1999 Ruling 9928863 - XXXXXXXXXX - FORWARD CONTRACTS

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:

Issue 1- does the proposed mutual fund qualify as foreign ppty?

Issue 2- are the underlying funds "mutual fund trusts" for purposes of the Act?

Issue 3-what is the cost amount of the forward contract?

Issue 4- is the forward contract foreign property?

Position:

Issue 1-no
Issue 2- yes

Issue 3-cost amount=brokerage,legal +incidental but not any amount paid on margin, N/Apmts paid pursuant to the contract etc.

Issue 4- no

Reasons:

issue 1-contract is structured so that none of underlying property can be acquired
issue 2-underlying funds will be mutual fund trusts as soon as 150 investors are obtained

issue 3-where fund is required to pay costs ( ie legal, brokerage, incidental) they will form part of cost amt.

issue 4-similar rulings wrt 991458 &991541

XXXXXXXXXX
XXXXXXXXXX 992886
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs/Mesdames:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling 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, none of the issues involved in this ruling request are:

a) in an earlier return of the taxpayer 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 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:

"Cost amount" means the cost amount of property as defined in subsection 248(1) of the Act;

"Counterparty" means a Canadian Branch of a major Canadian-resident financial institution or an investment dealer;

"Fund" means XXXXXXXXXX;

"Underlying Fund" means XXXXXXXXXX;

"Manager" means XXXXXXXXXX; a partnership formed under the laws of XXXXXXXXXX, which will be the manager, principal distributor, sponsor and promoter of the Fund. The Manager's partnership identification number is XXXXXXXXXX. The Manager files its Partnership Information returns with the XXXXXXXXXX Tax Services Office; and
"Trustee" means XXXXXXXXXX, a Canadian resident corporation and general partner of the Manager. The Trustee's business number is XXXXXXXXXX. The Trustee files its tax returns with the XXXXXXXXXX Tax Services Office.

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

Facts

1. The offices of the Manager, the Trustee and the Fund are located at XXXXXXXXXX.

2. The Underlying Fund is an open-end mutual fund trust as described in subsection 132(6) of the Act. The securities issued by the Underlying Fund constitute foreign property for the purposes of Part XI of the Act.

Proposed Transactions

3. The Fund will be formed under the laws of XXXXXXXXXX pursuant to a trust indenture dated on or about the date of the final simplified prospectus for the Fund. Units of the Fund will be offered for sale to the public in Canada pursuant to a simplified prospectus (the "Prospectus") which will have been filed with and accepted by the XXXXXXXXXX.

4. The Fund has not yet been assigned a tax account number. The Fund will file its income tax return with the XXXXXXXXXX Tax Centre.

5. The Fund will be an open-end unit trust as defined under paragraph 108(2)(a) of the Act. The Fund expects to qualify as a mutual fund trust in 1999, but in any event will so qualify before the 91st day following the end of its first taxation year. The Fund will elect under subsection 132(6.1) of the Act to be deemed to be a mutual fund trust from its inception.

6. The Fund will apply to become a "registered investment" under paragraph 204.4(2)(c) of the Act for the purposes of registered retirement savings plans, registered retirement income funds and deferred profit sharing plans as of the date that the Fund satisfies all of the conditions necessary to qualify as a mutual fund trust.

7. The Fund's investment objective will be disclosed in its prospectus. The Fund will use derivatives in the form of forward contracts to achieve its investment objective and may from time to time, use other types of derivative instruments permitted by National Policy No. 39 of the Canadian Securities Administrators (or any successor thereto) as an alternative method.

8. The Fund may invest in units of the Underlying Fund or in portfolio securities which are the same as those of the Underlying Fund, which would constitute foreign property for tax purposes, but at no time will the cost amount to a Fund of its foreign property investments exceed 20% of the cost amount to it of all its investments.

9. The Fund will link its returns to the performance of the Underlying Fund by entering into one or more forward contracts with one or more Counterparties. The investment returns of the Underlying Fund determine the payments the Fund will receive from or pay to the Counterparties. The primary type of forward contract to be entered into by the Fund will be a forward contract based on the units of the Underlying Fund. Alternatively, but only where the primary method is impractical, such as when the Fund cannot find appropriate Counterparties, the forward contract will be based on the portfolio securities of the Underlying Fund.

10. The forward contracts will be executed in Canada and will be governed by the laws of Canada. The forward contracts will not be listed, or traded over-the-counter, on any stock exchange. The forward contracts will be settled in Canada from time to time in cash, and are subject to risks of default by the Counterparts. The forward contracts will not entitle the Fund to acquire securities of an Underlying Fund nor will the forward contracts be convertible into, exchangeable for, or provide the Fund with any right to acquire property that is foreign property as defined in subsection 206(1) of the Act.

Each forward contract will have a term of 30, 60 or 90 days. A sample forward contract, based on units of the Underlying Fund was included with your submission.

11. Payments will be made under each forward contract at the end of its term, and early settlement payments will be made when the market value of the forward contracts or other derivatives with a Counterparty exceeds 10% of the net assets of the Fund for a specified period of time, as required under applicable securities laws and policies. The days on which a settlement payment is made are called settlement days. All payments under the forward contract will be made in cash only. The forward contracts will have no intrinsic value at the time they are entered into and immediately after settlement.

12. Under a forward contract based on the units of the Underlying Fund, on each settlement day:

i) the Fund will pay the Counterparties an amount equal to the imbedded interest charge in the forward contracts;

ii) if the price of a unit of the Underlying Fund has increased, the Counterparties will pay to the Fund an amount equal to the increase in the Underlying Fund unit price (without taking into account any distributions from the Underlying Fund) multiplied by the notional number of units of the Underlying Fund represented by the net assets of the Fund at the time the forward contract was entered into; and

iii) if the price of a unit of the Underlying Fund has decreased, the Fund will pay to the Counterparties an amount equal to the decrease in the Underlying Fund unit price (without taking into account any distributions from the Underlying Fund) multiplied by the notional number of units of the Underlying Fund represented by the net assets of the Fund at the time the forward contract was entered into.

13. The Fund may be required to provide margin in respect of the forward contracts. The Fund may pay brokerage fees, legal expenses or other expenses incidental to entering into a forward contract.

14. The assets of the Fund, other than the accrued value under the forward contracts, other derivatives and direct investments in the Underlying Fund or portfolio securities that are the same as those of the Underlying Fund, will be invested in bank deposits, money market instruments, such as treasury bills and banker's acceptances, and bank deposits with a weighted average duration of not more than 90 days. These investments will support the Fund's obligation under the forward contracts and other derivatives.

15. In order to hedge its obligation under the forward contracts, Counterparties may, but are not required to, acquire units of the Underlying Fund.

Purposes of Proposed Transactions

16. The purpose of the proposed transactions is to add a mutual fund to the family of mutual funds managed by the Manager to provide a more comprehensive selection of investments to registered retirement plan investors seeking to increase exposure to foreign investments returns.

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 described in paragraphs 9 to 13 above, and which are substantially similar to the sample forward contract included with your submission, will not be considered to be foreign property of the Fund for the purposes of Part XI of the Act.

B. For the purposes of subsections 248(1) and 206(2) of the Act, the cost amount to the Fund of its investment in forward contracts described in paragraphs 9 to 13 above, and which are substantially similar to the sample forward contract included with your submission, will, at the time entered into by the Fund, be equal to the brokerage fees, legal fees and other costs incidental to entering into the contracts and will not include an amount in respect of the contract price or any amounts paid, if any, as margin.

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 (CCRA) with respect to forward contracts as described in paragraphs 9 to 13 above which are entered into or acquired by the 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 Fund will qualify as a unit trust, a mutual fund trust or a registered investment for purposes of the Act.

Yours truly,

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