CRA may require the dismantling of an exchangeable unit structure on conversion of a REIT to a closed-end fund

Similarly to 2011-0410181R3, CRA gave opinions rather than rulings on the application of the s. 108(2)(b) tests following the conversion of an open-end REIT into a closed-end one.  The ruling letter states that special voting units were removed from the Declaration of Trust "to ensure that Trust can satisfy the criteria under subparagraph 108(2)(b)(vi)" (which provides that "the units" of a trust which satisfies the 80% asset test through holding Canadian real property must be listed).  Any proposition that this was necessary is questionable, as special voting "units" represent contractual voting rights rather than any beneficial interest in the property of the trust.  In this case, it may not have been a big deal as no special voting units (or corresponding exchangeable units in a subsidiary LP) happened to be outstanding.

The conversion is occurring in order that the trust can issue preferred units.  CRA's "preliminary" view is that a "reclassification" at the holder's option of Series A (fixed rate) prefs as Series B (floating rate) prefs, or vice versa, will be a taxable disposition.  This also may be overly form-driven.  Essentially, from the outset the holder of a beneficial interest in the trust has some modest choice as to the type of distribution it will receive.

Unlike 2011-0410181R3 and 2010-0361771R3, the redacted ruling does not specify that the same proportionate allocations of income will be made on preferred and ordinary units (which significantly eases the s. 104(7.1) analysis) – but this likely was in the redacted bits.

Neal Armstrong.  Summaries of 2012 Ruling 2011-0429611R3 under s. 108(2)(b), s. 248(1) - disposition and s. 104(7.1).