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: Unit trusts propose to modify their trust indenture to maximize the distribution of the trusts' net capital gains to redeeming unitholders (capital gains will first be allocated to redeeming unitholders and then to the remaining unitholders). The rulings requested are:
A) The trust may deduct the taxable portion of the capital gains payable to a redeeming unitholder (104(6)(b)).
B) The taxable portion of the capital gain paid to a redeeming unitholder will be included in his income(104(13)).
C) The taxable portion of the capital gain paid to a redeeming unitholder will be deemed to be a taxable capital gain of the unitholder (104(21)).
D) The proceeds of disposition of the redeemed units will be equal to the excess of the net asset value of the units over the capital gains distribution in respect of those units.
E) 104(7.1) will not apply.
F) 245(2) will not apply.
Position: The Rulings are granted.
Reasons: Consistent with rulings previously issued. The amount allocated and declared payable is paid in the taxation year or is payable in the taxation year if not paid.
XXXXXXXXXX 2007-025755
XXXXXXXXXX , 2007
Dear Madam:
Re: Advance Income Tax Ruling
XXXXXXXXXX . - Tax Number XXXXXXXXXX (XXXXXXXXXX Tax Services Office and XXXXXXXXXX Taxation Centre)
XXXXXXXXXX - Tax Number XXXXXXXXXX
XXXXXXXXXX - Tax Number XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
a) dealt with in an earlier return of the taxpayers or a related person;
b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;
c) under objection by one or any of the taxpayers or a related person;
d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and
e) the subject of a ruling previously issued by this Directorate.
In this document, unless otherwise indicated, all statutory references are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended, the "Act")
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified:
"Distribution Date" in respect of a Fund, means the last business day of each Fiscal Year of the Fund and such other date or dates as may be specified by notice in writing by the Manager to the Trustee from time to time;
"Distribution Period" of a Fund means a period ending on a Distribution Date of the Fund and beginning immediately after the immediately preceding Distribution Date (or, in the case of the first Distribution Period of a Fund, upon the inception of the Fund);
"Fiscal Year" of a Fund means the fiscal year of the Fund ending on the XXXXXXXXXX in each year;
"Funds" means collectively and "Fund" means individually each of XXXXXXXXXX;
"Fund to be established" means XXXXXXXXXX;
"Manager" means XXXXXXXXXX;
"Trustee" means XXXXXXXXXX.
FACTS AND PROPOSED TRANSACTIONS
1. The Manager is a corporation incorporated under the laws of Canada established to provide asset management services. The Manager is a "taxable Canadian corporation" and a "private corporation" within the meaning of paragraphs 89(1)(i) and 89(1)(f), respectively, of the Act.
2. The head office and registered office of the Manager is XXXXXXXXXX.
3. The Manager acts as the manager of the Funds already established and will act as the Manager of the Fund to be established. Each of these Funds is or will be a "unit trust" within the meaning of paragraph 108(2)(a) of the Act. It is not currently expected that any of the Funds will be "mutual fund trusts" within the meaning of subsection 132(6) of the Act. The XXXXXXXXXX was created in XXXXXXXXXX and therefore has yet to be issued a tax account number. The Fund to be established, which will be modeled after the XXXXXXXXXX, will be established within the next year.
4. The Trustee, a trust company existing under the laws of Canada, acts as the trustee of the currently existing Funds and it is anticipated that it will also act as Trustee for the Fund to be established. Accordingly, each Fund is or will be resident in Canada for the purposes of the Act.
5. The Trustee is a taxable Canadian corporation within the meaning of the Act and is a trust company licensed to carry on the business of providing trust services in Canada. This business includes, among other things, establishing pooled investment trusts under the laws of Canada or a province thereof and acting as trustee thereof for the benefit of unitholders of such trusts.
6. The Manager and the Trustee have entered into various pooled fund trust agreements in order to establish standard terms and conditions (the "Standard Terms and Conditions") for funds as may be established from time to time at the direction of the Manager, including the Funds. Each existing Fund was established by the delivery by the Manager to the Trustee of a schedule relating to such Fund and the payment by the Manager or the initial unitholders of $XXXXXXXXXX or such other amount that represented not less than the initial offering price of units of the Fund as determined by the Manager.
7. Each Schedule, incorporating the pooled fund trust agreement, constitutes the "Trust Agreement" in respect of a Fund.
8. Each Trust Agreement provides or, in the case of the Fund to be established, will provide that the Fund shall be divided into an unlimited number of units. Each Trust Agreement provides or will provide that each unit shall participate rateably with other units, in accordance with the provisions of the Trust Agreement, in the distribution of net income and net taxable capital gains of a Fund (except with respect to net taxable capital gains of the Fund allocated on redemption of units) and, on liquidation, in the distribution of the net assets of a Fund remaining after satisfaction of outstanding liabilities.
9. Each Trust Agreement provides or, in the case of the Fund to be established, will provide that the net income of a Fund (the "Net Income") for a period shall be the taxable income of the Fund for the period determined in accordance with the provisions of the Act regarding the calculation of taxable income, provided that capital gains and capital losses shall be excluded and provided further that the portion of the Fund's income comprised of taxable dividends received from corporations resident in Canada shall be calculated on the basis that the amount included in income in respect thereof is not greater than the actual amount received, and no amount is deductible in respect of amounts payable in the year to unitholders.
10. Each Trust Agreement provides or, in the case of the Fund to be established and of the XXXXXXXXXX, will provide that the net taxable capital gains of a Fund (the "Net Taxable Capital Gains") shall be determined as the amount, if any, by which the taxable capital gains of the Fund for the Fiscal Year as determined for purposes of the Act exceed the aggregate of the allowable capital losses (other than business investment losses) of the Fund for the year for the purposes of the Act and the portion determined by the Manager of the unapplied net capital losses of the Fund for the purposes of the Act for preceding Fiscal Years of the Fund, to the extent that they may be applied against taxable capital gains of the Fund for the Fiscal Year for the purposes of the Act.
11. Each Trust Agreement will be amended and the Fund to be established will be drafted to provide that the Trustee shall allocate all or any portion of the Net Taxable Capital Gains to unitholders who have redeemed units of the Fund at any time in the year, provided that the amount of Net Taxable Capital Gains allocated to a particular redeeming unitholder shall not exceed the amount, if any, by which the amount payable on the redemption of the units exceeds the adjusted cost base of the units being redeemed (the "Net Taxable Capital Gains Allocation on Redemption").
Section XXXXXXXXXX of each Trust Agreement will be added or amended, as the case may be to read as follows:
XXXXXXXXXX
12. Where units of a Fund are redeemed, each Fund pays or, in the case of the Fund to be established, will pay to the unitholder, out of the assets of the Fund, an amount equal to the net asset value per unit of the Fund multiplied by the number of units to be redeemed determined as of the applicable valuation date in respect of the redemption. Each Trust Agreement will be amended and the Trust Agreement of the Fund to be established will be drafted to provide that the proceeds of redemption will be reduced by the Net Taxable Capital Gains Allocation on Redemption allocated to the redeeming unitholder as described above in order to clarify that the payment made to the redeeming unitholder (the net asset value of such units) will include that Net Taxable Capital Gains Allocation on Redemption allocated to the redeeming unitholder.
13. Each Trust Agreement provides or, in the case of the Fund to be established, will provide that it is intended that sufficient Net Income and sufficient Net Taxable Capital Gains of the Fund be distributed to unitholders in each year so that the Fund will not be liable for income tax under Part I of the Act. Each Trust Agreement further provides or will provide that on the last Distribution Date in the Fiscal Year, a distribution of Net Taxable Capital Gains of a Fund shall be made to unitholders of record as at the closing time on the valuation date immediately prior to that Distribution Date equal to the Net Taxable Capital Gains less any amount distributed to unitholders who have redeemed during the Fiscal Year and less any amounts distributed from time to time during the Fiscal Year.
14. Each Trust Agreement will be amended to provide and the Fund to be established will be drafted to provide that if the total of the amounts determined by the Trustee in respect of the Net Taxable Capital Gains Allocation on Redemption described in paragraph 11 exceed the Net Taxable Capital Gains of the Fund for that Fiscal Year, Net Taxable Capital Gains on Redemption shall be allocated rateably amongst redeeming unitholders.
15. The amendments to the Trust Agreements as described above will be made once the advance income tax ruling has been issued to the Manager by the CRA. In addition, the establishment of the Fund to be established, as described above, i.e. including the provisions of paragraphs 11, 12 and 14 above, will only occur once the advance income tax ruling has been issued to the Manager by the CRA.
16. Each Fund will make a designation under subsection 104(21) so that the Net Taxable Capital Gains distributed to a unitholder (either at redemption or otherwise) is deemed to be a taxable capital gain of the unitholder.
PURPOSE OF THE PROPOSED TRANSACTIONS
17. The purpose of the proposed transactions is to allow the Net Taxable Capital Gains of a Fund for a Fiscal Year to be allocated among its unitholders in a more equitable manner.
RULINGS
Provided the above statements of facts, proposed transactions and purposes thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:
A. To the extent that the aggregate of the Net Taxable Capital Gains Allocation on Redemption for all redeeming unitholders of a Fund in a taxation year of the Fund does not exceed the Net Taxable Capital Gains of that Fund for that taxation year, each Fund will be entitled under paragraph 104(6)(b) of the Act to deduct in computing its income for a taxation year of the Fund the Net Taxable Capital Gains Allocation on Redemption that was payable in the taxation year to a unitholder in respect of his, her or its redeemed units.
B. To the extent that the aggregate of the Net Taxable Capital Gains Allocation on Redemption for all redeeming unitholders of a Fund in a taxation year of the Fund does not exceed the Net Taxable Capital Gains of that Fund for that taxation year, the Net Taxable Capital Gains Allocation on Redemption made by a Fund that was payable in the taxation year to a unitholder must be included in computing the income of the unitholder pursuant to paragraph 104(13)(a) of the Act.
C. To the extent that a Fund makes the proper designations in its return of income for a taxation year, the Net Taxable Capital Gains Allocation on Redemption paid to a unitholder who is a resident of Canada will be deemed to be a taxable capital gain of the unitholder in accordance with subsection 104(21) of the Act.
D. In computing a redeeming unitholder's gain in respect of his, her or its redeemed units of a Fund, the proceeds of disposition for the redeemed units will be the amount by which the net asset value of such units (determined as of the applicable valuation day in respect of the redemption) exceeds the amount of the unitholder's Net Taxable Capital Gains Allocation on Redemption in respect of those units.
E. The implementation of the proposed transactions described herein, will not, in and by itself, cause subsection 104(7.1) of the Act to apply so as to deny a Fund a deduction under paragraph 104(6)(b) of the Act.
F. The general anti-avoidance rule (the "GAAR") under subsection 245(2) of the Act will not be applied as a result of the proposed transactions to redetermine the tax consequences confirmed in the rulings given.
The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions in the documents submitted with your request not described above do not form part of the facts and proposed transactions on which these rulings are based and any reference to these documents is provided solely for the convenience of the reader.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for the Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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