30 November 1995 Ruling 9629833 - MUTUAL FUND LIMITED PARTNERSHIP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Public mutual fund limited partnership formed to fund up-front selling commissions to be paid to brokers which distribute mutual funds. This ruling involves the addition of a new fund to the ones previously ruled on in file #952958.

Position:

1. 3 year amortization ruling given as before.

Reasons:

1. Consistent with prior rulings for same taxpayer.

XXXXXXXXXX 962983

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs/Madams:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above mentioned taxpayers in connection with the proposed transactions described below.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

The following XXXXXXXXXX mutual funds constitute a group of funds known as

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The net asset value ("Net Asset Value") of XXXXXXXXXX each Fund is equal to XXXXXXXXXX the assets of the Fund, less XXXXXXXXXX liabilities of the Fund XXXXXXXXXX The Net Asset Value XXXXXXXXXX each Fund is calculated on each day that the XXXXXXXXXX Stock Exchange is open for trading. A day on which the Net Asset Value per security of each Fund is calculated is herein called a "Valuation Date". The Net Asset Value per security XXXXXXXXXX of each Fund is calculated by dividing the Net Asset Value XXXXXXXXXX at the close of business on the Valuation Date by the total number of securities XXXXXXXXXX outstanding at that time. The Net Asset Value per security will be the basis for all sales of Deferred Charge Securities (as defined below in 6) as well as for the automatic reinvestment of distributions and for redemptions.

XXXXXXXXXX. The Manager has been retained to provide all the necessary management and administrative services required to operate the business of each of the Funds, including services in connection with the distribution of units of the Funds. The management fees paid by the Funds vary in amount.

XXXXXXXXXX

The XXXXXXXXXX securities issued to an investor who purchases on a deferred charge basis are defined as follows:

XXXXXXXXXX

"Deferred Charge Securities".

XXXXXXXXXX

An investment in Distributed Securities (as defined below in 12) of a Fund may be redeemed and the proceeds reinvested in Deferred Charge Securities of another Fund at equivalent Net Asset Values without the imposition of a Redemption Fee (as defined below in 8).

XXXXXXXXXX

A redemption fee (the "Redemption Fee") will apply to all Distributed Securities of a Fund which are redeemed within XXXXXXXXXX years of their date of issue, or deemed date of issue, except: XXXXXXXXXX (the "Free Redemption Amount").

XXXXXXXXXX

The Redemption Fee, XXXXXXXXXX declines over time from the date of issue, or deemed date of issue, of the Deferred Charge Security as follows:

If Redeemed During the Following Redemption
Periods After the Date of Fee
Issue or Deemed Date of Issue Percentage

XXXXXXXXXX

XXXXXXXXXX

The Partnership was formed XXXXXXXXXX The initial limited partner XXXXXXXXXX purchased one unit of the Partnership for consideration of $XXXXXXXXXX. This unit was subsequently redeemed. The Partnership was formed for the purpose of arranging for the distribution of securities of the Funds and Additional Funds (as described below in paragraph 36) which purchasers of securities of the Funds elect to acquire on a deferred charge basis. The principal place of business of the Partnership is in XXXXXXXXXX

XXXXXXXXXX The General Partner will be responsible for the management of the Partnership on a day-to-day basis in accordance with the terms of the Partnership Agreement (as defined below in 26), and may engage agents to assist it in carrying out its management obligations to the Partnership.

The Partnership entered into a distribution agreement (the "Distribution Agreement") with each of the Funds and the Manager dated as of XXXXXXXXXX, pursuant to which the Partnership was granted the right to arrange for the distribution of Deferred Charge Securities in return for certain compensation. The Partnership was granted this right for the period commencing XXXXXXXXXX. The Deferred Charge Securities in respect of which the Partnership will pay the Selling Commission (as defined below in 16) or a Redemption Charge (as defined below in 17), and Deferred Charge Securities attributable to such securities are referred to herein as the "Distributed Securities". The Partnership's distribution right is exclusive, subject to it becoming non-exclusive in the circumstances described in the Distribution Agreement. The Partnership's distribution right does not extend to sales of securities of the Funds which are not Distributed Securities and the Partnership shall not receive any remuneration of any kind in respect of such securities of the Funds.

Pursuant to the Distribution Agreement and in consideration for its services, the Partnership is entitled to receive from each Fund and each Fund has agreed to pay to the Partnership an amount equal to the amount of any Redemption Fee paid by security holders on the redemption of their Distributed Securities. XXXXXXXXXX Such amount will continue to be payable to the Partnership on redemptions of Distributed Securities notwithstanding the expiry or earlier termination of the Partnership's appointment as exclusive distributor.

The Redemption Fee payable to the Partnership is calculated as follows:

XXXXXXXXXX

XXXXXXXXXX

In the event of the termination of a Fund, the Partnership will receive from that Fund any applicable Redemption Fee on the redemption of any outstanding Distributed Securities of that Fund. In the event of the termination of all of the Funds, the General Partner will thereafter take all necessary steps to wind up the Partnership and distribute the assets of the Partnership to the Limited Partners (as defined below in 20).

For its services in arranging for the distribution of Distributed Securities, the Partnership receives from the Manager a XXXXXXXXXX fee at an annual rate of XXXXXXXXXX% of the Net Asset Value per Distributed Security on the last Valuation Date of each month (the "Distribution Fee") for a period of XXXXXXXXXX years from the date of issue, or deemed date of issue, or for so long as such Distributed Security remains outstanding, whichever is earlier. XXXXXXXXXX The Distribution Fee shall continue to be payable to the Partnership on each Distributed Security for the period described above, notwithstanding that the Partnership's appointment as exclusive distributor or its right to act as a non-exclusive distributor has expired or has been terminated.

The primary purpose of the Distribution Agreement is to ensure that satisfactory arrangements exist to arrange for the distribution of the Distributed Securities and to provide a mechanism for the payment of Selling Expenses and Redemption Charges (as defined below in 17). The Partnership provides the following services to the Manager and the Funds, together with such other services as may from time to time be requested by the Manager in connection with the arrangements necessary to distribute Distributed Securities:

making all necessary arrangements for the distribution of the Distributed Securities through registered dealers approved by the Manager, including XXXXXXXXXX

paying:

XXXXXXXXXX

paying the applicable Redemption Charges (as defined below in 17) upon receipt of notice from the Manager of the redemption of securities of:

XXXXXXXXXX

if such securities are redeemed for the purpose of immediate reinvestment in Distributed Securities of one or more of the Funds;

XXXXXXXXXX

maintaining proper and adequate business records of its operations, including payments to registered dealers;

providing confirmation to the Manager and the Funds when requested as to the due and timely payment of Selling Expenses and Redemption Charges;

providing a financial report to the Manager at least monthly indicating the funding available to the Partnership to pay Selling Expenses and Redemption Charges; and

advising the Manager promptly of any dispute arising between the Partnership and any registered dealer as to the payment of Selling Expenses or otherwise.

The Manager advises the Partnership from time to time of its estimate of the amount required by the Partnership to pay Selling Expenses during the distribution period. The Manager also advises the Partnership of its estimate of the amount required by the Partnership to pay the redemption charges XXXXXXXXXX (collectively the "Redemption Charges"). The Funds and the Manager have jointly and severally agreed to use their best efforts to maximize the sale of Distributed Securities, provided that during any period or periods when the state of the financial markets becomes such that it would be impracticable or unprofitable to offer or to continue to offer the Distributed Securities for sale to the public or any event has occurred or situation developed which renders it inexpedient or unprofitable to offer or to continue to offer the Distributed Securities for sale to the public, the Funds and the Manager will be under no obligation to offer or to continue to offer the Distributed Securities for sale to the public.

The Partnership arranges for the sale of Distributed Securities only through registered dealers approved by the Manager and the Partnership does not itself directly or indirectly sell any securities of the Funds. All Distributed Securities are sold at a price equal to the Net Asset Value (as defined in the constituting document of each Fund) per security at the time of purchase, without a sales charge to purchasers.

The General Partner made arrangements with XXXXXXXXXX (the "Bank") under which the Partnership was granted a line of credit in an amount which may not exceed $XXXXXXXXXX, which funds are to be used to fund the payment of the Selling Expenses and Redemption Charges to be paid by the Partnership pursuant to the Distribution Agreement, as well as to fund its ongoing operating expenses. XXXXXXXXXX

During XXXXXXXXXX, the Partnership is offering limited partnership units ("Units") to investors pursuant to XXXXXXXXXX (the "Offering Document"). XXXXXXXXXX Subscribers for Units become a limited partner of the Partnership (a "Limited Partner") upon acceptance of his or her subscription by the General Partner.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The aggregate gross proceeds from the sale of Units is applied first to the payment of the Selling Expenses and the Redemption Charges and, if the monthly Distribution Fees, investment income and Redemption Fee earned are not sufficient to pay operating expenses, to the payment of operating expenses and to the repayment of amounts borrowed by the Partnership (as described in paragraph 19) to make such payments. It is anticipated that the proceeds of the offering will be sufficient to repay all amounts borrowed by the Partnership with the result that the Partnership is not expected to have any borrowing outstanding on or after XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

The General Partner, the initial limited partner, the Manager and the General Partner on behalf of the Limited Partners have entered into a limited partnership agreement (the "Partnership Agreement") dated as at XXXXXXXXXX. The expenses to be incurred by the Partnership during its XXXXXXXXXX fiscal period, principally consisting of the deductible portion of the Selling Expenses and the Redemption Charges, the Partnership's operating expenses, interest on amounts borrowed to make such payments and the deductible portion of the issue expenses and any agency commissions, are expected to exceed the income of the Partnership to be earned during that year. XXXXXXXXXX The Partnership is to carry out each of its activities with a view to making a profit.

Profits of the Partnership for each fiscal year are to be allocated such that the General Partner is entitled to XXXXXXXXXX% of the profits and the balance (XXXXXXXXXX%) is divided among the Limited Partners inscribed in the register of the Partnership at the end of the fiscal year of the Partnership in proportion to the number of Units held by each of them. Losses of the Partnership for each fiscal year are to be allocated among the General Partner and the Limited Partners on the same basis. The Selling Expenses and Redemption Charges will be amortized and deductible over three fiscal periods by the Partnership as described in Ruling A below.

XXXXXXXXXX the General Partner shall XXXXXXXXXX distribute XXXXXXXXXX to each Limited Partner who was a registered holder of the Units on the last day of each

XXXXXXXXXX

The General Partner may in its sole discretion make more frequent distributions.

XXXXXXXXXX

XXXXXXXXXX has entered into an agency agreement (the "Agency Agreement") with the Partnership and the General Partner, whereby XXXXXXXXXX agreed to offer the Units for sale on a best efforts basis, if, as and when issued by the Partnership in accordance with the Agency Agreement.

XXXXXXXXXX

The Partnership shall be dissolved upon the occurrence of any of the following events:

a date which will not be later than XXXXXXXXXX;

the termination of all of the Funds;

Limited Partners holding XXXXXXXXXX% of the Units vote to dissolve the Partnership;

the Manager acquires all of the assets of the Partnership; or

the General Partner is deemed to resign pursuant to XXXXXXXXXX of the Partnership Agreement, without appointment of a new general partner.

The Partnership shall not come to an end by reason of the death, bankruptcy, insolvency, mental incompetency or other disability of any Limited Partner or upon the transfer of any Units.

Upon the dissolution of the Partnership, the General Partner (or in the event that dissolution is caused by the dissolution or bankruptcy of the General Partner, such other person as may be appointed by ordinary resolution of the Limited Partners) shall act as a receiver and liquidator of the assets of the Partnership and shall:

sell or otherwise dispose of such part of the Partnership's assets as the General Partner shall consider appropriate for the purpose of making the payments contemplated in (b) below and the distributions contemplated in (c) and (d) below;

pay or provide for the payment of the debts and liabilities of the Partnership and liquidation expenses; and thereafter;

distribute to the Limited Partners of record on the date of dissolution, proportionate to the number of Units held by them, the amount in cash or kind of the capital contribution paid in respect of each Unit held, less any amount of capital previously distributed to Limited Partners pursuant to the General Partner's discretionary power to do so;

distribute the remaining assets of the Partnership, if any, as to XXXXXXXXXX% to the General Partner and as to XXXXXXXXXX%, among the Limited Partners of record on the date of dissolution, proportionate to the number of Units held by them; and

file the notice of dissolution prescribed by the Limited Partnerships Act (Ontario) and satisfy all applicable formalities in such circumstances as may be prescribed by the laws of other jurisdictions where the Partnership is registered. In addition, the General Partner shall give prior notices to the various parties as required.

For financial reporting purposes, the Selling Expenses and Redemption Charges, respectively, will be accounted for in accordance with the treatment required under the Canadian Institute of Chartered Accountants Emerging Issues Committee EIC - 33 Abstract dated November 20, 1991, which states that sales commissions and other distribution costs should be accounted for as deferred charge and amortized over the periods in which revenue is expected to be recognized.

As a Unit may be a tax shelter within the meaning assigned by subsection 237.1(1) of the Act, the General Partner has obtained an identification number in respect of the Units pursuant to subsection 237.1(2) of the Act. The General Partner will file annual tax shelter information returns and provide copies to the Limited Partners pursuant to subsection 237.1(7) of the Act.

None of the issues involved in this ruling are being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and none of the issues are under appeal or objection.

OTHER INFORMATION

36.The Manager has the right to add further mutual funds ("Additional Funds"), which it manages and which distribute their securities on the same basis as the Funds, to the Funds in respect of which the Partnership's distribution rights extends, provided the Manager causes each such Additional Fund to become a party to the Distribution Agreement as fully and effectually as if it had been an original signatory.

PROPOSED TRANSACTIONS

37.A new open-end mutual fund trust (the "New Fund") will be formed on or before XXXXXXXXXX. A preliminary prospectus, dated XXXXXXXXXX, was filed with the XXXXXXXXXX The New Fund will be structured, managed by the Manager, and distribute its units on the same basis as the Funds XXXXXXXXXX The New Fund will become a party to the Distribution Agreement (as defined above in paragraph 12) as fully and effectually as if it had been an original signatory.

38.Additional Units of the Partnership will be issued pursuant to the Offering Document, before XXXXXXXXXX, under the same terms and conditions as described above in paragraphs 20 and 21. The Partnership will continue to carry on its business as described above in the facts. The size of the offering pursuant to the Offering Document will not exceed $XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

39.The purpose of the proposed transactions described herein is to permit the distribution of the Distributed Securities of the New Fund without the investors having to pay a sales commission. In addition, in order to provide for the exchange of an investor's investment in XXXXXXXXXX Fund for securities in the New Fund on a deferred charge basis, the Partnership will pay the applicable Redemption Charges payable to XXXXXXXXXX This is a business and marketing consideration which is based upon the attractiveness of offering such securities of mutual funds without the investor having to pay a sales commission at the time of acquisition. It is also necessary, from a business perspective, to offer securities to investors without an acquisition charge because it has become prevalent in the industry and is therefore necessary to remain competitive.

RULINGS

40.Provided the above statements of fact, proposed transactions, and other information are accurate and constitute complete disclosure of all of the relevant facts and proposed transactions, and assuming the proposed transactions are carried out as described above and the Partnership is a partnership at law, we confirm the following:

The Selling Expenses (as defined in the postamble to paragraph 16(b)) and the Redemption Charges (as defined in paragraph 17) incurred by the Partnership in respect of the New Fund during the XXXXXXXXXX calendar year will be amortized and deductible by the Partnership in computing its income or loss for tax purposes as to 33-1/3% for each of the fiscal periods ending XXXXXXXXXX.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 issued by Revenue Canada, Taxation on September 28, 1990 (as amended by Special Release dated September 30, 1992) and is binding provided that by XXXXXXXXXX, both the New Fund is added and the closing of offerings of Additional Units, contemplated above in paragraph 38, are completed. This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments. Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly: (a) the reasonableness of any of the expenses of the Partnership; and (b) the existence of a reasonable expectation of profit of the Partnership or any partner of the Partnership.

As stated in paragraph 6 of Information Circular 70-6R2, binding rulings are not provided for transactions that are not seriously contemplated and are hypothetical in nature. Accordingly, no rulings have been provided in respect of transactions relating to the right to distribute Additional Funds as described above in 36 (other than the New Fund).

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch