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: Are the proposed Forward Contracts considered to be foreign property and if not, would such a transaction be subject to GAAR?
Position: No and GAAR is not applicable.
Reasons: The definition of foreign property in 206(1) of the Act includes property which is exchangeable for, convertible to or confers a right to acquire foreign property. Since the Forward Contract described in the ruling is settled in Canadian dollars and does not entitle the Funds to units of the Underlying Funds, and the Contract would not otherwise be considered foreign property based on the situs of the contract and does not involve the indebtedness of a non-resident person, we can reasonably conclude that the Forward Contract is not foreign property..
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XXXXXXXXXX 992307
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above noted taxpayers in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.
We understand that, to the best of your knowledge and the taxpayers noted above, none of the issues involved in this ruling request are:
a) in an earlier return of the taxpayers or a related person;
b) being considered by a tax services office and/or a tax centre in connection with a tax return previously filed by the taxpayers or a related person;
c) under objection by the taxpayers or a related person;
d) before the courts; or
e) the subject of a ruling previously issued by this Directorate to the taxpayers 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:
"Adjusted Forward Price" with respect to a Forward Contract means the price at which the Fund agrees to buy a Forward, as specified from time to time in a Notice of Adjustment, such price including an amount in respect of the cost to the Counterparty of borrowing the cash required to hedge its position under the Forward Contract;
"Bank" means XXXXXXXXXX, a taxable Canadian corporation which was incorporated under Schedule II of the Bank Act (Canada);
"Canadian Money Market Securities" means a portfolio of Canadian securities including cash, treasury bills of the Government of Canada, banker's acceptances of chartered Canadian banks, indebtedness issued or guaranteed by federal or provincial governments of Canada and evidence of deposits issued or fully guaranteed by Canadian financial institutions and for greater certainty, does not include any property that is included in the definition of "foreign property" in subsection 206(1) of the Act;
"Cost amount" means the cost amount of property as defined in subsection 248(1) of the Act;
"Counterparty" means the Bank; however, the Funds may enter into similar Forward Contracts with one or more of the Bank's subsidiaries or another major Canadian financial institution;
"Forward Contract" has the meaning set out in paragraphs 8 to 10;
"Forward" with respect to a Forward Contract means an agreement to buy the notional equivalent of a unit in the Underlying Fund on the Valuation Date;
"Fund A" means XXXXXXXXXX;
"Fund B" means XXXXXXXXXX;
"Fund C" means XXXXXXXXXX a mutual fund trust with the investment objective of long-term capital appreciation;
"Fund D" means XXXXXXXXXX; a mutual fund trust with the investment objective of long-term capital appreciation;
"Fund" means Fund A or Fund B, individually;
"Funds" means Fund A and Fund B, collectively; XXXXXXXXXX
"Manager" means XXXXXXXXXX, a taxable Canadian corporation that is an indirect wholly-owned subsidiary of the Bank; its business number is XXXXXXXXXX and it files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre;
"Notice of Adjustment" means a document which forms part of the Forward Contract and which adjusts the number of Forwards that are subject to the Forward Contract and the Adjusted Forward Price;
"Settlement Date" with respect to a Forward Contract means the date on which a Forward Contract is settled and will occur on the second business day following the maturity of a particular Forward Contract;
"Settlement Price" with respect to a Forward Contract means the net asset value of a single unit of the Underlying Fund as determined on the Valuation Date;
"Underlying Fund" with respect to Fund A, means Fund C and with respect to Fund B, means Fund D, individually;
"Underlying Funds" means Fund C and Fund D, collectively; and
"Valuation Date" with respect to a Forward Contract means the earlier of the day on which the Forward Contract matures and the business day following the termination of the contract and any value that is determined on the Valuation Date shall be determined at the time specified in the Forward Contract.
Facts
1. The Manager is the manager-trustee, principal distributor and promoter of the Funds. Its business includes the management of mutual fund trusts and it currently manages a group of XXXXXXXXXX mutual fund trusts.
2. The Counterparty carries on the business of banking in Canada. The credit rating of the Counterparty's indebtedness as determined by Canadian Bond Rating Service Inc. is XXXXXXXXXX.
3. The Manager has established each Underlying Fund as an inter vivos trust pursuant to a declaration of trust. The Underlying Funds are and will be, at all relevant times, mutual fund trusts as defined in subsection 132(6) of the Act. The Underlying Funds are not and will not be registered investments for the purposes of the Act and units of the Underlying Funds are and will continue to be "foreign property" as defined in subsection 206(1) of the Act.
Proposed Transactions
4. The Manager intends to establish the Funds as inter vivos trusts pursuant to separate declarations of trust that are governed by the laws of XXXXXXXXXX.
5. The units of the Funds will be offered for distribution to the public by prospectus. Each Fund intends to comply with the conditions prescribed in section 4801 of the Income Tax Regulations necessary to qualify as a mutual fund trust for the purposes of paragraph 132(6)(c) of the Act. It is expected that the Funds will comply with such conditions before the filing date for their respective 1999 income tax return and, pursuant to subsection 132(6.1) of the Act, each Fund will elect in its return of income under Part I of the Act for 1999 to be deemed to have been a mutual fund trust from the time of its establishment.
6. Fund A intends to invest its assets in Canadian Money Market Securities, units of Fund C and Forward Contracts linked to the investment return on Fund C. The cost amount of Fund A's investment in units of Fund C, and any other foreign property acquired by it, will not exceed 20% of the cost amount of all its property.
7. Fund B intends to invest its assets in Canadian Money Market Securities, units of Fund D and Forward Contracts linked to the investment return on Fund D. The cost amount of Fund B's investment in units of Fund D, and any other foreign property acquired by it, will not exceed 20% of the cost amount of all its property.
8. Each Fund will enter into a Forward Contract with the Counterparty. The Forward Contracts will be executed in Canada, will be governed by the laws of Canada and both parties to the contract will be resident in Canada. None of the Forward Contracts will be convertible into, exchangeable for, or provide the Funds with any right to acquire property that is foreign property. Each Forward Contract will be settled by means of a cash payment and is subject to any risks of default by the Counterparty. The timing, amount and character for tax purposes of payments under a Forward Contract will differ from the timing, amount and character for tax purposes of payments that would be made to an investor who acquired an equivalent amount of units in an Underlying Fund. A draft Forward Contract was included with your submission.
9. Under the terms of the Forward Contract, on each Settlement Date, the Counterparty will agree to pay to the Fund, an amount equal to the number of Forwards outstanding on the Valuation Date as adjusted by any previously issued Notice of Adjustment multiplied by the amount, if any, by which the Settlement Price exceeds the Adjusted Forward Price. If the Adjusted Forward Price exceeds the Settlement Price, the Fund will be obligated to pay to the Counterparty an amount equal to the number of Forwards outstanding on the Valuation Date as adjusted by any previously issued Notice of Adjustment times that difference. The amount paid by the Counterparty to the Fund will be less than the rate of return on the Underlying Funds since the formula for determining the Adjusted Forward Price includes an amount representing the cost to the Counterparty of borrowing the cash required to purchase units of the Underlying Funds. The term to maturity of each Forward Contract will be 90 days or less. The Forward Contracts will be automatically renewed, unless the Fund or the Counterparty provides the other party with notice of its intention not to renew the Forward Contract.
10. All Forward Contracts will be priced and paid for at fair market rates and will be settled in Canadian-denominated currency. All of the terms of the Forward Contracts will be in accordance with standard industry practice and will be comparable to arrangements entered into between arm's length parties.
11. As a result of this investment strategy, the return to an investor in units of the Funds will closely approximate the return which would be earned by investing in an equivalent amount of units of the Underlying Funds over the same period less the amount credited to the Counterparty on account of its borrowing costs.
12. Due to the expected initial size of the Funds, the Manager has not been able to identify an arm's length counterparty which has the required credit rating and is prepared to enter into a Forward Contract with either Fund. It is for this reason that the Bank has agreed to become a Counterparty under the Forward Contract described above. Under National Policy Statement No. 39, a mutual fund trust can only enter into a forward contract with a counterparty whose debt has a credit rating of at least "A" by the Canadian Bond Rating Service Inc. or an equivalent rating by any other rating agency listed in National Policy Statement No. 39.
13. All payments received by or paid to the Counterparty under a Forward Contract will be included in the computation of the Counterparty's income for Canadian tax purposes.
Purpose of Proposed Transactions
14. The purpose of the proposed transactions is to provide investors that are subject to foreign property limits under Part XI of the Act an opportunity to realize investment returns which are linked to the returns realized on units of the Underlying Funds without increasing the amount of foreign property held by those investors.
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 Forward Contracts acquired by Fund A and Fund B will not be "foreign property" as defined in subsection 206(1) of the Act.
B. For the purposes of subsection 248(1) of the Act and section 5000 of the Income Tax Regulations, the cost amount to each Fund of its investments in Forward Contracts which are substantially the same as the draft contract submitted will be equal to the brokerage fees, legal fees and other costs incidental to entering into or acquiring the investment and will not include an amount in respect of the Adjusted Forward Price or Settlement Price.
C. Subsection 245(2) of the Act will not apply to redetermine the tax consequences arising from the above rulings.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency (the CCRA) with respect to Forward Contracts as described in paragraphs 8 to 10 above which are entered into or acquired by a Fund within six months of the date of this letter.
The above rulings should not be construed as providing the CCRA's views on whether the Funds will qualify as mutual fund trusts for purposes of the Act.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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