases of interests that occur after 1999.
The above comments are an expression of opinion only and are not binding on the Department.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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.../cont'd
.../cont'd
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