1999 Ruling 9918303 - TAXABLE CANADIAN PROPERTY

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: Application of Subsection 2(3) and Section 115 to Gain on Units Listed on a Prescribed Stock Exchange

Position: Gain not Subject to Part I Tax - Taxpayer is a Non-Resident and Property Disposed of is not Taxable Canadian Property

Reasons: Taxpayer and Persons not Dealing at Arm's Length With the Taxpayer Do not Own, in Aggregate, 25% or More of the Shares of any Class of the Capital Stock of the Corporation

		991830
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX (the "Fund")
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended to the date hereof, and, unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "arm's length" has the meaning assigned by subsection 251(1); and

(c) "BCA" means the Business Corporations Act (XXXXXXXXXX).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as set forth below.

Facts

1. The Fund is a corporation organized under the laws of XXXXXXXXXX. The Fund is resident in XXXXXXXXXX and has not, at any time, been resident in Canada for purposes of the Act. The Fund is XXXXXXXXXX whose investment advisor is XXXXXXXXXX ("Manageco"). The board of directors of the Fund consists of XXXXXXXXXX individuals who are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies under XXXXXXXXXX. Subject to supervision by the board of directors, Manageco, as investment advisor, is responsible for the actual management of the Fund's portfolio, the provision of certain administrative services and the decision to buy, sell or hold securities.

2.

XXXXXXXXXX

3. Pursuant to a trust indenture dated as of XXXXXXXXXX between XXXXXXXXXX ("Realco") and XXXXXXXXXX as the bond trustee (the "Bond Trustee"), XXXXXXXXXX bonds (the "Bonds") were issued by Realco. Realco granted security to the Bond Trustee as collateral for Realco's obligations under the trust indenture in respect of the Bonds. This security included, among other things, a mortgage of Realco's interest (the "Property") in the lands and buildings comprising XXXXXXXXXX, an office and shopping complex situated in XXXXXXXXXX. The Fund purchased a number of these Bonds.

4. Realco became unable to meet its obligations under the terms of the Bonds and on XXXXXXXXXX the Bond Trustee commenced a foreclosure action in respect of the Property (the "Foreclosure"). XXXXXXXXXX (the "Corporation") was incorporated under the BCA on XXXXXXXXXX. The Corporation was established for the purpose of owning and managing the Property. The Corporation is a "public corporation" as that term is defined in paragraph (a) of the definition of pubic corporation in subsection 89(1).

5. Pursuant to a prospectus dated XXXXXXXXXX (the "Prospectus"), the Corporation issued XXXXXXXXXX Bonds and units ("Units") comprised of Subordinated Convertible Debentures due XXXXXXXXXX (the "Convertible Debentures") and Common Shares to the holders of the Bonds, including the Fund. As consideration for the XXXXXXXXXX Bonds and Units, the Bond Trustee transferred to the Corporation the security and foreclosure rights it held in connection with the Bonds. The Corporation completed the Foreclosure and acquired the Property.

6. The XXXXXXXXXX Bonds and Units were issued by the Corporation to the bondholders on the basis of $XXXXXXXXXX principal amount of XXXXXXXXXX Bonds and XXXXXXXXXX Units for each $XXXXXXXXXX owed to a particular bondholder in respect of the Bonds.

7. The XXXXXXXXXX Bonds are secured by a fixed and floating charge and security interest on all the assets of the Corporation. The XXXXXXXXXX Bonds bear interest payable semi-annually, in arrears, at an interest rate equal to the lesser of XXXXXXXXXX% per annum and the Bond Reference Rate (as such term is defined in the Prospectus) plus XXXXXXXXXX basis points. The XXXXXXXXXX Bonds will mature XXXXXXXXXX years from the date of issuance and may be redeemed by the Corporation after the XXXXXXXXXX anniversary date of their issue. In addition, the Corporation may be required to redeem the XXXXXXXXXX Bonds in certain limited circumstances which are described in the Prospectus. To date, the Corporation has not been required to redeem such bonds.

8. Each Unit is composed of $XXXXXXXXXX principal amount of Convertible Debentures and XXXXXXXXXX Common Shares. The Convertible Debentures are unsecured obligations of the Corporation ranking subordinate to all present and future non-subordinated indebtedness of the Corporation. The Convertible Debentures bear interest payable semi-annually, in arrears, at a rate of XXXXXXXXXX% per annum for the first XXXXXXXXXX years and thereafter at a rate of XXXXXXXXXX% per annum. The board of directors of the Corporation have the discretion, upon giving 60 days prior written notice to the holders of the Units, to accrue any one or more payments of interest on the Convertible Debentures. Subject to a change of control triggering event described in the Prospectus, the Convertible Debentures will not be convertible into Common Shares until XXXXXXXXXX years after issuance at the holder's option at a conversion price of $XXXXXXXXXX per Common Share, subject to certain adjustments. After XXXXXXXXXX years, the Corporation may satisfy payment of the principal amount of the Convertible Debentures by issuing Common Shares to such holders in a number of shares having a value equal to the principal amount, with such value being determined by reference to the then-trading price of the Common Shares. There have been no change of control triggering events to date and no such event is expected prior to the proposed transaction.

9. On the XXXXXXXXXX anniversary of their issuance, the Units will be separated into Convertible Debentures and Common Shares. This separation may occur earlier as a result of a change of control triggering event described in the Prospectus but to date, the Units have not been separated.

10. The Common Shares and the Convertible Debentures are listed on XXXXXXXXXX Stock Exchange and trade in the form of Units described in paragraph 5. The XXXXXXXXXX Bonds are listed on XXXXXXXXXX Stock Exchange.

11. Immediately after the issuance of the XXXXXXXXXX Bonds and the Units, the capitalization of the Corporation consisted of XXXXXXXXXX Bonds in the principal amount of $XXXXXXXXXX, Convertible Debentures in the principal amount of $XXXXXXXXXX and XXXXXXXXXX Common Shares, all of which securities were held by holders of the Bonds. Each holder of Bonds acquired that portion of the XXXXXXXXXX Bonds and the Units equal to the portion of the Bonds held by that holder immediately prior to the exchange. The Corporation continues to have the same capitalization to date.

12. XXXXXXXXXX ("Investco"), an investment company with variable capital organized under the laws of XXXXXXXXXX for whom Manageco acts as investment advisor, owns XXXXXXXXXX Units (representing XXXXXXXXXX% of the outstanding Units). Since the date of issuance of the Units, no Units have been owned by Manageco, the Fund, Investco or any person who did or does not deal at arm's length with any of them, other than the XXXXXXXXXX Units owned by the Fund and the XXXXXXXXXX Units owned by Investco.

13. The Fund exchanged the Bonds it held for approximately XXXXXXXXXX Units which it continues to own at the present time. The Fund's Units represent XXXXXXXXXX% of the Convertible Debentures and XXXXXXXXXX% of the issued Common Shares. The Convertible Debentures will not be convertible into Common Shares at any time prior to the proposed transaction. Consequently, the Fund, together with any persons with which the Fund does not deal at arm's length, will not, in aggregate, be in a position to acquire 25% or more of the outstanding shares of any class of the capital stock of the Corporation at any time prior to the proposed transaction.

14. The Fund, Manageco and Investco do not hold XXXXXXXXXX Bonds at the present time. Each of the Fund and Investco hold its Units as capital property and neither uses nor is deemed to hold or use its Units in connection with the carrying on of a business in Canada.

Proposed Transaction

15. The Fund will sell to a Canadian public corporation (the "Purchaser") all of the Units it holds. The proposed purchase price is $XXXXXXXXXX per Unit payable in cash. The Purchaser is and will be dealing at arm's length with the Fund before and after the sale.

Purpose of the Proposed Transaction

16. The Fund wishes to dispose of its interest in the Corporation.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and the purpose of the proposed transaction, and provided that the proposed transaction is undertaken in the manner described above, our ruling is as set forth below.

A. Provided that the conversion rights attached to the Convertible Debentures cannot be exercised at any time prior to the proposed transaction, any taxable capital gain realized by the Fund, as a consequence of the sale of its Units, will not be included in the Fund's taxable income earned in Canada for the purpose of computing its liability for tax under Part I of the Act.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted into law, could affect the ruling provided herein.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transaction is completed by XXXXXXXXXX.

Caveat

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the cost, adjusted cost base or fair market value of any particular asset; or

(b) any tax consequences relating to the facts and proposed transaction described herein other than those specifically described in the ruling given above.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch