31 May 1983 Income Tax Severed Letter RRR15 - Tax implications of setting up a pooled fund trust in the United States

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.

XXX

We reply to your letter of April 29 regarding the proposed establishment of a pooled fund trust in the United States.

From your letter we understand that the following registered pends on plans are enacted for employees of the XXX

XXX

Each pension trust holds foreign property as defined by subsection 20(2) of the Income Tax Act most of which is common shares trade on U.S. stock exchanges. Dividend on these shares attract 15% withholding tax. We understand that this tax can be avoided if the shares are owned by a U.S. trust which applies the dividends to pay pensions to residents of Canada. You advised us that if this withholding is avoided the average annual yield benefit to the trusts on their foreign property holding will be about 60 basis points (0.6%).

The proposal is that the plans will transfer some or all of their foreign property to a pooled fund trust (pooled fund) in exchange for its units. The pooled fund will be established in the United States under a U.S. trustee. XXX may also acquire units of the pooled fund. You provided us with a copy of the proposed trust agreement.

Income of the pooled fund will be allocated to units monthly. Income allocated to units held by XXX shall be distributed solely for the payment of pensions to Canadian resident beneficiaries of those pension plans. Income allocated to units held by XXX shall be applied to purchase additional units at their values at that time although, on the request of the trustee on XXX as the case may be, the income shall not be applied to purchase additional units but shall be distributed to an account maintained in Canada by the trustee for XXX or by XXX.

In these circumstances it is our opinion that

A) the transfer of investments by XXX to the pooled fund in exchange for units of the pooled fund does not constitute the payment of a superannuation or pension benefit within paragraph 212(1)(h) of the Act. We see the transaction as the acquisition of units of a non-resident trust and the settlement of the amount payable for the units by a payment in kind. Accordingly subsection 215(1) will not apply.

B) subsection 206(1) of the Act does not apply to the pooled fund since it is none of the entities described in section 205;

C) units of the pooled fund will constitute foreign property within paragraph 206(2)(h) of the Act to XXX and

D) the reference in each of paragraphs 206(1)(a) and 206(1)(b) of the Act to "... the fair market value at the time of its acquisition by a taxpayer ..." is to the fair market value of the units of the pooled fund at the time of their acquisition by RILA, RAPA or APP and not to the fair market values of the underlying investments of the pooled fund. On the other hand it seems to us that at the outset there will not be, in fact, much difference in value since the initial issuance of units by the pooled fund trust will occur at the time the pooled fund acquires its initial properties from the plans.