30 November 1997 Ruling 9806133 - FOREIGN PROPERTY & LOAN TO SUBSIDIARY

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.

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Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
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This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge your letters of XXXXXXXXXX.

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

i) is in an earlier return of the taxpayers or a related person,

ii) is being considered by an office of Revenue Canada 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 judgement has been issued, the time limit for appeal to a higher court has not expired, or

v) is the subject of a ruling previously to the taxpayers or a related person issued by the Directorate.

In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

"ACo" refers to XXXXXXXXXX;

"BCo" refers to XXXXXXXXXX;

“CCo” refers to XXXXXXXXXX;

“DCo” refers to XXXXXXXXXX;

“ECo” refers to XXXXXXXXXX ( a corporation created and resident in the XXXXXXXXXX);

“FCo” refers to XXXXXXXXXX;

“Holdings” refers toXXXXXXXXXX;

“Fund” refers to XXXXXXXXXX;

“X Trust Company” refers to XXXXXXXXXX;

“Plans” refer to the pension plans for XXXXXXXXXX;

“Previous Plan” refers to the XXXXXXXXXX;

“Master Trust” refers to the XXXXXXXXXX;

“Previous Master Trust” refers to the XXXXXXXXXX.

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

Facts

1. ACo and BCo are wholly-owned subsidiaries of Holdings. ACo provides management, administrative and portfolio advisory services to mutual funds, segregated funds and pooled investment funds. Each of ACo, BCo and Holdings is a taxable Canadian corporation, as defined in subsection 89(1) of the Act.

2. Each of CCo and DCo is a taxable Canadian corporation, as defined in subsection 89(1) of the Act.

3. ACo established the Fund pursuant to a trust agreement (the "Trust Agreement") entered into between ACo and X Trust Company, the trustee of the Fund.

4. ACo is the manager and acts as investment advisor to the Fund.

5. The capital of the Fund is represented by transferable units (the "Units") of beneficial interest in the Fund, the terms and conditions of each of which are identical.

6. The Previous Plan and the Plans are pension plans for the employees of CCo and DCo.

7. Each of the Previous Plan and the Plans is a pension trust, as defined in paragraph 149(1)(o) of the Act, and each has invested 100% of its assets in a trust which qualifies as a master trust, as defined in paragraph 149(1)(o.4) of the Act, known as Previous Master Trust and Master Trust respectively.

8. ECo is a corporation created under the laws of a country other than Canada. ECo is not resident in Canada for purposes of the Act.

9. The authorized capital of ECo consists of two classes of shares. One class of shares of ECo ("Ordinary Shares") has the right to vote on all matters which shareholders of ECo are entitled to vote under the governing laws of the country under which ECo was established, including the election of the members of the board of directors of ECo, but do not have the right to participate in the earnings of ECo, other than the right to have its nominal share capital returned on a winding-up or liquidation of ECo. The other class of shares of ECo ("Participating Shares") is not entitled to vote on any matters which the holders of Ordinary Shares of ECo are entitled to vote. Accordingly, holders of Participating Shares are not entitled to vote in the election of members of the Board of Directors of ECo. The Participating Shares do have the right to fully participate in the earnings of ECo.

10. FCo, a wholly-owned Canadian resident subsidiary corporation of BCo, owns XXXXXXXXXX% of the Ordinary Shares of ECo. The remaining XXXXXXXXXX% of the Ordinary Shares and XXXXXXXXXX% of the Participating Shares of ECo have been issued to the Fund. The subscription price paid by the Fund was US $XXXXXXXXXX for the Ordinary Shares and US $XXXXXXXXXX for the Participating Shares.

11. FCo has granted CCo an option to acquire the Ordinary Shares owned by FCo.

12. The proposed transactions described herein have already been undertaken with respect different parties, in particular, the Previous Plan and the Previous Master Trust, but not with respect to the Plans and the Master Trust.

Proposed Transactions

13. As the necessary approvals are obtained from a Plan, the Master Trust will invest 100% of the assets which relate to such Plan in units of the Fund. The Master Trust will subscribe for units of the Fund at a subscription price equal to the net asset value per unit of the Fund at the date of such subscription.

14. The Fund will invest the subscription proceeds it receives from the Master Trust such that not less than XXXXXXXXXX% of the cost amount of its property received from the Master Trust will be invested in debt of Canadian resident issuers, likely money market investments.

15. The Fund will enter into swap contracts with arm's length counterparts under which the Fund will swap the income it receives from its money market investments for amounts based on "notional" investments in certain debt and equity indices. The "notional" investments will be in amounts that equal the principal amount of the Fund's money market investments. The swap contracts are not traded on a public exchange. The Fund will also purchase futures contracts which trade on public exchanges both inside and outside Canada.

16. The Fund will subscribe for additional Participating Shares of ECo with a portion of the subscription proceeds received by the Fund from the Master Trust on the issuance of units of the Fund. The number of Participating Shares subscribed for by the Fund will be determined based on the fair market value of ECo at the date of subscription.

17. The aggregate cost amount to the Fund of the swap contracts, futures contracts and the shares of ECo do not, and at all times will not, exceed XXXXXXXXXX% of the cost amount to the Fund of all its property.

18. ECo will borrow from an arm's length financial institution money (the "Loan") which is secured by the assets of ECo and some of the assets of the Fund. The Fund’s assets will be pledged pursuant to a guarantee given by the Fund of ECo's indebtedness under the Loan. The Fund will not borrow any money. The maximum amount of the Loan will not exceed XXXXXXXXXX% of the subscription proceeds received by the Fund from the Master Trust.

19. ECo will invest the amount it receives on the subscription for the additional Participating Shares and the amount of the Loan in a diversified portfolio of investments established outside Canada.

20. The Fund will elect under section 259 of the Act in the prescribed manner and time so that the Master Trust will be considered, from the date it acquires units of the Fund as described above, for purposes of Part XI of the Act, to hold the property held by the Fund and to not hold units of the Fund.

21. ECo will be a controlled foreign affiliate, as defined in subsection 95(1) of the Act, of the Fund. Certain investments of ECo will be property which may constitute offshore investment fund properties, in respect of which ECo may be required to include certain amounts computed under section 94.1 of the Act in computing its foreign accrual property income ("FAPI") for purposes of subsection 91(1) of the Act.

22. An amount equal to the income and capital gains of ECo will be distributed by ECo to the Fund as dividends in the taxation year of ECo in which they are earned or realized, as the case may be. In addition, ECo has the discretion to distribute, as dividends or return of capital, the amount, if any, by which its FAPI, for purposes of subsection 91(1) of the Act, exceeds its income and capital gains earned and realized in the taxation year.

23. The Trust Agreement provides that sufficient net income and net realized capital gains of the Fund, if any, including FAPI of ECo included in the income of the Fund, shall be distributed to Unitholders each year so that the Fund will not be liable to pay income tax under Part I of the Act. Unitholders have the right to enforce payment at the end of each year of any amount due to them at the end of such calendar year.

Purpose of Proposed Transactions

The purpose of the proposed transactions is to permit the Fund to invest in properties that will allow it to achieve its investment objectives of optimizing long-term risk-adjusted return measured in Canadian dollars of a balanced portfolio of fixed income and equity indices. The proposed transactions will also allow the Plans, through the Master Trust, to invest in the Fund.

Rulings Requested and Given

A. For the purposes of paragraph 104(6)(b) of the Act, the Fund is not prohibited from including in the computation of the amount that would be its income for a taxation year as became payable in that year to the Master Trust, the amount of income computed under section 91(1) of the Act in respect of the additional Participating Shares in ECo referred to in 16 above. The Master Trust, as a unitholder of the Fund, shall be required to include such amount in computing its income for that year pursuant to paragraph 104(13)(a) of the Act.

B. The pledging of its assets as security for the Loan will not in and by itself result in the Fund acquiring or holding “foreign property”, as defined in subsection 206(1) of the Act.

C. Subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the ruling given above.

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that:

a) the units referred to 13 above,

b) the additional Participating Shares referred to in 16 above,

c) the Loan referred to in 18 above, and

d) the investments referred to in 19 above

are entered into or acquired within six months from the date of this letter.

Yours truly,

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

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