2010 Ruling 2009-0343201R3 - Trust Conversion to Corporation

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: Is the Trust conversion to corporate form acceptable?

Position: YES

XXXXXXXXXX 							2009-034320

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Trust")
XXXXXXXXXX ("ACo")

This is in reply to your letter of XXXXXXXXXX wherein you request an advance income tax ruling on behalf of the above-named taxpayers.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request herein is:

(i) in a return of the Trust, ACo or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Trust, ACo or a related person;

(iii) under objection by the Trust, ACo or a related person;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the CRA to the Trust or ACo, or a related person, XXXXXXXXXX ; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, all statutory references are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.l, as amended to the date of this letter (the "Act"). Throughout this letter, the singular should be read as plural and vice versa where the circumstances so require. All monetary references herein are to Canadian dollars.

Definitions:

In this letter, the following terms are defined as follows:

(a) XXXXXXXXXX

(b) "ACo" means XXXXXXXXXX , a Taxable Canadian Corporation all of the shares of which are owned by LP;

(c) "ACo Debt" means the receivable of LP and liability of ACo in respect of the debt owing from ACo to LP with a principal amount of approximately $XXXXXXXXXX

(d) "ACo Receivable" means the receivable of Trust and liability of ACo in respect of the debt owing from ACo to Trust with a principal amount of approximately $XXXXXXXXXX ;

(e) "ACo Share" means a voting common share in the capital of ACo;

(f) "AmalCo A" means the corporation that will result from the Amalgamation of NewCo and GPCo pursuant to the Plan of Arrangement as set forth in 25 below;

(g) "AmalCo B" means the corporation that will result from the Amalgamation of AmalCo A and ACo pursuant to the Plan of Arrangement as set forth in 26 below;

(h) "Amalgamation" means the amalgamation pursuant to the Plan of Arrangement of two Taxable Canadian Corporations to form one corporate entity in such a manner that all of the property and liabilities of the predecessor corporations will become the property and liabilities of the new corporation and all of the shareholders (except any predecessor corporation) that own shares of any predecessor corporation will receive shares of the new corporation as a result of the merger as contemplated under subsection 87(1) of the Act;

(i) "CRA" means the Canada Revenue Agency;

(j) "Effective Date" means the effective date of the Plan of Arrangement;

(k) "Election 1" means the first election described in 18 below;

(l) "Election 2" means the second election described in 18 below;

(m) "Exchangeable LP Unit" means an interest in the income and capital of LP issued pursuant to the LP Agreement that also includes a right to exchange such units for Trust Units as set forth in the LP Agreement;

(n) "Exchangeable LP Unitholders" means the holders of Exchangeable LP Units;

(o) "FMV" means fair market value;

(p) "GAAR" means the general anti-avoidance rule under section 245 of the Act;

(q) "GPCo" means XXXXXXXXXX ., a Taxable Canadian Corporation incorporated under the XXXXXXXXXX being the general partner of LP, all of the shares of which are owned by the Trust;

(r) "GPCo Shares" means the voting common shares in the capital of GPCo;

(s) "Indenture" means the declaration of trust dated XXXXXXXXXX made by the initial Trustees of Trust and the initial Trust Unitholder of Trust that, among other things, established Trust and specifies the terms and conditions under which all property of Trust and any income and gains therefrom, are held and administered for the benefit of the Trust Unitholders;

(t) "LP" means XXXXXXXXXX , a limited partnership formed under the laws of XXXXXXXXXX pursuant to the LP Agreement;

(u) "LP Agreement" means the written limited partnership agreement dated XXXXXXXXXX entered into among the Exchangeable LP Unitholders and Trust as limited partners of LP, and GPCo as its general partner;

(v) "LP Receivable" means the receivable of Trust and liability of LP in respect of the debt owing from LP to Trust, the principal amount of which is currently estimated to be $XXXXXXXXXX , which is equal to the amount for which the current amount of this obligation was issued;

(w) "LP A Unit" means an interest in the LP's capital and income issued to Trust pursuant to the terms of the LP Agreement;

(x) "mutual fund trust" has the meaning assigned by subsection l32(6) of the Act;

(y) "NewCo" means a Taxable Canadian Corporation to be incorporated under the XXXXXXXXXX , as described in 14 below;

(z) "NewCo Share" means a voting common share of NewCo;

(aa) XXXXXXXXXX

(bb) "Plan of Arrangement" means the court approved plan of arrangement pursuant to the XXXXXXXXXX that will govern those transactions outlined in 16 to 26 below;

(cc) XXXXXXXXXX

(dd) "Proposed Transactions" means those transactions and events described in 14 to 26 below;

(ee) "Public Corporation" has the meaning assigned by subsection 89(1) of the Act;

(ff) "Regulations" means the Income Tax Regulations;

(gg) "SubCo" means the corporation incorporated under the XXXXXXXXXX as set forth in 15 below;

(hh) "SubCo Note" means the note payable as set forth in 19 below that evidences the receivable of LP and liability of SubCo;

(ii) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act;

(jj) "Trust" means XXXXXXXXXX , a trust created and governed under the laws of the Province of XXXXXXXXXX and formed pursuant to the Indenture;

(kk) "Trustees" means the trustees of the Trust as appointed pursuant to, and governed by, the Indenture;

(ll) "Trust Liabilities" means the various liabilities of the Trust totalling approximately $XXXXXXXXXX ;

(mm) "Trust Unit" means a trust unit of the Trust, each such unit representing an equal fractional undivided beneficial interest in any distributions from the Trust and in any net assets of the Trust in the event of termination of the Trust;

(nn) "Trust Unitholder" means a holder of a Trust Unit; and

(oo) "TSX" means Toronto Stock Exchange.

Facts:

1. The Trust is an open-ended trust established under the laws of the Province of XXXXXXXXXX pursuant to the Indenture.

2. The Trust is a mutual fund trust and would, but for the application of subsection 122.1(2) of the Act be a "SIFT Trust" as that term is defined in subsection 122.1(1) of the Act. The Trust Units are publicly traded and listed on the XXXXXXXXXX . Based upon the five-day weighted average trading price of the Trust Units on the XXXXXXXXXX , the aggregate FMV of the Trust Units as at XXXXXXXXXX was approximately $XXXXXXXXXX . The Trust Units are widely held and there is no person or identifiable group of persons that controls the Trust.

3. The Trust's property consists of:

(a) a XXXXXXXXXX % interest in LP, by virtue of the Trust holding all of the LP A Units;
(b) all of the shares of GPCo;
(c) the ACo Receivable and the LP Receivable; and
(d) cash not in excess of $XXXXXXXXXX .

4. The cost amount to the Trust of the ACo Receivable and the LP Receivable is equal to the principal amount of each such obligation.

5. The Indenture provides that at all times there will be XXXXXXXXXX Trustees. The current Trutees are XXXXXXXXXX individuals, each of whom deals at arm's length with each other and with the Trust.

6. LP is a limited partnership formed pursuant to the laws of the Province of XXXXXXXXXX .

7. LP's property consists of:

(a) the ACo Shares;
(b) the ACo Debt; and
(c) nominal amounts of cash and accounts receivable.

8. The ACo Debt is held as capital property by LP, the principal amount of which is materially greater than its FMV. The ACo Debt is a commercial obligation and a commercial debt obligation issued by ACo, both as defined in subsection 80(1) of the Act. The cost amount of the ACo Debt to LP is equal to the principal amount of the ACo Debt.

9. Since XXXXXXXXXX , the partners of LP have been the Trust, GPCo and Exchangeable LP Unitholders. The Trust is a limited partner and owns all of the LP A Units. GPCo owns a nominal interest and acts as general partner. The Exchangeable LP Unitholders are limited partners that own Exchangeable LP Units. Exchangeable LP Units have been exchanged for Trust Units by various Exchangeable LP Unitholders from time to time. Each Exchangeable LP Unitholder is a person that deals at arm's length with GPCo and the Trust.

10. ACo is a Taxable Canadian Corporation, all of the shares of which are owned by LP. ACo, directly and indirectly through various lower tier subsidiaries and partnerships, carries on a XXXXXXXXXX business in Canada and in the United States.

11. In addition to the ACo Debt and the ACo Receivable, ACo owes approximately $XXXXXXXXXX to a group of arm's length lenders under various debt facilities.

12. ACo is expected to generate a loss of approximately $XXXXXXXXXX in respect of its current taxation year. ACo also has approximately $XXXXXXXXXX of net capital losses carried forward.

13. The taxation year of each of the Trust, ACo, GPCo and LP ends on XXXXXXXXXX .

Proposed Transactions:

14. The Trust will cause a new corporation ("NewCo") to be incorporated under the XXXXXXXXXX and will subscribe for XXXXXXXXXX NewCo Shares for $XXXXXXXXXX .

15. ACo will incorporate a new corporation ("SubCo") pursuant to the XXXXXXXXXX and will subscribe for XXXXXXXXXX common shares of SubCo for $XXXXXXXXXX .

The Plan of Arrangement will provide that the transactions described in 16 through 24 below will occur in the following order commencing at XXXXXXXXXX on the Effective Date and that the Amalgamations described in 25 and 26 will not occur until the day after the Effective Date.

16. The Trust will transfer its LP A Units, shares of GPCo, the ACo Receivable, the LP Receivable, and any other property owned by it to NewCo in consideration of NewCo assuming the Trust Liabilities and issuance of that number of NewCo Shares that is equal to XXXXXXXXXX less than the total number of outstanding Trust Units.

17. The Trust will distribute its only property, being the NewCo Shares, to the Trust Unitholders in exchange for their Trust Units on a XXXXXXXXXX basis, whereupon the Trust Units will be cancelled and immediately following this transaction, the Trust will be terminated and cease to exist.

18. Immediately after the distribution of the NewCo Shares by the Trust there will be at least XXXXXXXXXX persons, other than insiders, each of whom holds at least XXXXXXXXXX NewCo Shares having an aggregate FMV of not less than $XXXXXXXXXX and insiders of the corporation will not hold more than XXXXXXXXXX % of the issued and outstanding NewCo Shares. Prior to the Amalgamation described in 25 below, NewCo will elect ("Election 1") to be a public corporation by filing with the CRA (i) the prescribed form; (ii) a certified copy of the directors' resolution authorizing the election to be made; and (iii) the statutory declaration described in paragraph 4800(4)(d) of the Regulations. The NewCo Shares will be the class of shares designated in this election. In addition, in its tax return for its first taxation year, NewCo will elect to be deemed to have been a public corporation from the beginning of that year ("Election 2"). Since the filing deadline for this latter election is after the two Amalgamations described in 25 and 26 below, it will be filed by AmalCo B.

19. LP will transfer all of its rights and interest in the ACo Debt to SubCo in consideration for issuance by SubCo of a demand non-interest bearing note payable by SubCo ("SubCo Note") to LP which note will have a principal amount equal to the FMV of the ACo Debt, which amount is anticipated to be materially less than the principal amount of the ACo Debt.

20. SubCo will be wound-up into ACo pursuant to the XXXXXXXXXX and the ACo Debt will be settled without any payment being made by ACo. Also, ACo will become the debtor in respect of the SubCo Note and as a result will be indebted to LP in an amount equal to the principal amount thereof. ACo will elect, in prescribed form and within the time referred to in paragraph 80.01(4)(c) of the Act, to have the rules in subsection 80.01(4) of the Act apply with respect to the settlement of the ACo Debt as a result of the winding-up of SubCo. Since the filing deadline for this election is after the two Amalgamations described in 25 and 26 below, it will be filed by AmalCo B.

21. The Exchangeable LP Unitholders will transfer their Exchangeable LP Units to NewCo in consideration for NewCo Shares on the basis of one NewCo Share for each Trust Unit into which the Exchangeable LP Units were exchangeable immediately prior to the Effective Date, and such Exchangeable LP Unitholders will be given the option of making a joint election with Newco under section 85 in respect of this transfer.

22. LP will assign that portion of the SubCo Note that has a FMV equal to the principal amount of the LP Receivable to NewCo as full payment of the LP Receivable and the LP Receivable will be settled at this time.

23. LP will be wound-up and the liabilities of LP will be assumed by NewCo and GPCo and undivided interests in LP's property (including the ACo Shares and the portion of the SubCo Note that was not assigned to NewCo) will be distributed to NewCo and GPCo.

24. The paid-up capital of the GPCo Shares and the ACo Shares will be reduced to $XXXXXXXXXX without payment.

25. GPCo will Amalgamate with NewCo to form AmalCo A.

26. ACo will Amalgamate with AmalCo A to form AmalCo B.

Purpose of the Proposed Transactions:

27. The Trust Unitholders and Exchangeable LP Unitholders wish to convert the Trust into corporate form (i.e., AmalCo B) and for the underlying structure of AmalCo B to be simplified, inter alia, through the elimination, by way of wind-up or Amalgamation, as the case may be, of GPCo, LP and ACo, and the corresponding settlement of the ACo Debt, the ACo Receivable, and the LP Receivable.

Rulings Given

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions were completed in the manner described above, we rule as follows:

A. Paragraph 40(2)(e.1) of the Act will apply to deem any capital loss realized by LP on the disposition by it of the ACo Debt to SubCo to be nil. The amount of any capital loss otherwise realized on the disposition which is deemed to be nil is referred to herein as the "Denied Loss".

B. The amount of the Denied Loss will be added in computing the adjusted cost base of the ACo Debt to SubCo pursuant to paragraph 53(1)(f.11) of the Act so that the cost amount to SubCo of the ACo Debt will be equal to the principal amount of such indebtedness.

C. Provided that AmalCo B, as successor to ACo by virtue of the Amalgamation outlined herein, files the prescribed election in the prescribed form and within the time prescribed by subsection 80.01(4) of the Act, subsection 80.01(4) of the Act will apply to deem the ACo Debt owing by ACo to SubCo immediately prior to the winding-up ("that time") of SubCo to have been settled by payment of an amount equal to the amount that would be the cost amount to SubCo of the ACo Debt at that time if the definition of cost amount was given the meaning set out in subsection 80.01(4) of the Act.

D. Provided that the fair market value of the portion of the SubCo Note that is assigned to NewCo as full repayment of the LP Receivable is equal to the principal amount of the LP Receivable, no "forgiven amount" within the definition of that term in subsection 80(1) of the Act will arise as a result of this repayment.

E. Provided NewCo files the prescribed election in prescribed form on the Effective Date and subsequently AmalCo B files, as successor to NewCo by virtue of the Amalgamation outlined herein, the election described in the postamble of the definition of "public corporation" in subsection 89(1) with NewCo's tax return for its first taxation year, both as described in 18 above, NewCo will be a "public corporation" for purposes of the Act at the time the Trust distributes the NewCo Shares to the Trust Unitholders in exchange for Trust Units.

F. Subsection 245(2) of the Act will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 issued by the CRA and are binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not to the Act.

This letter is based solely on the facts and Proposed Transactions described above. The documentation submitted with your request does not form part of the facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions; nor

(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

Yours truly,

XXXXXXXXXX
For Director,
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch