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:
We were asked to rule that 1) the reclassification of the issued and outstanding units in Class A units, the addition of a conversion feature to the Class A units and the creation of Class B units will not result in any disposition for the existing unitholders and 2) the conversion of a unit of one class into a unit of the other class of the same Fund will not be considered to be a disposition of the unit.
Position:
We concluded that the unitholders will not be considered to have disposed of their units.
Reasons:
The rights, obligations and ownership of unitholders will not be significantly changed.
XXXXXXXXXX 3-972613
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs\Madams
Re: Advance Income Tax Rulings
XXXXXXXXXX
We are writing in reply to your letters dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX (the "Manager") and XXXXXXXXXX (the "Fund").
You advise that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request 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.
The Manager's tax account number is XXXXXXXXXX. The Fund's tax account number is XXXXXXXXXX. Both the Manager and the Fund file their income tax returns with the XXXXXXXXXX Tax Services Office.
Our understanding of the facts, proposed transactions and their purpose is as follows.
FACTS AND PROPOSED TRANSACTIONS
1.The Fund was formed by declaration of trust dated XXXXXXXXXX and is governed by the laws of the Province of XXXXXXXXXX.
2.The Fund is an open-end "mutual fund trust" within the meaning of subsection 132(6) of the Income Tax Act (the "Act").
3.The Fund is divided into an unlimited number of equal units of one class, representing an undivided interest in the assets of the Fund.
4.The investment objective of the Fund is
XXXXXXXXXX
5.The net asset value of the Fund is the value of all assets of the Fund less its liabilities. The net asset value of the Fund is calculated on each day that the XXXXXXXXXX Stock Exchange is open for trading (a "Business Day"). The net asset value per unit of the Fund is calculated by dividing the net asset value of the Fund at the close of business on a Business Day by the total number of units of the Fund outstanding at that time. The net asset value per unit of the Fund is the basis for all purchases and redemptions of units of the Fund and the reinvestment of distributions from the Fund.
Purchase and redemption requests for units of the Fund are processed at the close of business on each Business Day after the net asset value of the Fund and the net asset value per unit of the Fund has been calculated for that Business Day and before distributions are made from the Fund. Immediately after a distribution, the net asset value per unit will decrease by the amount of distribution. Therefore, if a distribution is made, the net asset value of the Fund and the net asset value per unit of the Fund is recalculated immediately after the distribution.
6.The distribution policy of the Fund is determined from time to time by the Manager and is declared in the simplified prospectus for the Fund. Currently, the Fund pays
XXXXXXXXXX
to ensure that the Fund is not subject to income tax under Part I of the Act, after taking into consideration any capital gains refund available to it pursuant to subsection 132(1) of the Act.
7.If the fixed rate distributions exceed the Fund's net income and the non-taxable portion of any capital gains designated under subsection 104(21) of the Act in respect of unitholders of the Fund, the excess is a non-taxable return of capital. This return of capital results in a reduction of the adjusted cost base of a unitholder's units of the Fund pursuant to subparagraph 53(2)(h)(i.1) of the Act.
8.Distributions paid by the Fund to unitholders are automatically reinvested to purchase additional units of the Fund, unless a unitholder requests payment of a distribution by cheque or by direct bank deposit.
9.Manager proposes to call a special meeting of the unitholders of the Fund in XXXXXXXXXX to seek approval to amend the declaration of trust for the Fund to create a second class of units which will be convertible into units of the existing class and to add a conversion feature to the existing class of units, all as more particularly described below. For the purpose of this ruling, the existing units will be reclassified as "Class A units" and the new class of units will be referred to as "Class B units".
10.Assuming that the unitholders approve the resolution to amend the declaration of trust for the Fund, the amendments to the declaration of trust will be implemented within 6 months of the date of this ruling (the "Effective Date").
10.1Based on discussions with the dealers and brokers who represent the unitholders of the Fund, the Manager expects at least XXXXXXXXXX of the unitholders and as many as XXXXXXXXXX% of the unitholders of the Fund to convert their Class A units to Class B units beginning at the earliest opportunity after the Effective Date.
10.2The Manager further expects that within the one year period after the Effective Date some unitholders will convert their Class B units into Class A units.
11.The attributes of the Class A units will be substantially identical to the attributes of the units before the amendments to the declaration of trust, except that the Class A units will be convertible on any Business Day, at the option of the unitholder, into Class B units having an aggregate net asset value equal to the aggregate net asset value of the Class A units being converted, after taking into consideration the payment of any applicable redemption or exchange fees. The Class B units will similarly be convertible into Class A units and the other attributes of the Class B units will be substantially identical to the attributes of the existing units.
12.The Class A units and the Class B units will rank on a parity with each other with respect to distribution of income and return of capital on liquidation of the Fund, based on the relative net asset value per unit of each class of units.
13.Each holder of a whole Class A unit will be entitled to one vote at meetings of unitholders of the Fund (except on issues where Class B unitholders are entitled to vote separately as a class) and at meetings of Class A unitholders. Similarly, each holder of a whole Class B unit will be entitled to one vote at meetings of unitholders of the Fund (except on issues where Class A unitholders are entitled to vote separately as a class) and at meetings of Class B unitholders. Each unitholder's vote(s) will be weighted based on the net asset value of the Class A and Class B units held by that unitholder.
14.The Manager will establish the distribution policy for Class A units and for Class B units from time to time and will declare that policy in the then current simplified prospectus for the Fund. For the foreseeable future, the Manager intends to maintain a quarterly fixed rate distribution of $XXXXXXXXXX per Class A unit and intends to establish a quarterly fixed rate distribution of $XXXXXXXXXX per Class B unit.
15.As before, each unit will be allocated a prorata share of the Fund's net income based on the net asset value of the unit in relation to the net asset value of the Fund. If the total amount of distributions in a year to Class A unitholders is less than the portion of the Fund's net income for the year that is attributable to the Class A units, an additional distribution to Class A unitholders will be made in December of that year. Similarly, if the total amount of distributions in a year to Class B unitholders is less than the portion of the Fund's net income for the year that is attributable to the Class B units, an additional distribution to Class B unitholders will be made in December of that year. As before, the Fund will distribute a sufficient amount of its net income each year to ensure that the Fund will not be subject to income tax under Part I of the Act, after taking into consideration any capital gains refund available to it pursuant to subsection 132(1) of the Act.
16.On the Effective Date and until the first quarterly distribution, the Class A units will have the same net asset value per unit as the Class B units. On the first quarterly distribution date following the Effective Date, the net asset value for Class A units will be reduced by $XXXXXXXXXX per unit and the net asset value for Class B units will be reduced by $XXXXXXXXXX per unit with the result that, following the distribution, the net asset value per Class A unit will be different from the net asset value per Class B unit.
17.On each Business Day following the Effective Date, the net asset value per Class A units will be calculated separately from the net asset value per Class B units, but the same procedure will be used. To illustrate, the net asset value per Class A unit will be calculated by first establishing a "rate of return" for the Fund for the period since the previous Business Day. The rate of return will then be multiplied by the aggregate net asset value of all Class A units on the previous Business Day and divided by the number of Class A units outstanding at the close of business on the current Business Day. Following the calculation of the net asset value per Class A unit and the net asset value per Class B unit for a Business Day, purchase and redemption requests for units of the Fund for the the Business Day will be processed using the relevant net asset value per unit for the Business Day.
18.After the purchase and redemption requests have been processed for a Business Day, if the Business Day is a calendar quarter end, the Fund will make distributions in accordance with its distribution policy. The net asset value per Class A unit and the net asset value per Class B unit will be recalculated for the Business Day to reflect the distribution.
PURPOSE OF PROPOSED TRANSACTIONS
19.Currently, the Fund pays fixed distributions that exceed the Fund's annual income. The current fixed distribution rate is designed to accommodate investors who require a relatively high fixed cash flow for their living expenses notwithstanding the current low-interest rate environment. The proposed transaction is designed to accommodate the needs of those investors who do not require distributions in excess of income and are concerned that the current level of fixed distributions paid by the Fund will unduly erode their capital investment.
RULINGS GIVEN
Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof and that the proposed transactions are carried out as set forth herein, the following rulings are given:
A.The reclassification on the Effective Date of each unit of the Fund as a Class A unit, the addition of a conversion feature to the Class A units and the creation of Class B units will not, in and of themselves, result in a disposition of the existing units for the purposes of the Act.
B.The conversion of Class A units, at the option of the unitholder, into an equivalent value of Class B units and the conversion of Class B units, at the option of the unitholder, into an equivalent value of Class A units will not, in and of themselves, result in a disposition, for the purposes of the Act, of the Class A units or the Class B units being converted.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding on the Department provided the proposed transaction is completed on or before XXXXXXXXXX. These rulings do not cover proposed transactions occuring after XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments thereto.
Yours truly,
Marc Vanasse, CA
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretation Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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© Sa Majesté la Reine du Chef du Canada, 1996
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