CRA rules on the internal conversion of a MFC (a former non-MFC) into a MFT, and on ss. 107.4/132.2 eliminations of subtrusts

A mutual fund corporation is proposing to convert into a REIT.  First, it will settle a subtrust with modest assets, and distribute the units of the subtrust to its public shareholders, who thus will now hold assets of a "good" mutual fund trust ("REIT #1"), albeit with nominal assets.  Next, it will merge into REIT #1 under s. 132.2, so that REIT #1 is now the successor to substantially all its assets.  However, it will not be released under its covenant under convertible debentures, which will be assumed by REIT #1 only on an "internal" assumption (respecting which CRA gave a favourable s. 20(1)(c) ruling).

In order to get rid of a subtrust which now is an assets of REIT #1 (and which was the result of an earlier s. 248(1) – disposition, (f) consolidation of four predecessor subtrusts into one), there will be s. 107.4 transfers of all its assets to a new subtrust ("REIT #2"), followed by a distribution of its units by REIT #1 to the REIT #1 unitholders.  REIT #2 then will be merged into REIT #1 under s. 132.2.  The same steps will then be repeated for a lower-tier subtrust.  These steps are analogous to the numerous rulings for "Davis + Henderson"-style conversions of the corporate subsidiary of a REIT or income fund into a mutual fund corporation (essentially all of whose shares were held by the parent fund), with that mutual fund corporation then being merged into the fund under s. 132.2.

Other than a cryptic reference in the summary, the ruling letter is silent on the most interesting point: at some point in its past, the taxpayer was an "ordinary" taxable Canadian corporation rather than a MFC.

Neal Armstrong. Summary of 2013 Ruling 2011-0395091R3 ("MFC to MFT Conversion") under s. 132.2 – qualifying exchange.