2010 Ruling 2009-0350481R3 - Reorganization of a REIT

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.

Principal Issues: Rulings (1) Whether the settlement of some debts will result in a "forgiven amount" as defined in subsection 80(1), (2) Will the transfer of Holding Trust assets to Trust B be a "qualifying disposition" within the meaning of subsection 107.4(1), (3) Whether the transfer of property from Trust B to the Fund will constitute a "qualifying exchange" in subsection 132.2(1), (4) Whether the proposed transaction will affect the Funds qualification as a mutual fund trust, (5) Whether 253.1 of the Act will apply, (6) Whether the proposed transactions cause the Fund to exceed the Normal Growth Guidelines as set out by the Dept. of Finance on December 15, 2006, (7 ) Whether the consolidation of the Fund units held by the unit holders will result in a disposition of the Fund units by the unit holders, (8) Whether subsection 245(2) will be applied to re-determine any of the tax consequences confirmed in the rulings given. Opinion: Whether proposed subsection 143.3(4) will apply for purposes of determining the forgiven amount in respect of the Holding Trust notes.

Position: Rulings (1) No, (2) Yes, (3) Yes, (4) No, (5) Yes, (6) No, (7) No, (8) No Opinion: No

Reasons: In compliance with the law

XXXXXXXXXX 							2009-035048

Attention: XXXXXXXXXX

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

RE: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling in respect of the above noted taxpayers. We also acknowledge correspondence of XXXXXXXXXX .

To the best of your knowledge and that of your client, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayers or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,
(iii) is under objection by the taxpayers or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or
(v) is the subject of a ruling previously issued by the Directorate to the taxpayers or a related person.

This document is based solely on the facts and Proposed Transactions described below. We have not reviewed any documentation related to your request and as a result, any reference to a document completed or to be completed in respect of the facts and Proposed Transactions is provided solely for the convenience of the reader.

Except as otherwise noted, all statutory references in this letter are references to the provisions of the Income Tax Act R.S.C 1985 (5th supp.) c.1, as amended (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. All references to a "Regulation" are references to a regulation promulgated under the Act. The following terms have the meaning specified:

(a) "AAA GP" means XXXXXXXXXX ;
(b) "AAA LP" means XXXXXXXXXX ;
(c) "CRA" means the Canada Revenue Agency;
(d) "Declaration of Trust" means the amended and restated declaration of trust dated XXXXXXXXXX governing the Fund, as it may be amended and restated from time to time;
(e) "Fund" means XXXXXXXXXX ;
(f) "Fund Unit" means a trust unit of the Fund with the terms and conditions described in Paragraph 4 below;
(g) "Holding Trust" means XXXXXXXXXX ;
(h) "Holding Trust Assets" means all of the assets owned by Holding Trust immediately prior to the transfer described in Paragraph 25 below, including without limitation, XXXXXXXXXX ;
(i) "Holding Trust Declaration of Trust" means the amended and restated declaration of trust dated XXXXXXXXXX governing Holding Trust, as it may be amended and restated from time to time;
(j) "Holding Trust Notes" means the unsecured subordinated notes of Holding Trust with an aggregate principal amount of approximately $XXXXXXXXXX , all of which are held by the Fund;
(k) "Holding Trust Unit" means a trust unit of Holding Trust with the terms and conditions described in Paragraph 9 below; and.
(l) "Management GP" means XXXXXXXXXX ;
(m) "Management LP" means XXXXXXXXXX ;
(n) "Normal Growth Guidelines" means the Guidance Provided on "Normal Growth" for Income Trusts and Other Flow-Through Entities issued in a press release by the Department of Finance on December 15, 2006 and revised in the Explanatory Notes relating to the Income Tax Act, the Excise Act, 2001 and the Excise Tax Act dated December 4, 2008, which guidelines are incorporated by reference in the SIFT Rules;
(o) "Paragraph" means a numbered paragraph in this advance income tax ruling request;
(p) "Proposed Transactions" means the transactions described in Paragraphs 19 to 37;
(q) "SIFT Rules" means the amendments to the Act enacted on June 22, 2007 and March 12, 2009 to modify the tax treatment of certain publicly-traded trusts that are specified investment flow-through trusts, their beneficiaries and certain partnerships that are specified investment flow-through partnerships and their partners;
(r) "SSS GPs" means, collectively, XXXXXXXXXX ;
(s) "SSS LPs" means, collectively, XXXXXXXXXX ;
(t) "Transfer Time" means the point in time at which the transfer of assets described in Paragraph 31 will occur and, for greater certainty, will be the transfer time referred to in the definition of "qualifying exchange" in subsection 132.2(2);
(u) "Trust B" means a trust to be formed under the laws of the Province of XXXXXXXXXX as described in Paragraphs 21 to 24 below; and
(v) "Trust B Units" means a trust unit of Trust B with the terms and conditions described in Paragraph 23 below.
Our understanding of the facts, Proposed Transactions and purpose of the Proposed Transactions is as follows:

Facts

1. The Fund is a XXXXXXXXXX and a mutual fund trust within the meaning of subsection 132(6). XXXXXXXXXX . The Fund has a XXXXXXXXXX year end for purposes of the Act.

2. The principal office of the Fund is located at XXXXXXXXXX . The Tax Services Office for the Fund is the XXXXXXXXXX Tax Services Office and the Tax Centre is the XXXXXXXXXX Tax Centre.

3. The Fund owns all of the issued and outstanding Holding Trust Units; the Holding Trust Notes; all of the issued and outstanding shares of Management GP, XXXXXXXXXX , XXXXXXXXXX , certain other companies that own no property other than legal title to real properties beneficially owned by the Fund and certain other companies which are inactive and are in the process of being dissolved or the shares of which will be transferred to Management LP prior to XXXXXXXXXX ; XXXXXXXXXX % of the limited partnership interests in XXXXXXXXXX ; and XXXXXXXXXX % of the limited partnership interests in XXXXXXXXXX .

4. Under the terms of the Declaration of Trust, the Fund may issue an unlimited number of Fund Units, each Fund Unit represents an equal interest in the Fund and all Fund Units participate pro rata in any distributions by the Fund and, in the event of termination of the Fund, in the net worth of the Fund. Each Fund Unit entitles the holder thereof to one vote at all meetings of Unitholders. The issued and outstanding Fund Units may be subdivided or consolidated from time to time by the trustees of the Fund.

5. Fund Units are widely held by the public, and to the knowledge of the trustees of the Fund, no person beneficially owns, directly or indirectly, or exercises control or direction over, more than XXXXXXXXXX % of the issued and outstanding Fund Units, other than XXXXXXXXXX , which owns XXXXXXXXXX % of the Fund Units on behalf of various client accounts. Fund Units are listed and traded on the XXXXXXXXXX Stock Exchange under the symbol XXXXXXXXXX .

6. The Fund was not established and has not been maintained primarily for the benefit of non-residents of Canada. All of the XXXXXXXXXX trustees of the Fund are individuals resident in Canada.

7. Holding Trust is an unincorporated open-ended trust established under the laws of the Province of XXXXXXXXXX that qualifies as a "unit trust" pursuant to paragraph 108(2)(a). XXXXXXXXXX . Holding Trust has XXXXXXXXXX employees and has a XXXXXXXXXX year end for purposes of the Act.

8. The principal office of Holding Trust is located at XXXXXXXXXX .

9. Under the terms of the Holding Trust Declaration of Trust, Holding Trust may issue an unlimited number of Holding Trust Units. Each Holding Trust Unit represents an equal undivided beneficial interest in any distribution from Holding Trust (whether of income, net realized capital gains or other amounts) and in any net assets of Holding Trust in the event of the termination or winding-up of Holding Trust. Each Holding Trust Unit is redeemable at the option of the holder and entitles the holder thereof to one vote at any meeting of holders of Holding Trust Units.

10. Holding Trust has XXXXXXXXXX individual trustees, XXXXXXXXXX of whom are resident in Canada.

11. Holding Trust owns a XXXXXXXXXX % limited partnership interest in Management LP, a XXXXXXXXXX % limited partnership interest in AAA LP, a XXXXXXXXXX % limited partnership interest in each of the SSS LPs and XXXXXXXXXX % of the issued and outstanding common shares in each of the SSS GPs.

12. Management LP was formed as a limited partnership under the laws of the Province of XXXXXXXXXX . Management GP, a direct, wholly-owned subsidiary of the Fund, is the general partner of Management LP. Management LP has a XXXXXXXXXX year end for purposes of the Act. Management GP owns a XXXXXXXXXX % general partnership interest in Management LP and Holding Trust owns a XXXXXXXXXX % limited partnership interest in Management LP.

13. Management LP provides property management services in respect of properties that are either wholly-owned by the Fund (or an entity in which the Fund holds a share or interest) or which are co-owned by the Fund (or an entity in which the Fund holds a share or interest) with an arm's length person.

14. The registered office of Management LP is located at XXXXXXXXXX . The federal business number of Management LP is XXXXXXXXXX .

15. AAA LP was formed as a limited partnership under the laws of the Province of XXXXXXXXXX . AAA GP, a direct, wholly-owned subsidiary of Management LP, is the general partner of AAA LP. AAA LP has a XXXXXXXXXX fiscal year end for purposes of the Act. AAA GP owns a XXXXXXXXXX % general partnership interest in AAA LP and Holding Trust owns a XXXXXXXXXX % limited partnership interest in AAA LP.

16. AAA LP owns XXXXXXXXXX . The registered office of AAA LP is located at XXXXXXXXXX . The federal business number of AAA GP is XXXXXXXXXX .

17. The SSS LPs were each formed as limited partnerships under the laws of the Province of XXXXXXXXXX . The SSS GPs are the respective general partners of the SSS LPs. Holding Trust owns a XXXXXXXXXX % limited partnership interest in each of the SSS LPs and XXXXXXXXXX % of the issued and outstanding common shares of each of the SSS GPs. The remaining limited partnership interest in each of the SSS LPs and the remaining common shares of each of the SSS GPs are owned by arm's length third parties. Each SSS LP has a fiscal period ending on XXXXXXXXXX for purposes of the Act.

18. The SSS LPs each own XXXXXXXXXX located in XXXXXXXXXX or XXXXXXXXXX . The registered office of each of the SSS LPs is located at XXXXXXXXXX . The federal business numbers of the SSS LPs are as set out on XXXXXXXXXX .

Proposed Transactions

19. The Holding Trust will issue Holding Trust Units to the Fund in satisfaction of the remaining outstanding principal amount of the Holding Trust Notes.

20. Following the issuance of Holding Trust Units described in Paragraph 19, the Holding Trust Notes will be settled and extinguished.

21. A Canadian resident third party settlor will settle Trust B with a nominal cash contribution in exchange for one Trust B Unit with the terms and conditions described in Paragraph 23.

22. The Fund will subscribe for Trust B Units for cash consideration. The initial Trust B Unit that will be issued to the third party settlor, as described in Paragraph 21, will be repurchased by Trust B for an amount equal to the cash received from the third party settlor.

23. Pursuant to the declaration of trust of Trust B, Trust B will be authorized to issue an unlimited number of Trust B Units with the following terms and conditions:

(a) each Trust B Unit will represent an equal undivided interest in Trust B;
(b) each Trust B Unit will participate pro-rata in any distributions;
(c) each Trust B Unit will participate pro-rata in the net assets of Trust B in the event of termination or winding-up of Trust B;
(d) each Trust B Unit will entitle the holder thereof to one vote at all meetings of holders of Trust B Units;
(e) each Trust B Unit will be redeemable at the option of Trust B for an amount equal to the fair market value of the Trust B Unit. The redemption price will be payable, at the option of Trust B, in cash or Fund Units; and
(f) each Trust B Unit will be redeemable at the option of the holder at fair market value. The redemption price will be payable, at the option of Trust B, in cash or Fund Units.

24. The declaration of trust of Trust B will provide that the only undertaking of Trust B will be activities described in paragraph 132(6)(b) and its terms will be substantially the same as the terms of the declaration of trust of Holding Trust such that the rights, privileges and conditions attached to the Trust B Units will be substantially the same as those attached to the Holding Trust Units. The trustee of Trust B will be an individual resident in Canada and will not be a director of Management GP.

25. Pursuant to an agreement to be entered into between Holding Trust and Trust B, immediately prior to the Transfer Time, Holding Trust will transfer all of the Holding Trust Assets to Trust B for no consideration. Holding Trust will not make the election in subparagraph 107.4(3)(a)(i). A written election will be filed by or on behalf of Trust B with the Minister within the time period specified in subparagraph (f)(v) of the definition "disposition" in subsection 248(1) that paragraph (f) will not apply to the transfer.

26. Following the transfer described in Paragraph 25, the Fund will own all of the Holding Trust Units and all of the Trust B Units and will continue to hold an indirect interest in all of the Holding Trust Assets by reason of its ownership of all of the Trust B Units. Holding Trust will then be wound-up.

27. The Fund will distribute a certain number of its Trust B Units acquired in Paragraph 22 to all of the Fund Unitholders on a pro-rata basis as a distribution of capital. The Fund will remit to the Receiver General, on behalf of each Fund Unitholder that is non-resident, an amount equal to the amount required by the Act to be withheld on behalf of that Fund Unitholder in respect of the return of capital, and will remit such amount to the Receiver General of Canada on behalf of that Fund Unitholder, pursuant to subsection 218.3(2), if applicable.

28. The Fund has obtained a prospectus and registration exemption under applicable securities legislation to allow for the distribution of the Trust B Units without the filing of a prospectus, registration statement or similar document.

29. The number of Trust B Units distributed by the Fund to the Fund Unitholders will be such that Trust B will satisfy all of the conditions to be a mutual fund trust pursuant to subsection 132(6) and section 4801 of the Regulations immediately after the distribution described in Paragraph 27. In particular, after the distribution, there will be at least XXXXXXXXXX unitholders of Trust B, each unitholder of Trust B will hold at least either XXXXXXXXXX Trust B Units, if the fair market value of each Trust B Unit is less than $XXXXXXXXXX , or XXXXXXXXXX Trust B Units, if the fair market value of each Trust B Unit is $XXXXXXXXXX or more but less than $XXXXXXXXXX , and the aggregate fair market value of the Trust Units held by each unitholder of Trust B will be at least $XXXXXXXXXX . The fair market value of each Trust B Unit will be less than $XXXXXXXXXX . For purposes of satisfying the requirements in section 4801 of the Regulations, the unitholders of Trust B would include groups of unitholders that collectively meet such requirements, as determined in accordance with subsections 4803(3) and 4803(4) of the Regulations.

30. An election will be filed by or on behalf of Trust B so that Trust B will be deemed to have been a mutual fund trust from the beginning of its first taxation year within the prescribed time specified in subsection 132(6.1).

31. Pursuant to an agreement to be entered into by the Fund and Trust B:

(a) Trust B will transfer all of the Holding Trust Assets acquired in the transaction described in Paragraph 25 (and any cash received from the Fund on its subscription for Trust B Units as described in Paragraph 22, to the extent such cash will not be required to fund expenses of Trust B) to the Fund at the Transfer Time; and
(b) as consideration for the transfer, the Fund will assume any outstanding liabilities of Trust B and issue Fund Units having an aggregate fair market value equal to the aggregate fair market value of the assets transferred to the Fund less any assumed liabilities.

32. At the Transfer Time, each of the Fund and Trust B will qualify as a mutual fund trust for purposes of the Act.

33. At the Transfer Time, Trust B will have no material outstanding liabilities and the only material assets of Trust B will be the Holding Trust Assets.

34. Within XXXXXXXXXX days after the Transfer Time, Trust B will redeem all of the issued and outstanding Trust B Units held by the Fund and the Fund Unitholders, except for one Trust B Unit which the Fund will hold until the wind-up of Trust B which will occur on or before XXXXXXXXXX . Trust B will satisfy the redemption price for such Trust B Units by transferring the Fund Units acquired in Paragraph 31. No consideration other than the Fund Units will be received by the Fund or the Fund Unitholders on the redemption of the Trust B Units. The Fund Units that will be received by the Fund upon the redemption of the Trust B Units will be cancelled upon receipt.

35. After the Transfer Time and on or before XXXXXXXXXX , Trust B will be wound-up. The one Trust B Unit held by the Fund will be cancelled on the wind-up for no consideration.

36. Immediately after the transactions described in Paragraph 34, the outstanding Fund Units held by the Fund Unitholders will be consolidated on a basis such that the number of Fund Units outstanding following such consolidation will be equal to the number of Fund Units outstanding immediately before the reorganization. No Fund Units will be cancelled or redeemed and the Fund Unitholders will not receive, and shall not be entitled to receive, any proceeds of disposition as a consequence of the consolidation.

37. An election will be filed by or on behalf of Trust B and the Fund, in prescribed form and within the prescribed time in paragraph (c) of the definition "qualifying exchange" in subsection 132.2(2), to have the rules in section 132.2 apply to the proposed transactions described in Paragraphs 31 through 34.

38. The Fund, as a limited partner of AAA LP, the SSS LPs, Management LP, XXXXXXXXXX and XXXXXXXXXX will not control or manage the business of AAA LP, the SSS LPs, Management LP, XXXXXXXXXX , and XXXXXXXXXX .

Purpose of the Proposed Transactions

39. The Proposed Transactions are intended to modify the current structure of the Fund to address issues that have arisen as a result of the current business environment and to ensure that the Fund will satisfy the definition "real estate investment trust" in subsection 122.1(1) of the Act before XXXXXXXXXX , such that the Fund will not be taxable under the SIFT Rules after XXXXXXXXXX . Since it is unclear whether the Fund would satisfy the "real estate investment trust" definition if it maintains its current structure, the Fund believes that the Proposed Transactions are necessary in order to remove any uncertainty regarding the status of the Fund as a "real estate investment trust".

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. The settlement of Holding Trust Notes, as described in paragraphs 19 and 20 above, will not result in the Holding Trust having a "forgiven amount" as defined in subsection 80(1), provided that the fair market value of the Holding Trust Units issued by the Holding Trust to the Fund in settlement of the Holding Trust Notes is not less than the remaining outstanding principal amount of the Holding Trust Notes so settled.

B. The transfer of the Holding Trust Assets by Holding Trust to Trust B, as described in paragraph 25 above, will be a "qualifying disposition" within the meaning of subsection 107.4(1), such that the rules in subsection 107.4(3) will apply to Holding Trust and Trust B in respect of such transfer.

C. Provided that:

(a) at the Transfer Time each of Trust B and the Fund is a mutual fund trust within the meaning of subsection 132(6);
(b) the property transferred by Trust B to the Fund at the Transfer Time pursuant to the agreement described in Paragraph 31 has an aggregate fair market value equal to at least XXXXXXXXXX % of the fair market value of all property owned by Trust B at the Transfer Time; and
(c) Trust B and the Fund jointly elect, in the prescribed form and within the prescribed time in paragraph (c) of the definition "qualifying exchange" in subsection 132.2(2);

the transactions described in Paragraphs 31 through 34 will constitute a "qualifying exchange" such that the rules in subsection 132.2(1) will apply to such transactions.

D The Proposed Transactions will not, in and by themselves, adversely affect the qualification of the Fund as a mutual fund trust within the meaning of subsection 132(6).

E Section 253.1 will apply in respect of the Proposed Transactions such that the Fund shall not be considered to be carrying on any business or other activity of Management LP, AAA LP or the SSS LPs for purposes of paragraph 132(6)(b) solely because of its acquisition and holding of its interest in Management LP, AAA LP and the SSS LPs, respectively.

F. The Fund will not be considered to have exceeded the Normal Growth Guidelines solely by reason of undertaking the Proposed Transactions such that the Fund will not be subject to the SIFT rules solely as a result of the Proposed Transactions. For greater certainty, and in accordance with the Normal Growth Guidelines, the reorganization of the Fund described herein will not be considered growth because there will be no net addition to the equity of the Fund as a result of the Proposed Transactions.

G. The consolidation of the Fund Units held by Unitholders, as described in Paragraph 36, will not in itself result in a disposition of Fund Units by the Unitholders.

H. Subsection 245(2) will not be applied to redetermine any of the tax consequences confirmed in the rulings given above solely as a result of the Proposed Transactions described herein.

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above. In particular, we express no opinion with respect to whether the Fund or Trust B is, at any particular time, a mutual fund trust within the meaning of subsection 132(6) or whether the Fund is, at any particular time, a real estate investment trust within the meaning of subsection 122.1(1).

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed within XXXXXXXXXX months from 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.

Opinion

Provided that our understanding of the facts and Proposed Transactions described herein are correct, it is our opinion:

A. Assuming that proposed subsection 143.3(4) is enacted in substantially the same form as proposed in the Notice of Ways and Means Motion to introduce an Act to amend the Income Tax Act released by the Minister of Finance on July 16, 2010 and provided that the fair market value at that time of the Holding Trust Units issued to the Fund does not exceed the remaining outstanding principal amount at that time of the Holding Trust Notes in satisfaction of which the Holding Trust issues the Holding Trust Units, as described in paragraph 19, proposed paragraph 143.3(4)(a) will not apply to reduce the amount paid in satisfaction of the principal amount of the Holding Trust Notes for purposes of determining the "forgiven amount", as defined in subsection 80(1), in respect of the Holding Trust Notes, and will therefore not affect ruling A.

In accordance with paragraph 22 of Information Circular 70-6R5, the comments in the immediately preceding paragraph A are only an expression of an opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CRA.

Yours truly,

XXXXXXXXXX
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch