1999 Ruling 9912673 - REDUCED MANAGEMENT FEES

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: Whether a reduction in mgt fees for some unitholders causes 104(7.1) to deny a deduction under 104(6) and whether the proposed changes cause the funds to lose their status as unit trusts

Position: 1: No 2: No

Reasons: See previous rulings 941353, 942514 & opinion 901041

XXXXXXXXXX
XXXXXXXXXX 991267
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted trust and beneficiaries under the trust in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your letters of XXXXXXXXXX.

We understand that, to the best of your knowledge, none of the issues involved in this ruling request are:

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

b) being considered by a tax services office and/or a taxation centre in connection with a tax return previously filed by the taxpayer or a related person;

c) under objection by the taxpayer or a related person;

d) before the courts; or

e) the subject of a ruling previously issued by this Directorate to the taxpayer or a related person.

In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

a) "Fund" means any of XXXXXXXXXX, individually;

b) "Funds" means the XXXXXXXXXX, collectively;

c) "Management Agreement" means any of the management agreements under which the Manager manages the Funds on behalf of the Trustees for each of the Funds;

d) "Manager" means XXXXXXXXXX, a corporation resident in Canada;

e) "Net Asset Value" of a Fund is the value of the Fund's assets less its liabilities as determined on a Valuation Day;

f) "Qualifying Class XXXXXXXXXX Unitholders" means Class XXXXXXXXXX Unitholders who have been designated as such by the Manager;

g) "Trustee 1" means XXXXXXXXXX;

h) "Trustee 2" means the individuals who are appointed from time to time by XXXXXXXXXX to be the trustees of the XXXXXXXXXX;

i) "Trustee" means Trustee 1 or Trustee 2, individually;

j) "Trustees" means Trustee 1 and Trustee 2 collectively, each acting on behalf of the respective Funds for which they are trustees;

k) "Unitholders" means investors in any of the Funds;

l) "Units" means issued units of beneficial interest in any of the Funds; and

m) "Valuation Day" means each day on which XXXXXXXXXX Stock Exchange is open for business.

The names and addresses of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.

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

Facts

1. Each of the Funds is a mutual fund trust as defined in subsection 132(6) of the Act and is managed by the Manager.

2. The Manager is the trustee of XXXXXXXXXX of the Funds and Trustee 2 is the trustee of the remaining XXXXXXXXXX Funds. The Trustees are resident in Canada.

3. The Trustee of each Fund calculates the Net Asset Value of the Fund as at the close of business on each Valuation Day.

4. The capital of each Fund is divided into Units which may be purchased or redeemed by Unitholders at a price equal to the Net Asset Value of the Unit as last determined on a Valuation Day. There are four classes of Units for each Fund designated as Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX Units. The Units of each class have different rights and attributes attached to them. The Net Asset Value per Unit varies for each class of Units. Currently only Class XXXXXXXXXX and Class XXXXXXXXXX Units are offered for sale.

5. Under each Management Agreement, the Manager is entitled to receive an annual fee from each Fund for its services. The fee for Class XXXXXXXXXX units is based on the Net Asset Value of the Units of the Fund and is calculated based on the daily Net Asset Value of the respective classes of Units of the Fund during the month. Management fees for Class XXXXXXXXXX Units are paid to the Manager directly by the Class XXXXXXXXXX Unitholders and therefore no amount of management fees are allocated to the Class XXXXXXXXXX Units of a Fund.

Proposed Transactions

6. The Manager wishes to grant reductions to the management fees chargeable in respect of Class XXXXXXXXXX Units of a Fund for those Class XXXXXXXXXX Unitholders who have invested a certain minimum amount in Class XXXXXXXXXX Units of the Fund. In order to permit the Manager to effectively reduce management fees to some but not all Class XXXXXXXXXX Unitholders without negatively impacting the Funds or the remaining Class XXXXXXXXXX Unitholders who are not entitled to a reduction, the Trustee of each Fund and the Manager propose to amend the Declaration of Trust and the Management Agreement in respect of each Fund.

7. The Management Agreement for each Fund will be amended to provide that the Manager, in its discretion, may accept a management fee which is less than that otherwise payable by a Fund in respect of the Class XXXXXXXXXX Units of such Fund. When the Manager agrees to accept a lower fee, the Trustee will distribute the amount of such reductions (the "Management Fee Distributions") to the Qualifying Class XXXXXXXXXX Unitholders. Qualifying Class XXXXXXXXXX Unitholders will consist of certain Unitholders who have maintained large investments in Class XXXXXXXXXX Units for a significant period of time and have negotiated with the Manager to receive the benefit of a reduced management fee. Management Fee Distributions will be made at such times as are determined by the Manager.

8. The Declaration of Trust for each Fund will be amended to provide that the requirement to make pro rata distributions to the Unitholders of each Class of the Fund will not apply to Management Fee Distributions. The Trustee of a Fund will distribute the amount of any Management Fee Distributions among the Qualifying Class XXXXXXXXXX Unitholders. The amount of the Management Fee Distributions will be calculated and credited by each Fund on each Valuation Day. Such amounts will be distributed on a regular basis first out of the net income and net capital gains of a Fund, to the extent that the Fund earns such income and gains in the year in which the Management Fee Distributions are made, and otherwise out of capital of the Fund. The Management Fee Distributions will be distributed by a Fund to the Qualifying Class XXXXXXXXXX Unitholders by automatic reinvestment in additional Class XXXXXXXXXX Units of the Fund or by cash. A person must own Class XXXXXXXXXX units at the time of the distribution in order to receive Management Fee Distributions. Any Management Fee Distributions which cannot be distributed to a person because the person has ceased to be a Qualifying Class XXXXXXXXXX Unitholder prior to distribution will be added to the net income of the Fund and distributed pro rata to all Class XXXXXXXXXX Unitholders as and when distributions of net income are made.

9. The Proposed Transactions will be reflected in the next annual information form and amended prospectus that are filed with the applicable securities regulators.

Purpose of Proposed Transactions

10. The purpose of the proposed transactions is to encourage investors to invest and maintain large investments in Class XXXXXXXXXX Units of a Fund by ensuring that management fees payable by the Fund in respect of such investments are competitive with management fees which would be charged to such investors by other mutual fund managers and to ensure that the income tax consequences associated with a Fund paying reduced management fees and making Management Fee Distributions will be borne by the Qualifying Class XXXXXXXXXX Unitholders and not by the Fund or other Class XXXXXXXXXX Unitholders.

Rulings Given

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:

A. 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 any of the Funds a deduction in computing its income under paragraph 104(6)(b) of the Act.

B. Provided each Fund otherwise qualifies as a "unit trust" within the meaning of subsection 108(2) of the Act, it will not cease to so qualify as a consequence of the proposed transactions.

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 are binding on Revenue Canada provided that, for each of the Funds the amended Declarations of Trust and Management Agreements are finalized in substantially the same form as submitted on XXXXXXXXXX as amended XXXXXXXXXX, and the documents are signed and effective within six months of the date of this letter.

Yours truly,

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

XXXXXXXXXX

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