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:
This ruling request involves XXXXXXXXXX mutual fund trusts XXXXXXXXXX which propose to add XXXXXXXXXX new XXXXXXXXXX units that will be available to investors XXXXXXXXXX . The purpose of the proposed transactions is to permit the manager of the funds to more effectively market the funds to different segments of the investor market and to tailor the fees and expenses applicable to such segments by offering a separate XXXXXXXXXX units of each such fund. In this ruling, the principal issues are:
1) Does the creation of XXXXXXXXXX new XXXXXXXXXX units result in a disposition of the existing unitholders units?
2) Since the proposed amendments to the XXXXXXXXXX provide for the reclassification of an existing XXXXXXXXXX , or XXXXXXXXXX new XXXXXXXXXX units of a fund to another XXXXXXXXXX units of the same fund, will such a reclassification of units result in a disposition to the unitholder?
3) Will subsection 104(7.1) apply to the proposed transactions?
Position TAKEN
Unitholders are not considered to have disposed of their units because of the addition of XXXXXXXXXX new XXXXXXXXXX or the reclassification of the units from one XXXXXXXXXX to another XXXXXXXXXX units of the same fund. Subsection 104(7.1) does not apply.
Reasons FOR POSITION TAKEN
Since each fund's XXXXXXXXXX explicitly provides for the creation of XXXXXXXXXX new XXXXXXXXXX units, the creation and issuance of XXXXXXXXXX new XXXXXXXXXX units will not result in the disposition of the existing units of a fund held by a unitholder. Also, as a unitholder will not be entitled to proceeds of disposition on any reclassification of units and the units will not be redeemed or cancelled upon the reclassification, and the rights, privileges and conditions attached to the reclassified units will be substantially the same as the existing units, the reclassification of units will not result in a disposition. As described in ATR-65, subsection 104(7.1) is an anti-avoidance provision intended to prevent the streaming by commercial trusts of income and capital to different beneficiaries depending on their taxable status. However, as outlined above the main purpose of the proposed transactions is to permit the manager of the funds to more effectively market the funds to different segments of the investor market. Although the addition of XXXXXXXXXX new XXXXXXXXXX and the reclassification of existing units can result in the existing unitholders percentage share of a fund's income being greater than their percentage interest in the property of the fund, this result was not one of the main purposes of the proposed transactions and subsection 104(7.1) should not apply.
Similar rulings (no disposition and the non-application of subsection 104(7.1)) were given in ruling 9905003, 9818043 and 9827053. The paragraph 104(6)(b) and 104(13(a) rulings were straight forward and it was clear that GAAR should not apply to the proposed transactions.
XXXXXXXXXX 3-993014
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling
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 that of the taxpayers involved, none of the matters considered in this ruling request are:
(a) in an earlier return of the taxpayers or related persons;
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
(c) under objection by the taxpayers or related persons;
(d) before the courts; or
(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons with the exception of ruling 981804.
In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
Tax Account Number
"Manageco" means XXXXXXXXXX.
"Fund A" means XXXXXXXXXX.
"Fund B" means XXXXXXXXXX.
"Fund C" means XXXXXXXXXX.
"Fund D" means XXXXXXXXXX.
"Fund E" means XXXXXXXXXX.
"Fund F" means XXXXXXXXXX.
"Fund G" means XXXXXXXXXX.
"Fund H" means XXXXXXXXXX.
"Fund I" means XXXXXXXXXX.
"Fund J" means XXXXXXXXXX.
"Fund K" means XXXXXXXXXX.
"NTN Group of Funds" means the XXXXXXXXXX.
"XXXXXXXXXX X Units" means the XXXXXXXXXX Units.
"XXXXXXXXXX Y Units" means the XXXXXXXXXX Units.
Manageco deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Services Office/Tax Centre. Funds A to K file, or will file, their returns at the XXXXXXXXXX Tax Centre and deal, or will deal with, the XXXXXXXXXX Tax Services Office.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
FACTS
1. Funds A to K are part of a group of XXXXXXXXXX mutual funds known as the NTN Group of Funds, which mutual funds reflect a variety of investment objectives. XXXXXXXXXX.
2. Each of Funds A to K (collectively, the "Funds", individually, the "Fund") was established by XXXXXXXXXX and is or is expected to be an open-end "mutual fund trust" as defined in subsection 132(6). Funds G to J are new funds which were created in XXXXXXXXXX and Fund K is a new fund which was created in XXXXXXXXXX.
3. The trustee for each of the Funds is Manageco which is a "taxable Canadian corporation" as defined in subsection 89(1). Manageco also acts as the investment manager for some of the Funds. In addition, under management agreements between Manageco and each Fund, Manageco provides management services to each Fund for a fee and, as such, is responsible for providing or arranging for the day-to-day business administration of the Funds. Manageco is the principal distributor of the Funds and under distributorship agreements between Manageco and each Fund, Manageco is responsible for marketing and distributing units of the Funds.
4. XXXXXXXXXX, each of the Funds is authorized to issue XXXXXXXXXX units, issuable in XXXXXXXXXX. Each Fund is authorized to issue an unlimited number of units XXXXXXXXXX. Manageco, as trustee, is entitled to create, determine the attributes of and authorize for issue one or more new XXXXXXXXXX units for each Fund. Each of Funds A to F (the "Group 1 Funds") currently offers two XXXXXXXXXX units, namely, XXXXXXXXXX X Units and XXXXXXXXXX Y Units. Each of Funds H to K (the "Group 2 Funds") offers XXXXXXXXXX X Units and in accordance with its XXXXXXXXXX has created XXXXXXXXXX Y Units but no XXXXXXXXXX Y units are currently offered to investors. Fund G, similar to the Group 2 Funds, offers XXXXXXXXXX X Units and in accordance with its XXXXXXXXXX has created XXXXXXXXXX Y Units. Fund G has recently issued XXXXXXXXXX Y Units to one investor.
5. Unitholders purchasing XXXXXXXXXX X Units of the Funds may either pay a negotiable up-front commission to their investment dealers at the time of the purchase or pay a redemption fee if their units are redeemed within XXXXXXXXXX years from the time of purchase. In either case, Manageco will pay the investment dealer a trailing commission based on a percentage of the value of XXXXXXXXXX X Units held by the unitholder.
6. Unitholders purchasing XXXXXXXXXX Y Units of the Funds generally make their purchase without paying any up-front commission or redemption fee. Manageco does not pay trailing commissions to investment dealers in connection with the XXXXXXXXXX Y Units.
7. The XXXXXXXXXX for each of the Funds provides that each XXXXXXXXXX units of a Fund are fully paid and non-assessable when issued. In addition, each XXXXXXXXXX units of a Fund ranks equally with the other XXXXXXXXXX the Fund in the payment of distributions (other than management fee distributions, described in 11 below) and return of capital in the event of liquidation, dissolution or winding-up of the Fund, based on the relative net asset value of XXXXXXXXXX. Each unitholder of a whole unit is entitled to one vote at all meetings of the Fund, except meetings at which unitholders of another XXXXXXXXXX units are entitled to vote separately XXXXXXXXXX.
8. XXXXXXXXXX X Units of the Funds are offered for sale XXXXXXXXXX to Canadian residents XXXXXXXXXX Y Units of the Group 1 Funds are offered for sale XXXXXXXXXX to eligible Canadian resident XXXXXXXXXX.
9. An additional distinction between the XXXXXXXXXX X Units and the XXXXXXXXXX Y Units of a Fund is the Fund expenses allocated XXXXXXXXXX . Certain expenses of a Fund are attributable only to XXXXXXXXXX particular XXXXXXXXXX units of the Fund and include XXXXXXXXXX Any other expenses incurred by a Fund that are not allocable to XXXXXXXXXX particular XXXXXXXXXX are borne proportionately by all unitholders of the Fund ("Common Expenses").
10. The management fee charged by Manageco pursuant to the management agreement between Manageco and each Fund is a specified annual percentage of the average daily net asset value of XXXXXXXXXX units of each such Fund. The management fees payable by the Funds for XXXXXXXXXX X Units range from XXXXXXXXXX% to XXXXXXXXXX% annually and for XXXXXXXXXX Y Units range from XXXXXXXXXX% to XXXXXXXXXX% annually. The management fee is computed daily and payable monthly.
11. To encourage holdings of Fund units by groups, XXXXXXXXXX, Manageco occasionally negotiates a reduction of the effective management fee payable by such XXXXXXXXXX investors. The goal of such reduced fee arrangements is to achieve fees that are competitive
XXXXXXXXXX.
12. Under XXXXXXXXXX for each Group 1 Fund and Fund G, XXXXXXXXXX X Units may be reclassified as XXXXXXXXXX Y Units of the same Fund if the unitholder of the XXXXXXXXXX X Units subsequently satisfies the XXXXXXXXXX Y Criteria and requests this reclassification. However, under the XXXXXXXXXX for each Group 2 Fund, the reclassification of XXXXXXXXXX X Units of a Group 2 Fund to XXXXXXXXXX Y Units of the same Fund may only occur commencing with the offering by such Fund of the XXXXXXXXXX Y Units. At the time of such reclassification, the aggregate net asset value of the XXXXXXXXXX X Units of a Fund and the aggregate net asset value of the XXXXXXXXXX Y Units into which they are reclassified will be equal. In addition, the XXXXXXXXXX provide that Manageco may require XXXXXXXXXX Y Units to be reclassified as XXXXXXXXXX X Units if the unitholder of such XXXXXXXXXX Y Units ceases to meet the XXXXXXXXXX Y Criteria. At the time of such reclassification, the aggregate net asset value of the XXXXXXXXXX Y Units of the Fund to be reclassified and the aggregate net asset value of the XXXXXXXXXX X Units into which they are reclassified will be equal. Other than as described above, the rights, privileges, restrictions and conditions of the XXXXXXXXXX X Units are substantially the same as those of the XXXXXXXXXX Y Units and, on any reclassification, a unitholder will not be entitled to proceeds of disposition and the reclassified units will not be redeemed or cancelled upon any reclassification. This reclassification feature of the Group 1 Funds was the subject of the previously mentioned ruling.
13. Under XXXXXXXXXX, each Fund is required to distribute at the end of a taxation year to its unitholders in XXXXXXXXXX the Fund the amount, if any, by which its net income and realized capital gains (net of any realized capital losses of the Fund in such year or prior years) exceed any non-capital loss of the Fund XXXXXXXXXX each computed in accordance with the relevant provisions of the Act. The portion of the distribution to which XXXXXXXXXX units of a Fund is entitled is determined by taking its proportionate share of XXXXXXXXXX income of the Fund
XXXXXXXXXX.
14. Units of XXXXXXXXXX each Fund are issued or redeemed at their respective net asset values.
XXXXXXXXXX.
PROPOSED TRANSACTIONS
15. Manageco proposes to amend the XXXXXXXXXX for each Fund to create and offer for investment a new XXXXXXXXXX units (the "New XXXXXXXXXX Units") for each of the Funds. The New XXXXXXXXXX Units will be offered to Canadian residents by way of XXXXXXXXXX.
16. The New XXXXXXXXXX Units are designed for unitholders
XXXXXXXXXX.
17. Manageco will not pay trailing commissions to Investment Dealers on New XXXXXXXXXX Units. As a result, Manageco will have lower distribution costs for the New XXXXXXXXXX Units and therefore is in a position to charge a lower management fee to the Fund for the New XXXXXXXXXX Units. It is anticipated that the management fee for New XXXXXXXXXX Units will range from XXXXXXXXXX% to XXXXXXXXXX% annually. Accordingly, XXXXXXXXXX Expenses of a Fund referable to its New XXXXXXXXXX Units may be different thanXXXXXXXXXX Expenses of the Fund referable to its XXXXXXXXXX X and XXXXXXXXXX Y Units. The XXXXXXXXXX for each of the Funds will authorize a Fund to pay XXXXXXXXXX distributions with respect to the New XXXXXXXXXX Units. However, the Funds do not intend to pay such distributions at this time.
18. The XXXXXXXXXX for each Fund will also be amended to provide that if a unitholder no longer XXXXXXXXXX, the New XXXXXXXXXX Units of the Fund held by the unitholder will be reclassified into XXXXXXXXXX X Units of such Fund upon the receipt by Manageco (within a certain time period (the "Notice Period")) of instructions from the unitholder requesting such reclassification. At the time of such reclassification, the aggregate net asset value of the New XXXXXXXXXX Units of the Fund to be reclassified and the aggregate net asset value of the XXXXXXXXXX X Units into which they are reclassified will be equal. A unitholder will not be entitled to proceeds of disposition upon any reclassification and the reclassified units will not be redeemed or cancelled upon any reclassification. In the absence of such instructions, the Fund will automatically redeem the New XXXXXXXXXX Units at the end of the Notice Period for an amount equal to their net asset value.
19. In addition, it is proposed that the XXXXXXXXXX for each Fund be amended to provide specifically that XXXXXXXXXX X Units of a Fund may be reclassified as New XXXXXXXXXX Units of such Fund if certain criteria are met. XXXXXXXXXX. At the time of such reclassification, the aggregate net asset value of the XXXXXXXXXX X Units of the Fund to be reclassified and the aggregate net asset value of the New XXXXXXXXXX Units into which they are reclassified will be equal. A unitholder will not be entitled to proceeds of disposition upon any reclassification and the reclassified units will not be redeemed or cancelled upon any reclassification. This reclassification feature will be in addition to the existing reclassification feature of XXXXXXXXXX X Units under the XXXXXXXXXX for each Fund relating to the reclassification of XXXXXXXXXX X Units into XXXXXXXXXX Y Units and vice versa.
20. Other than the rights, privileges, restrictions and conditions described above, the rights, privileges, restrictions and conditions of the New XXXXXXXXXX Units will be substantially the same as those of each existing XXXXXXXXXX units of each Fund.
21. In addition, Manageco proposes to offer XXXXXXXXXX Y Units of each of the Group 2 Funds to new investors by way of a XXXXXXXXXX , a copy of which was enclosed with the ruling request. Commencing with such offering, XXXXXXXXXX X Units of a Group 2 Fund may be reclassified as XXXXXXXXXX Y Units of the same Fund, or vice versa, as described in 12 above.
22. Each Fund will continue to be responsible for the payment of its expenses and XXXXXXXXXX units of each Fund, including the New XXXXXXXXXX Units and XXXXXXXXXX Y Units of the Group 2 Funds, will continue to bear its XXXXXXXXXX Expenses and its share of Common Expenses XXXXXXXXXX.
23. The net asset value of XXXXXXXXXX units of a Fund, including the New XXXXXXXXXX Units and XXXXXXXXXX Y Units of the Group 2 Funds, will be computed separately for each XXXXXXXXXX which there are units outstanding in accordance with the terms of the XXXXXXXXXX, and the unitholders of XXXXXXXXXX, including New XXXXXXXXXX Units and XXXXXXXXXX Y Units of the Group 2 Funds, will continue to be allocated distributions as described above.
PURPOSE OF PROPOSED TRANSACTIONS
24. The purpose of the proposed transactions is to permit Manageco to more effectively market the Funds to different segments of the investor market and to tailor the fees and expenses applicable to such segments by offering a separate XXXXXXXXXX units of each such Fund.
RULINGS GIVEN
Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:
A. Unitholders of a Group 2 Fund whose XXXXXXXXXX X Units are reclassified as XXXXXXXXXX Y Units of the same Fund or whose XXXXXXXXXX Y Units are reclassified as XXXXXXXXXX X units of the same Fund, both as described in 21 above, will not be considered to have disposed of their units by virtue only of such reclassification.
B. Unitholders of a Fund whose New XXXXXXXXXX Units are reclassified as XXXXXXXXXX X Units of the same Fund as described in 18 above, or unitholders of a Fund whose XXXXXXXXXX X Units are reclassified as New XXXXXXXXXX Units of the same Fund as described in 19 above, will not be considered to have disposed of their units by virtue only of such reclassification.
C. Existing unitholders of a Fund will not be considered to have disposed of their units by virtue only of the implementation of the proposed transaction described in 15 above.
D. In computing its income for a taxation year, each Fund will be entitled to deduct, under paragraph 104(6)(b), the amount of Fund income (including taxable capital gains) that is paid or payable by the Fund to unitholders of the Fund in such taxation year pursuant to the amended XXXXXXXXXX governing the Fund and the provisions of subsection 104(7.1) will not apply to the Fund by virtue only of the implementation of the proposed transactions.
E. The amount of Fund income (including taxable capital gains) that is paid or payable to a unitholder in a taxation year will be included in computing the income of that unitholder under paragraph 104(13)(a).
F. Subsection 245(2) will not be applied to redetermine the tax consequences of the rulings given above solely as a result of the implementation of the proposed transactions described herein.
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) provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act, which if enacted into law, could have an effect on the rulings provided herein.
The above rulings should not be construed as providing the CCRA's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.
OPINION GIVEN
In our opinion, based on the information provided in 12 above, unitholders of Fund G whose XXXXXXXXXX X Units are reclassified as XXXXXXXXXX Y Units of Fund G or whose XXXXXXXXXX Y Units are reclassified as XXXXXXXXXX X units of Fund G would not be considered to have disposed of their units by virtue only of such reclassification.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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