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) Whether the MFT would be considered as an open-ended trust pursuant to paragraph 108(2)(a) of the Act, given that a 25-year promissory note instead of cash will be provided to the MFT unitholders upon their demand for redemption of the MFT units?
(b) Whether the MFT's only undertaking would be investing funds in the commercial trust units and the 25-year promissory notes and not in operating the XXXXXXXXXX business of the commercial trust for the purpose of subsection 132(6) of the Act?
(c) Whether the MFT units would be considered as foreign property within the meaning of the term under subsection 206(1) of the Act?
(d) Whether subsection 245(2) of the Act would apply in respect of the 25-year promissory notes?
(e) Whether the disposal of XXXXXXXXXX assets would be considered as a part of the series of transactions in the XXXXXXXXXX corporate reorganization?
Position:
(a) Yes
(b) Yes
(c) No
(d) No
(e) No
Reasons:
(a) XXXXXXXXXX, it is our view that the MFT would be an open-ended trust under paragraph 108(2)(a) of the Act because the requirements of the provision has been met notwithstanding illiquid assets would be received by the MFT unitholders upon the redemption of the MFT units.
(b) XXXXXXXXXX, it is our view that the only undertaking of the MFT is investing funds in the commercial trust units and the 25-year promissory notes. The MFT could not be considered as operating the XXXXXXXXXX business of the commercial trust.
(c) By virtue of paragraph 5000(1)(e) of the Regulations, the MFT units would not be considered as foreign property. The commercial trust units would be considered as foreign property, but, the 25-year promissory notes would not be considered as foreign property. The MFT would hold less than 20% of the cost of all of its property in the commercial trust units (and more than 80% of such cost in the 25-year promissory notes), notwithstanding the fact that the MFT still owns 100% of the commercial trust. However, that is enough to meet the requirements under paragraph 5000(1)(e) of the Regulations to have the MFT units to qualify as non foreign property.
(d) The GAAR Committee concluded that subsection 245(2) of the Act should not be applied. Even though it was concluded that there would be tax avoidance transactions in respect of the 25-year promissory notes, there would be no misuse of the "foreign property" definition nor abuse of the provisions of the Act read as a whole, given that the business of the commercial trust will be carried on in Canada. The GAAR Committee was advised by Finance that interests in trusts are treated as foreign property as it was not intended to encourage flow-through investments, such as trusts or partnerships, where there is no corporate level of tax. However, it was also noted that the foreign property definition does not include debt issued by a trust resident in Canada.
(e) The XXXXXXXXXX corporate reorganization was carried out with different corporate purpose and therefore the subsequent sale of the XXXXXXXXXX assets of XXXXXXXXXX would not be considered as a part of series of the reorganization transactions.
XXXXXXXXXX
XXXXXXXXXX 991832
XXXXXXXXXX
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX wherein you have requested an advance income tax ruling on behalf of the above-noted corporations and trusts in respect of divesting XXXXXXXXXX assets which are no longer considered as part of its principal XXXXXXXXXX operations. We acknowledge our subsequent telephone conversations (XXXXXXXXXX) and your additional information and documents provided to us.
We understand that to the best of your knowledge and that of the taxpayers involved in this ruling, none of the issues involved in the requested rulings:
(a) is in an earlier return of the taxpayer or a related person;
(b) is 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;
(c) is under objection by the taxpayer or a related person;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
(e) is the subject of a ruling previously issued by the Directorate.
We also understand that the above-noted corporations file their income tax returns at the XXXXXXXXXX Tax Centre and are served by the XXXXXXXXXX Tax Services Office. Their XXXXXXXXXX account numbers are as follows:
Account No.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Definitions
Unless otherwise stated, the terms and expressions used herein are defined as follows:
"A Co." means XXXXXXXXXX.
"Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this ruling letter.
"Administration Agreement" means the administration agreement between the MFT and M Co. as described in 18 below.
"Agent Fees" means the agent fees paid by the CT to G Co. under the Guarantee Agreement as described in 17 below.
"arm's length" has the meaning assigned by section 251 of the Act.
"B Co." means XXXXXXXXXX.
"Bridge Loan" means the bridge loan described in 12 below.
"C Co." means XXXXXXXXXX.
"CDS" means Canadian Depository for Securities Limited.
"cost amount" has the meaning assigned by subsection 248(1) of the Act.
"CT" means the XXXXXXXXXX Trust as described in 7 and 9 below.
"CT Indenture" means the XXXXXXXXXX Trust Agreement in respect of the CT.
"CT Trustees" means the individual trustees of the CT as described in 9 below.
"Deficient Amount" means the deficient amount that the CT's XXXXXXXXXX revenue falls short of the Guarantee Price, and that has to be paid by G Co. to the CT under the Guarantee Agreement, as described in 17 below.
"DPSP" means deferred profit sharing plan as defined in subsection 147(1) of the Act.
"Distributable Cash" means all amounts which are receivable by the MFT, including interest, amounts declared to be payable on the CT units, and the proportionate share of payments on the First Notes held by the MFT as determined by the CT Trustees, less, among other items, any amount which the MFT Trustee may reasonably consider to be necessary to provide for the payment of any costs which have been or will be incurred by the MFT and cash used to redeem the MFT units.
"E Co." means XXXXXXXXXX.
"F Co." means XXXXXXXXXX.
"First Bonds" means the non-recourse mortgage bonds described in 12 below.
"First Notes" means the promissory notes (series 1) issued by the CT as described in 10 below.
"foreign property" has the meaning assigned by subsection 206(1) of the Act and section 5000 of the Regulations.
"G Co." means XXXXXXXXXX.
"Guarantee Agreement" means the agency and guarantee agreement between the CT and G Co. as described in 17 below.
"Guarantee Fees" means the fees paid by the CT to G Co. under the guarantee in respect of the Guarantee Price under the Guarantee Agreement as described in 17 below.
"Guarantee Price" means the price of XXXXXXXXXX production from the XXXXXXXXXX System which is guaranteed by G Co. to the CT under the Guarantee Agreement as described in 17 below.
"M Co." means XXXXXXXXXX which will be a wholly-owned Canadian subsidiary of G Co. and will be a taxable Canadian corporation XXXXXXXXXX, and which will be created only to perform the services under the O&M Agreement and Administration Agreement and will have no substantial assets.
"MFT" means the XXXXXXXXXX Income Fund as described in 6 and 8 below.
"MFT Indenture" means the XXXXXXXXXX Income Fund Trust Agreement in respect of the MFT.
"MFT Trustee" means the corporate trustee of the MFT as described in 8 below.
"mutual fund trust" has the meaning assigned by subsection 132(6) of the Act.
"N Co." means XXXXXXXXXX.
"non-resident" has the meaning assigned by subsection 248(1) of the Act.
"O&M Agreement" means the operation and maintenance agreement between the CT and M Co. as described in 18 below.
"personal trust" has the meaning assigned by subsection 248(1) of the Act.
"XXXXXXXXXX System" means the XXXXXXXXXX system as described in 3 below.
"prohibited investment" has the meaning assigned by section 8514 and paragraph 8502(h) of the Regulations in respect of an RPP.
"public corporation" has the meaning assigned by subsection 89(1) of the Act.
"Purchase Agreement" means the agreement in respect of the purchase of the XXXXXXXXXX System and the related XXXXXXXXXX business by the CT from N Co.
"qualified investment" has the meaning assigned by subsection 146(1) of the Act in respect of an RRSP, by subsection 146.1(1) of the Act in respect of an RESP, by subsection 146.3(1) of the Act in respect of an RRIF, or by section 204 of the Act in respect of an DPSP, as the case may be.
"XXXXXXXXXX Laws" means the laws of the Province of XXXXXXXXXX.
"Redemption Price" means the price the MFT unitholders are entitled to receive upon the redemption of their MFT units and it is equal to the lesser of: (i) 90% of the weighted average price per MFT unit at which the MFT units have traded on the principal exchange on which the MFT units are listed (or, if the MFT units are not so listed on any exchange, the principal market on which the MFT units are quoted for trading) during the period of the last 10 days during which the MFT units traded on such exchange or market immediately prior to the date on which the MFT units were tendered for redemption; and (ii) an amount equal to (a) the average closing prices of the MFT units on such exchange or market if there was a trade on such date and the exchange or market provides a closing price; (b) an amount equal to the average of the highest and lowest prices of the MFT units on such exchange or market on a particular day; or (c) the average of the last bid and ask prices on such exchange or market if there was no trading on such date.
"Regulations" means the Income Tax Regulations (Canada).
"related" has the meaning assigned by section 251 of the Act.
"resident in Canada" has the meaning assigned by section 250 of the Act.
"RESP" means registered education savings plan as defined in subsection 146.1(1) of the Act.
"RPP" means registered pension plan as defined in subsection 248(1) of the Act.
"RRIF" means registered retirement income fund as defined in subsection 146.3(1) of the Act.
"RRSP" means registered retirement savings plan as defined in subsection 146(1) of the Act.
"Second Notes" means the promissory notes (series 2) issued by the CT as described in 15 below.
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
"Trustco" means XXXXXXXXXX.
"unit trust" has the meaning assigned by subsection 108(2) of the Act.
Facts
1.
XXXXXXXXXX
After this corporate reorganization, E Co. directly or indirectly owns approximately XXXXXXXXXX% of the common shares of N Co. E Co. also directly and indirectly owns approximately XXXXXXXXXX% of the common shares of G Co.
2. E Co. is a public corporation and a taxable Canadian corporation. E Co. is a corporation incorporated under and governed by the laws of Canada. E Co. is engaged in the businesses of XXXXXXXXXX. N Co. is a public corporation and a taxable Canadian corporation. N Co. is formerly F Co. and is a corporation incorporated under and governed by the laws of Canada. N Co. is engaged in the businesses of XXXXXXXXXX. G Co. is a public corporation and a taxable Canadian corporation. G Co. is a corporation incorporated under and governed by the laws of Canada. G Co. is engaged in the business of XXXXXXXXXX.
3. N Co. owns an XXXXXXXXXX system (the "XXXXXXXXXX System") XXXXXXXXXX. The XXXXXXXXXX System also include other assets such as lands, buildings XXXXXXXXXX, movable or immovable, corporeal or incorporeal. The XXXXXXXXXX System has an approximate useful life of XXXXXXXXXX years, assuming proper repair and maintenance and capital program would be carried out.
XXXXXXXXXX
4. The XXXXXXXXXX System is operated by a division of N Co.
XXXXXXXXXX
5. N Co. would like to focus on its core business of XXXXXXXXXX and as a result would like to dispose of the XXXXXXXXXX System and its business of XXXXXXXXXX.
Proposed Transactions
6. An open-ended inter vivos trust (the "MFT") will be created under the laws of the Province of XXXXXXXXXX (the "XXXXXXXXXX Laws") pursuant to a trust agreement (the "MFT Indenture"). The MFT will be established for the purpose of subscribing for and owning all of the CT units and First Notes referred to in 10 below. Under the XXXXXXXXXX Laws, the patrimony of the MFT will be transferred in trust and will constitute a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or any unitholders of the MFT. Pursuant to the MFT Indenture, the MFT units represent the undivided beneficial interest of the holders thereof in the MFT. Each MFT unit carries one vote at meetings of the MFT unitholders and each unitholder has equal privileges and is entitled to participate equally in distributions by the MFT and, in the event of any required distribution of all of the property of the MFT, in the net assets of the MFT after satisfaction of all liabilities of the MFT. An abridged form of the MFT Indenture will be executed prior to the filing of the prospectus referred to in 13 below since the issuer, being the MFT, must be constituted in order to file the prospectus. The MFT Indenture will subsequently be restated and amended by the amended and restated trust agreement with the detailed terms and conditions of the trust.
7. Another open-ended inter vivos trust (the "CT") will be created under the XXXXXXXXXX Laws pursuant to a trust agreement (the "CT Indenture"). The CT will be established for the purpose of carrying on the business of XXXXXXXXXX. Under the XXXXXXXXXX Laws, the patrimony of the CT will be transferred in trust and will constitute a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or any unitholders of the CT. Pursuant to the CT Indenture, the CT units represent the undivided beneficial interest of the holders thereof in the CT. Each CT unit carries one vote at meetings of the CT unitholders and each unitholder has equal privileges and is entitled to participate equally in distributions by the CT and, in the event of any required distribution of all of the property of the CT, in the net assets of the CT after satisfaction of all liabilities of the CT. The CT will not be a mutual fund trust nor a personal trust.
8. Pursuant to the MFT Indenture, the control and administration of the MFT property and the right to conduct the affairs of the MFT will be vested exclusively in the sole trustee of the MFT (the "MFT Trustee") which, among many other requirements, must be a corporation incorporated under the laws of Canada or a province thereof, be a resident in Canada and be authorized under the XXXXXXXXXX Laws to carry on the business of a trust company. Trustco will be appointed as the initial MFT Trustee. Trustco will also act as transfer agent and registrar for the MFT units. The MFT Trustee will be dealing at arm's length with and will not be related to any of G Co., N Co. and their affiliates and the CT Trustees at all times. Pursuant to the MFT Indenture, at no time may non-residents of Canada be the beneficial owners of more than 49% of the MFT units. Furthermore, the MFT Trustee may not, without the approval of the MFT unitholders, vote the CT units with respect to any matter which requires the approval of the CT unitholders.
9. Pursuant to the CT Indenture, the control and administration of the CT property and the right to conduct the affairs of the CT will be vested exclusively in the trustees of the CT (the "CT Trustees"). The CT Trustees consist of seven individuals chosen by G Co. (subject to the approval by the MFT unitholders). The term of the appointment of the CT Trustees will be one year. The CT Trustees must be resident in Canada. As long as G Co. owns less than a majority of the outstanding MFT units, then a majority of the CT Trustees chosen by G Co. must be unrelated to G Co. (as such term is defined in The Toronto Stock Exchange Guidelines on Corporate Governance). However, if G Co. owns more than 50% of the outstanding MFT units, then a majority of the CT Trustees chosen by G Co. may be related to G Co. and at least three of the rest must be unrelated to G Co.
10. The MFT will issue and sell its units to N Co., raising approximately $XXXXXXXXXX. N Co. will borrow, on a day-light loan basis, approximately $XXXXXXXXXX from a financial institution and will use the proceeds of this loan to subscribe for all of the MFT units. The MFT will invest the net proceeds from this issuance as to 85% thereof, approximately $XXXXXXXXXX, in promissory notes (series 1) of the CT (the "First Notes") secured by way of a second-ranking hypothec on the immovables and real properties of the CT and as to 15% thereof, approximately $XXXXXXXXXX, in the CT units. The First Notes will bear market interest rate and will be mature and fully re-paid at the end of 25 years after the issuance. The First Notes will be subordinated to the Bridge Loan and First Bonds referred to in 12 below. The terms and conditions on the First Notes also provide that the CT Trustees, in all circumstances, may repay the principal amount without penalty. At no time would the cost amount to the MFT of the CT units exceed 20% of the cost amount to the MFT of all property held by it. At the outset, the MFT will be the only investor in the CT units and First Notes.
11. A book entry only certificate representing the MFT units will be issued in registered form to CDS or its nominee and will be deposited with CDS at the closing. A purchaser of the MFT units will only receive a customer confirmation from the registered dealer which is a CDS participant through which the MFT units are purchased. The MFT unitholders will not have the right to receive physical certificates evidencing their ownership of the MFT units. However, the MFT units will be listed and traded at a prescribed stock exchange and any transfer of the ownership will be made through CDS.
12. The CT will borrow approximately $XXXXXXXXXX as a bridge loan ("Bridge Loan") from N Co. The CT will use the proceeds of the Bridge Loan together with the above-noted proceeds from issuing the First Notes and CT units to pay to N Co. for the acquisition of the XXXXXXXXXX System and the related XXXXXXXXXX business (excluding the working capital) from N Co. for approximately $XXXXXXXXXX pursuant to the Purchase Agreement. A part of the proceeds received by N Co. from the disposition of the XXXXXXXXXX System and the related XXXXXXXXXX business (excluding the working capital) will be used to repay the day-light loan referred to in 10 above. The Bridge Loan bears interest at an annual rate of XXXXXXXXXX% per annum. The principal amount of the Bridge Loan is repayable in XXXXXXXXXX. The CT will offer the non-recourse mortgage bonds ("First Bonds") pursuant to a private placement debt offering, the proceeds of which will be used to repay the Bridge Loan. The First Bonds consist of two series: (i) $XXXXXXXXXX principal amount of series 1 due in XXXXXXXXXX, and (ii) $XXXXXXXXXX principal amount of series 2 due in XXXXXXXXXX. The First Bonds of the two series will bear market interest rates. The CT will also enter into a loan agreement with a financial institution pursuant to which a $XXXXXXXXXX revolving line of credit will be made available to the CT at market interest rate. The line of credit will be used for general business purposes in connection with the operation of the XXXXXXXXXX System and to finance the capital expenditure and major maintenance program XXXXXXXXXX. At the time of the acquisition of the XXXXXXXXXX System, this line of credit will be drawn at approximately $XXXXXXXXXX and will be used to acquire the working capital relating to the XXXXXXXXXX System, composed mainly of accounts receivable, XXXXXXXXXX and spare parts inventory and accounts payable.
13. N Co. will offer for sale to the public by way of prospectus the MFT units which are owned by N Co. G Co., as part of the public offering, will purchase and hold, at the outset, XXXXXXXXXX % of the issued MFT units. After completion of this public offering, the MFT will comply with the prescribed conditions in section 4801 of the Regulations and paragraph 132(6)(c) of the Act.
14. Pursuant to the MFT Indenture, the MFT units will be redeemable at any time at the demand of the MFT unitholders for cash at the Redemption Price to a maximum of $XXXXXXXXXX in the aggregate in any one calendar month. (This maximum amount may be waived by the MFT Trustee.) Redemptions in excess of that maximum will be in specie redemptions and at a price equal to the fair market value of the MFT units as determined by the MFT Trustee (subject to any applicable regulatory approvals). In this case, MFT will satisfy the redemption by the distribution of that proportion of the CT units and First Notes held by the MFT that the redeemed MFT units are of the total MFT units issued and outstanding, including the units to be redeemed. The CT units and First Notes will not be listed on any stock exchange and no market is expected to develop in such CT units and First Notes. It is anticipated that this in specie redemption right will not be the primary mechanism for the MFT unitholders to dispose of their units (i.e., the MFT units can be traded at a prescribed stock exchange as described in 11 above). The First Notes may be subject to resale restrictions under applicable securities laws. The First Notes so distributed will be qualified investments for trusts governed by RRSPs, RESPs or RRIFs and will not be prohibited investments for trusts governed by RPPs, but they will not be qualified investments for trusts governed by DPSPs (i.e., it is anticipated that no trusts governed by DPSPs will be investing in the MFT units). For the MFT unitholders which are trusts governed by RRSPs, RPPs, RESPs or RRIFs, the Second Notes would be distributed to the MFT unitholders along with the First Notes in the event of an in-specie redemption. In such circumstances, the MFT Trustee would cause the CT to redeem the proportionate share of the CT units for the Second Notes and then would distribute to the MFT unitholders the Second Notes along with the First Notes.
15. Pursuant to the CT Indenture, the CT units will be redeemable at any time at the demand of the CT unitholders for payment in cash or in specie - promissory notes (series 2) of the CT (the "Second Notes") secured by way of a second-ranking hypothec on the immovables and real properties of the CT. The Second Notes will bear market interest rate and will be mature and fully re-paid at the end of one year after the issuance. The Second Notes will be subordinated to the Bridge Loan and First Bonds referred to in 12 above. The terms and conditions on the Second Notes also provide that the CT Trustees, in all circumstances, may repay the principal amount without penalty. The Second Notes so distributed will be qualified investments for trusts governed by RRSPs or RRIFs, and will not be prohibited investments for trusts governed by RPPs, but they will not be qualified investments for trusts governed by DPSPs. The Second Notes will not be listed on any stock exchange and no market is expected to develop in such Second Notes.
16. The CT will own, operate and manage the XXXXXXXXXX System XXXXXXXXXX and will carry on the business of XXXXXXXXXX. All of the existing XXXXXXXXXX purchase agreements with N Co.'s customers and the agreements with XXXXXXXXXX and XXXXXXXXXX will be assigned and transferred to the CT. The CT will continue to sell XXXXXXXXXX under these existing XXXXXXXXXX purchase agreements.
17. Pursuant to a XXXXXXXXXX-year agency and guarantee agreement (the "Guarantee Agreement"), G Co. will guarantee, except in certain limited circumstances, that the CT will receive the guarantee price (the "Guarantee Price") for all XXXXXXXXXX produced and delivered by the XXXXXXXXXX System. The Guarantee Price will be (a) $XXXXXXXXXX in any given year. Commencing XXXXXXXXXX, the guarantee price will be subject to an annual adjustment equal to the lesser of XXXXXXXXXX thereof or XXXXXXXXXX of the increase in the consumer price index during the previous year. Should there be a deficiency in the revenue to the CT to correspond to the Guaranteed Price at the end of any month, G Co. would pay the deficient amount to the CT (the "Deficient Amount"), which amount will be income to the CT. However, if the market rates for XXXXXXXXXX increase in excess of the Guarantee Price, G Co. will benefit from this positive price difference (full amount of this price difference will be provided to G Co. on a monthly basis as part of the fees for its services (the "Guarantee Fees")). XXXXXXXXXX. In the initial years of the Guarantee Agreement, it is expected that G Co. will be required to pay the Deficient Amounts. Should G Co. pay a Deficient Amount in any year, G Co. may receive revenues from sources other than the XXXXXXXXXX until it has recovered, in its entirety, the sum of the Deficient Amounts paid to the CT. However, the Guarantee Fees paid by the CT to G Co. do not reduce the Deficient Amount. The Guarantee Agreement will be structured to take into consideration the material obligations of the CT under the above-noted assigned XXXXXXXXXX purchase agreements. Pursuant to the Guarantee Agreement, G Co. will also act as the sales agent of the CT in respect of sales of XXXXXXXXXX and will provide sales, XXXXXXXXXX and XXXXXXXXXX services. As part of the fees for its services, an annual sales and marketing fee of $XXXXXXXXXX (the "Agent Fees"), adjusted by the consumer price index annually, will be paid to G Co. in monthly installments.
18. The CT will retain the services of M Co. to provide operation and maintenance services for the XXXXXXXXXX System as well as management services for the XXXXXXXXXX System and the MFT. Pursuant to a XXXXXXXXXX operation and maintenance agreement (the "O&M Agreement"), M Co., will operate and maintain the XXXXXXXXXX System in accordance with prudent industry practice and the annual operating plan to be approved by the CT Trustees. M Co. will hire all of the employees of the XXXXXXXXXX division of N Co. currently involved with the operations and maintenance of the XXXXXXXXXX System. M Co. will also perform management services for the CT, including reporting to the CT Trustees, accounting and financial services, preparing financial statements and other financial report, and preparing annual plans and budgets. All costs relating to the XXXXXXXXXX System will be incurred by M Co. for the account of the CT. Pursuant to an administrative agreement (the "Administration Agreement"), M Co. will provide the MFT certain administrative and support services, including to ensure compliance by the MFT with continuous disclosure obligations under applicable securities legislation, to provide investor relations services, to provide to the MFT unitholders all information to which they are entitled under the MFT Indenture, to call and hold meetings of the MFT unitholders, to provide for the calculation of distribution to the MFT unitholders of Distributable Cash, to attend the matter relating to redemption of the MFT units, and to ensure compliance with the MFT's limitations on non-resident ownership. All costs relating to these services will be for the account of the MFT. There will be no fees nor mark-up charged by M Co. to the MFT or CT in respect of these agreements.
19. The CT will pay interest to the holders of the First Notes and Second Notes and make regular cash distributions to the CT unitholders and/or the holders of the First Notes or Second Notes, by way of principal repayments, equal to substantially all of the net profit before taxes and depreciation realized by it in carrying on the XXXXXXXXXX business. The MFT will make quarterly cash distributions (the "Distributable Cash") to holders of its units equal to substantially all the cash received by it on the CT units and First Notes owned by it, less, among other things, expenses of the MFT. If the MFT Trustee determines that the MFT does not have sufficient cash to fully pay any distribution, the distribution may include the issuance of freely tradable MFT units at a price based upon the Redemption Price. Under the MFT Indenture, income of the MFT may be used to finance cash redemption of the MFT units as described in 14 above and accordingly such income so utilized will not be payable to the MFT unitholders by way of cash distributions but rather will be payable in the form of additional MFT units.
Purposes of the Proposed Transactions
20. The central and basic purpose of the proposed transactions is to maximize the value of N Co.'s XXXXXXXXXX System. A unit trust whose units are publicly traded is a suitable acquisition vehicle to satisfy this commercial objective.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, our rulings are as follows:
A. The CT will be considered as a unit trust pursuant to paragraph 108(2)(a) of the Act.
B. The MFT will be considered as a unit trust pursuant to paragraph 108(2)(a) of the Act.
C. Subject to the provisions of subsection 132(7) of the Act, the MFT will be considered as a mutual fund trust at a particular time pursuant to subsection 132(6) of the Act, provided that at the particular time:
(a) the MFT remains a unit trust and resident in Canada;
(b) the MFT's only undertaking remains the investing of its funds in the CT units and First Notes; and
(c) the MFT complies with the prescribed conditions under section 4801 of the Regulations.
D. The MFT units will not be considered as foreign property for the purpose of computing the tax payable under Part XI of the Act in respect of any particular month, provided that at no time during the relevant period for the particular month did the cost amount to the MFT of all of the CT units and other foreign property, if any, held by it exceed 20 per cent of the cost amount to it of all property held by it.
E. The First Notes and Second Notes will not be considered as foreign property for the purpose of Part XI of the Act, provided that the CT remains resident in Canada.
F. The MFT will not be considered as a designated beneficiary of the CT for the purpose of Part XII.2 of the Act, provided that the MFT remains a mutual fund trust.
G. Part XII.2 of the Act will not apply in a taxation year to the MFT, provided that throughout the year the MFT remains a mutual fund trust.
H. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3, as amended, and are binding on Revenue Canada, provided that all of the proposed transactions are completed by XXXXXXXXXX.
Nothing in this ruling letter should be construed as confirming the cost of any property, classification of any depreciable property or the amount of any expense described herein. Furthermore, the rulings given above do not imply acknowledgement, acceptance or confirmation by Revenue Canada of any tax consequences arising out of the facts and proposed transactions described herein except as expressly stated in the above under the heading of Rulings Given. In particular, we do not express any opinions in respect of M Co., the Purchase Agreement, reasonableness of the Agent Fees and Guarantee Fees.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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