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: (a) Will certain broadening of the scope of the permissible investments for a particular trust or the addition of a redemption right to the Trust Units result in a disposition of such units for purposes of the Act?
(b) Will the proposed redemption right satisfy the requirements of subparagraph 108(2)(a)(i)?
Position: (a) No.
Reasons: (a) Based upon the facts of this situation and the position taken in a number of earlier rulings that the addition of such a redemption right would not cause a disposition.
(b) The determination of the redemption price and terms regarding the satisfaction of same are reasonable having regard to the facts of this situation and positions previously taken.
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above trust and unitholders thereof. We also acknowledge your letters of XXXXXXXXXX as well as our various telephone conversations concerning this matter.
The above trust files its trust income tax returns under account number XXXXXXXXXX and is serviced by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier tax return of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is before the Courts or, if a judgement has been issued, the time limit for appeal to a higher Court has not expired; or
(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings and Interpretations Directorate.
Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:
"A Co." means XXXXXXXXXX.
"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter.
"adjusted cost base" has the meaning assigned by section 54 of the Act.
"B Co." means XXXXXXXXXX.
"Manager" means the party with which the Trustee, in accordance with the Trust Indenture, has entered into a management agreement whereby that party is engaged to provide services in connection with the management and administration of the Trust and the Royalty; A Co. has remained the Manager since the Trust Indenture was originally entered into.
"mutual fund trust" has the meaning assigned by subsection 132(6) of the Act.
"Net Working Interest" means the XXXXXXXXXX owned by A Co. and which is subject to the Royalty reserved therefrom.
"principal amount" has the meaning assigned by subsection 248(1) of the Act.
"proceeds of disposition" has the meaning assigned by section 54 of the Act.
"Regulations" means the Income Tax Regulations.
"related" has the meaning assigned by section 251 of the Act.
"Royalty" means the royalty to which the Net Working Interest owned by A Co. is subject and is the "XXXXXXXXXX" described in paragraph 10 of the Ruling.
"Ruling" means advance income tax ruling XXXXXXXXXX issued to the Trust and certain corporations.
"taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.
"Trust" means XXXXXXXXXX.
"Trustee" means XXXXXXXXXX, a trust company incorporated under the laws of Canada.
"Trust Indenture" means the trust indenture dated XXXXXXXXXX, as amended and restated on XXXXXXXXXX, between XXXXXXXXXX the Trustee and A Co.
"Trust Units" means units of the Trust.
"Trust Unitholders" means the holders from time to time of one or more Trust Units and includes Registered Plans.
"unit trust" has the meaning assigned by subsection 108(2) of the Act.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. The Trust is a closed ended investment trust formed under the laws of the Province of XXXXXXXXXX pursuant to the Trust Indenture. The trustee of the Trust, as appointed under the Trust Indenture, is the Trustee.
The Trust was formed for the purpose of acquiring the Royalty and issuing Trust Units. Further details concerning the Trust and its acquisition of the Royalty are contained in the Ruling. The nature and calculation of the Royalty remain as detailed in paragraph 10 of the Ruling.
The Trust is resident in Canada for purposes of the Act. The principal office of the Trust and the Trustee is located at XXXXXXXXXX.
2. The beneficiaries of the Trust are the Trust Unitholders and accordingly, the Trust Units represent beneficial interests in the Trust.
A maximum of XXXXXXXXXX Trust Units have been created and may be issued pursuant to the Trust Indenture. The Trust Units share equally in all distributions from the Trust and carry equal voting rights (one vote per Trust Unit) at meetings of the Trust Unitholders. Trust Unitholders are not liable to pay further calls or assessments in respect of the Trust Units and no conversion, retraction or pre-emptive rights attach to the Trust Units.
There are presently approximately XXXXXXXXXX Trust Units issued and outstanding (XXXXXXXXXX Trust Units were issued upon the original offering of such units to the publicXXXXXXXXXX Trust Units were issued on XXXXXXXXXX pursuant to a public offering described in paragraph 7 below). The Trust Units are listed for trading on XXXXXXXXXX.
3. Trust Units give the Trust Unitholders the right to receive, on a quarterly basis, a percentage of the cash generated by the Trust after deduction of all expenses of the Trust, based upon the number of Trust Units held by the Trust Unitholders in proportion to the total number of Trust Units outstanding at that time.
A resolution approved by not less than 66 2/3% of the votes of Trust Unitholders represented at a meeting is required to remove the Trustee and appoint a successor Trustee or to terminate the Trust. Any appointment of a successor Trustee must not cause the Trust to cease to be resident in Canada for purposes of the Act. Any successor Trustee will be a trust company incorporated under the laws of Canada or any of the Provinces of Canada and licensed thereunder to carry on the functions of a trustee.
Unless the Trust is terminated or extended by vote of the Trust Unitholders on an earlier date, the Trustee will commence to wind up the affairs of the Trust on XXXXXXXXXX.
Pursuant to the Trust Indenture, at no time may more than one-half of the outstanding Trust Units be held by non-residents of Canada for purposes of the Act. If the Trustee becomes aware that a majority of the Trust Units are beneficially owned by non-residents of Canada for purposes of the Act, the Trustee may force a sale of such units as is necessary to ensure that a majority of the Trust Units are no longer beneficially owned by non-residents.
4. As provided in XXXXXXXXXX of the Trust Indenture, the net proceeds from the original offering of Trust Units referred to in paragraph 2 above were used to acquire the Royalty. Pursuant to XXXXXXXXXX of the Trust Indenture, net proceeds from subsequent offerings of Trust Units can only be used to acquire other royalties XXXXXXXXXX and short term investments (essentially debt instruments of the Canadian government or of a Canadian provincial government or highly graded debt securities of other issuers, in each case maturing within 180 days after the date of acquisition) or paying costs or expenses relating thereto.
5. The Trust is a unit trust, pursuant to paragraph (b) of the definition thereof contained in subsection 108(2) of the Act, and a mutual fund trust. The only undertaking of the Trust is the investing of its funds in the Royalty, all of the issued common shares of A Co. XXXXXXXXXX.
6. A Co. is a taxable Canadian corporation whose authorized share capital consists of an unlimited number of common shares XXXXXXXXXX. Its issued share capital consists of XXXXXXXXXX common shares (all owned by the Trust as noted in the preceding paragraph) XXXXXXXXXX. The board of directors of A Co. consists of XXXXXXXXXX directors, XXXXXXXXXX. A Co.'s business is restricted to XXXXXXXXXX and to managing the Trust.
7. Pursuant to a short form prospectus dated XXXXXXXXXX Trust Units were offered for sale at a price of $XXXXXXXXXX per Trust Unit. This offering (the "Offering") closed on XXXXXXXXXX with all such Trust Units having been sold. The net proceeds raised from the Offering, after deducting underwriting fees and other expenses of the issue, was approximately $XXXXXXXXXX.
Based upon current crude oil prices, A Co. expects that the net proceeds from the Offering, cash flow from operations and available credit facilities will be XXXXXXXXXX.
11. An annual and special meeting of the Trust Unitholders was held in XXXXXXXXXX at which two special resolutions were considered and passed by the Unitholders. Under those special resolutions the Unitholders authorized the Trustee to:
i) make such amendments to the Trust Indenture as A Co., as manager of the Trust, may determine to be advisable to broaden the scope of the Trust's permissible investments to enable the Trust to make any investment which a unit trust and a mutual fund trust is entitled to make for purposes of the Act, XXXXXXXXXX; and
ii) amend the Trust Indenture to convert the Trust to an open-ended trust and to include a new article entitled "Redemption of Trust Units" which would provide for the rights described in paragraphs 15 through 17 below.
In addition, under each of those special resolutions, the Trustee was authorized to make incidental amendments to the Trust Indenture and to do all such acts and things as A Co., as manager of the Trust, may determine to be necessary or desirable to make the provisions of the Trust Indenture consistent with, or to give full effect to, the amendments to the Trust Indenture referred to in such special resolution.
12. The property of the Trust consists of, and immediately before the commencement of the proposed transactions detailed below will consist of, the Royalty, all of the issued common shares of A CoXXXXXXXXXX.
13. The broadening of the scope of the Trust's permissible investments and the conversion of the Trust to an open-end trust as described in paragraph 14 below, in and by themselves, will not entitle a Trust Unitholder to proceeds of disposition and the Trust Units will not be redeemed, acquired or cancelled upon such changes.
14. After the date of this letter and on or before XXXXXXXXXX, the Trustee and A Co., as Manager of the Trust, will finalize and execute an agreement to effect the amendments to the Trust Indenture described in paragraph 11 above. Under that agreement, the Trust Indenture will be amended to:
i) broaden the scope of the Trust's permissible investments as described in paragraph 11 i) above; and
ii) change the Trust's status from a closed ended unit trust to an open ended unit trust, the latter being a trust contemplated in paragraph 108(2)(a) of the Act, by introducing a redemption right for the Trust Units. In particular, the Trustee will amend the Trust Indenture, as authorized in paragraph 11 ii) above, to add an article entitled "Redemption of Trust Units" which will provide as described in paragraphs 15 through 17 below. Voting rights, distribution rights and all other rights attached to the Trust Units will not change.
Immediately following the issuance of XXXXXXXXXX, at least 80% of the property of the Trust will continue to consist of property described in subparagraph 108(2)(b)(iii) of the Act and not more than 10% of its property will consist of bonds, securities or shares in the capital stock of A Co. (in each case determined based upon the fair market value of the Royalty, the common shares of A Co., XXXXXXXXXX and any remaining portion of the Additional Royalty) and not less than 95% of its income (determined without reference to subsections 49(2.1) and 104(6) of the Act) for its 1999 taxation year will continue to be derived from, or from the disposition of, investments described in subparagraph 108(2)(b)(iii) of the Act, i.e., the Trust will at that time continue to comply with the requirements of subparagraphs 108(2)(b)(iii), (iv) and (v) of the Act.
19. It is anticipated that trading on XXXXXXXXXX and not the right of redemption will continue to be the primary mechanism for Trust Unitholders to dispose of their Trust Units. Any assets of the Trust which may be distributed in specie to Trust Unitholders in connection with a redemption will not be listed on any stock exchange and no market is expected to develop in those assets.
20. Notwithstanding the expectation that Trust Unitholders will usually prefer to dispose of their Trust Units on XXXXXXXXXX rather than to redeem them, the Manager is of the view that it is reasonable to expect Trust Unitholders to redeem their Trust Units in certain circumstances.
21. Notwithstanding the broadening of the scope of the Trust's permissible investments and the conversion of the Trust to an open-end trust as described in paragraph 14 above, the only undertaking of the Trust will be as described in paragraph 132(6)(b) of the Act.
22. It is intended that the amendments to the Trust Indenture, as described in paragraph 14 above and which were authorized as described in paragraph 11 above, will be made as of XXXXXXXXXX.
Purpose of the Proposed Transactions
23. The management of A Co. believes that the current provisions of the Trust Indenture do not provide the flexibility required to most efficiently manage the affairs of the Trust or A Co. In particular, those provisions may not permit XXXXXXXXXX in the most efficient manner. As a closed-end trust, the ability of the Trust to advance the net proceeds of offerings of Trust Units to A Co. is restricted by the fact that not more than 10 per cent of the Trust's property can consist of bonds, securities or shares in the capital stock of A Co. This restriction will not be applicable if the Trust converts to an open-end trust.
Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, and that the proposed transactions are carried out as set forth herein, the following rulings are given:
A. Existing Trust Unitholders will not be considered to have disposed of their Trust Units by virtue only of the broadening of the scope of the Trust's permissible investments and the introduction of the redemption right described in paragraph 14 above.
B. At the time immediately after the Trust Indenture is amended to add the redemption right described in paragraph 14 above, the Trust will be a unit trust by virtue of paragraph 108(2)(a) of the Act.
C. Provided that the Trust is a mutual fund trust immediately prior to the implementation of the proposed transactions, then at the time immediately following the introduction of the redemption right described in paragraph 14 but prior to the acquisition of any additional assets (other than the A Co. Note) pursuant to the broadening of the scope of the Trust's permissible investments as described in that same paragraph, it will be a mutual fund trust.
D. Provided that the Trust is a mutual fund trust under ruling C at the time specified in that ruling, a Trust Unit will be a "qualified investment" as contemplated under paragraph 4900(1)(d) of the Regulations at that time and will be considered a "qualified investment" within the respective definitions of that term contained in subsections 146(1), 146.3(1) and section 204 of the Act at that time.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that the Trust Indenture is amended in substantially the same form as the draft amendment thereto submitted with your letter of XXXXXXXXXX, and that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:
i) the determination of the fair market value or adjusted cost base of any property referred to herein (in particular the determination of the fair market value of XXXXXXXXXX);
ii) that the acquisition by the Trust of any particular property after the broadening of the scope of the Trust's permissible investments as described in paragraph 14 above (XXXXXXXXXX) will satisfy the "investing of its funds in property" requirement contained in paragraphs 108(2)(b) and 132(6)(b) of the Act; or
iii) that the Trust will be a mutual fund trust throughout the taxation year in which the proposed transactions take place.
In order to qualify as a mutual fund trust throughout a particular taxation year, the Trust must be a unit trust as defined in subsection 108(2) throughout the taxation year. In order to qualify as a unit trust for the portion of the taxation year in which paragraph 108(2)(a) of the Act does not apply to the Trust, the following conditions must be met throughout the taxation year in which the proposed transactions occur:
(a) the Trust remains resident in Canada for purposes of the Act;
(b) the Trust's only undertaking remains as described in subparagraph 108(2)(b)(ii) of the Act;
(c) at least 80% of the Trust's property consists of property of the type described in subparagraph 108(2)(b)(iii) of the Act;
(d) not less than 95% of the Trust's income [determined without reference to subsections 49(2.1) and 104(6) of the Act] for that year will be derived from, or from the disposition of, investments described in subparagraph 108(2)(b)(iii) of the Act; and
(e) not more than 10% of the Trust's property consists of bonds, securities or shares in the capital stock of any one corporation or debtor other than Her Majesty in right of Canada or a province or a Canadian municipality.
For greater certainty, it is a question of fact whether any property, or interest therein, is a property described in subparagraph 108(2)(b)(iii) of the Act.
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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