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: Where an income distribution reinvestment plan of a unit trust enables a unitholder to reinvest income distributions in new units at a price equal to XXXXXXXXXX % of the average market price and without commission or service charge, will a benefit be considered to be conferred pursuant to subsection 105(1)?
Position: Yes.
Reasons: The issue was considered by the Policy Review Committee and it was decided that it would not be appropriate to extend our long-standing favourable administrative position concerning dividend reinvestment plans of corporations to income distribution reinvestment plans of trusts. This is consistent with E9321283 in which we concluded that the proposed discounts of 10% to 15% would result in a benefit under 105(1).
XXXXXXXXXX
991185
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX as amended by your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the REIT and the unitholders thereof (the "Unitholders") in respect of the tax consequences arising out of the proposed transactions described below. We acknowledge our related telephone conversations.
To the best of your knowledge and that of the REIT, none of the issues involved in this letter are:
a) in an earlier return of the REIT or a related person,
b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the REIT or a related person,
c) under objection by the REIT or a related person,
d) before the courts, or
e) the subject of a ruling previously issued by the Directorate in respect of the REIT or a related person.
The REIT files its tax returns at the XXXXXXXXXX Tax Centre.
Except as otherwise noted, all statutory references in this letter are references to the provisions of the Canadian Income Tax Act (R.S.C. 1985, 5th Supplement, c.1 as amended) (the "Act").
FACTS
1. The REIT is an unincorporated real estate investment trust created by a Declaration of Trust made as of XXXXXXXXXX. The REIT commenced operations on XXXXXXXXXX, with the completion of its initial public offering.
2. The beneficial interests in the REIT are divided into a single class of units (the "Units"). The number of Units which the REIT may issue is unlimited. Units of the REIT are listed on the XXXXXXXXXX Stock Exchange ("XXXXXXXXXX").
3. The REIT is a unit trust and a mutual fund trust within the meaning of subsections 108(2) and 132(6) of the Act. The REIT's principal undertaking is the acquiring, holding, maintaining, improving, leasing and managing of real properties and interests in real properties that are capital property of the REIT. In addition, the REIT invests its funds in mortgages as well as shares of corporations which own real estate.
4. To the best of the knowledge of the REIT, there is no beneficial owner of, or any other person who exercises control or direction over, Units carrying more than ten percent of the votes attached to the outstanding Units of the REIT other than XXXXXXXXXX, which is the registered holder of XXXXXXXXXX Units of the REIT, representing approximately XXXXXXXXXX% of the outstanding Units. (XXXXXXXXXX).
5. The Declaration of Trust of the REIT provides that all of the income (other than net taxable capital gains and net recapture income) of the REIT is distributed to its Unitholders each year. Net taxable capital gains and net recapture income are also distributed to Unitholders each year.
PROPOSED TRANSACTIONS
6. The trustees of the REIT propose to implement a XXXXXXXXXX Reinvestment Plan (the "Plan"). A draft copy of the Plan was attached to your ruling request letter as Appendix "A". The Plan will provide that any Canadian resident Unitholder may enroll in the Plan at any time by completing an authorization form and thereby become a participant in the Plan. Because of foreign securities legislation, a Unitholder who is not resident in Canada will not be eligible to participate in the Plan. Under the Plan, a Unitholder who is entitled to participate may purchase additional Units of the REIT with the cash distributions paid by the REIT on Units which are held by the Unitholder or held in the Unitholder's account maintained pursuant to the Plan.
7. The Plan provides that the REIT shall pay to the agent (the "Agent") (which will be a trust company administering the Plan) all cash distributions paid on Units owned by Unitholders who participate in the Plan and the Agent will use such funds to purchase additional Units directly from the REIT. Additional Units purchased under the Plan will be registered in the name of the Agent, as agent for a Unitholder who participates in the Plan.
8. The price at which Units of the REIT will be purchased by the Agent with cash distributions will be the "Average Market Price" of Units, which is defined in the Plan to mean the price that is equal to XXXXXXXXXX% of the weighted average price of Units of the REIT on the XXXXXXXXXX for the five trading days immediately preceding the relevant Distribution Date. The "Distribution Date" means on or about XXXXXXXXXX each year in the case of quarterly distributions, and on or about the last day of each month in the case of monthly distributions. No commissions, service charges or brokerage fees are payable by Unitholders who participate in the Plan.
9. The Plan will permit a full reinvestment of the REIT distribution because it permits fractions of Units as well as whole Units to be purchased and held for participants in the Plan. Distributions from the REIT in respect of whole Units and fractions of Units purchased under the Plan will be held by the Agent for each participant's account and automatically reinvested under the Plan in additional Units.
10. The right to participate in the Plan may not be transferred by a Unitholder without the approval of the REIT and the applicable securities regulatory authorities. Participation in the Plan may be terminated by a participant at any time by giving written notice. Participation will also terminate upon certain other events listed in the Plan, including a disposition of all of a participant's Units of the REIT, receipt of a written notice of the death of a participant by the Agent or a participant ceasing to be resident in Canada.
PURPOSE OF PROPOSED TRANSACTIONS
11. The purpose of the Plan is to enable Canadian resident Unitholders of the REIT to invest all cash distributions from the REIT in additional Units of the REIT. All such additional Units are purchased directly from the REIT by the Agent, which acts as agent for the Unitholders who participate in the Plan. The Plan permits the REIT to raise additional equity capital through the issue of Units to existing Unitholders and to provide Unitholders with an economical way to increase their investment in the REIT.
RULINGS
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 purpose thereof, and provided that the proposed transactions are carried out as described above, our rulings are as follows:
A. By virtue of the provisions of subsection 105(1) of the Act, the amount by which the fair market value on the date of purchase of any Units of the REIT exceeds the purchase price paid for such Units pursuant to the provisions of the Plan as described in paragraphs 7 and 8 above shall be included in computing the income of the Unitholder on whose behalf the Units are purchased.
B. By virtue of subsection 52(1) of the Act, for purposes of subdivision c of the Act, the amount added to a Unitholder's income pursuant to ruling A shall be added in computing the cost to the Unitholder of such Units of the REIT except to the extent that such amount is otherwise added to the cost or included in computing the adjusted cost base to the Unitholder of such Units.
These rulings are based on the Act as it currently reads and do not take into consideration any proposed amendments thereto. These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transaction described in paragraph 6 above is completed by XXXXXXXXXX.
You had also requested confirmation that the enrollment itself of a Unitholder in the Plan as described in paragraph 6 above will not result in a benefit being conferred by the REIT on such Unitholder pursuant to subsection 105(1) of the Act. It is our view that ruling A addresses the assessable benefits under the Plan.
Pursuant to draft legislation released in December 1998, there is a proposal to amend subsection 52(1) of the Act. We have reviewed the draft legislation and are of the view that if it is enacted as presently drafted, it will not affect ruling B provided above.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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