2003 Ruling 2003-0016433 - Reduced Mgmt Fee-add. Class of units of MFT

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 CCRA.

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

Principal Issues: This ruling involves the addition of a new class of units to an existing multi-class structure of mutual fund trusts. This ruling expands upon the previous ruling given, 2000-000836, and raises the same issues:

1) Does the creation of a new series of units result in a resettlement of the existing trusts or a disposition of existing units by current unitholders?

2) Does the reclassification of Class B units into Class C units or Class C units into Class A or Class B units result in a disposition to the unitholder?

3) Will 104(7.1) or GAAR apply to the transactions?

Position: No to all three questions.

Reasons: 1) The changes to the trust agreement are not so significant as to cause a resettlement of the existing trusts. 2) The unitholders will not be deemed to have disposed of their units since the reclassification of units will not result in any units being redeemed or cancelled nor will the unitholder be entitled to any proceeds of disposition as a result of the reclassification; the rights, privileges and conditions attached to the reclassified units will be substantially the same as the existing units with the exception of the reduced management fee. 3) The purpose test in 104(7.1) is not met as the main purpose of the proposed transactions is to enable the manager to effectively market the units to differing groups of investors by applying an appropriate level of management fee for each group of investors.

XXXXXXXXXX 2003-001643

Attention: XXXXXXXXXX

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers on whose behalf this ruling is requested, none of the issues involved in this ruling request are:

(a) in an earlier return of the taxpayers or a related person;

(b) being considered by a tax services office and/or a tax centre in connection with a tax return previously filed by the taxpayers or a related person;

(c) under objection by the taxpayers or a related person;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayers or a related person, with the exception of rulings 952451 and 2000-0008363.

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

"Class A Unit" means a unit of a Fund which has been designated as a Class A Unit of the Fund;

"Class B Unit" means a unit of a Fund which has been designated as a Class B Unit of the Fund;

"Class C Unit" means a unit of a Fund which has been designated as a Class C Unit of the Fund;

"Class A Unitholder" means an investor holding Class A Units of a Fund;

"Class B Unitholder" means an investor holding Class B Units of a Fund;

"Class C Unitholder" means an investor holding Class C Units of a Fund;

"Class B Unitholder Agreement" means any of the agreements entered into between the Manager and a Class B Unitholder individually, which, among other things, sets out the exact amount of the additional fee payable by the Class B Unitholder directly to the Manager;

"Class C Unitholder Agreement" means any of the agreements entered into between the Manager and a Class C Unitholder individually, which, among other things, sets out the exact amount of the additional fee payable by the Class C Unitholder directly to the Manager;

"Common Expenses" means all of the expenses relating to the operation of a Fund other than expenses that are to be paid by the investors in a specific class of units, such as management fees;

"Fund Agreement" means the agreement between the Manager and the Trustee, as restated on XXXXXXXXXX, and amended from time to time, which sets out the terms and conditions applicable to a family of mutual fund trusts, including Fund 1 and Fund 2;

"Fund 1" means XXXXXXXXXX;

"Fund 2" means XXXXXXXXXX;

"Fund" means each of Fund 1 and Fund 2, individually;

"Funds" means Fund 1 and Fund 2, collectively;

"Manager" means XXXXXXXXXX, a corporation incorporated under the laws of Canada and its income tax account number is XXXXXXXXXX;

"Per Unit Class A NAV" means the net asset value of a Class A Unit which is calculated in the manner set out in paragraph 4 below;

"Per Unit Class B NAV" means the net asset value of a Class B Unit which is calculated in the manner set out in paragraph 4 below;

"Per Unit Class C NAV" means the net asset value of a Class C Unit which is calculated in the manner set out in paragraph 19 below;

"Trading Day" means, in the case of Fund 1, a day on which the XXXXXXXXXX is open for trading, and in the case of Fund 2, a day on which the XXXXXXXXXX are open for trading;

"Trustee" means the XXXXXXXXXX, a corporation incorporated under the laws of Canada, and registered and licensed under the laws of Canada to carry on the business of a trust company; and

"Valuation Time" means 4:00 p.m. Eastern Standard Time on each December 31, each Trading Day and each other date that is identified to the Trustee by the Manager and set out in the current simplified prospectus of the Fund.

The Funds deal with the XXXXXXXXXX and the Manager deals with the XXXXXXXXXX.

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

Facts

1. Each Fund has qualified at all relevant times as a "unit trust" as defined in subsection 108(2) and as a "mutual fund trust" as defined in subsection 132(6). The beneficial interest in each Fund is currently divided into two classes of units, namely Class A Units and Class B Units. Each Fund is authorized to issue an unlimited number of Class A Units and Class B Units. Class A Units are available to all types of investors. Class B Units are only available to certain sophisticated investors including large institutional investors, high net worth individuals and employees of the Manager.

2. The Class A Units and Class B Units were created by an amendment to the Fund Agreement dated XXXXXXXXXX. The major difference between the Class A Units and the Class B Units of each Fund is the amount of management fees payable by the Fund in respect of the units of each class. The Manager is paid a management fee by each Fund based on the net asset value of each class of units of the Fund at each Valuation Time and this fee is payable at the end of each month.

3. The net asset value of each class of units of each Fund is computed separately as follows:

(a) The net asset value of the Class A Units of each Fund is determined by subtracting the management fees payable by the Fund in respect of the Class A Units from the Class A Units' proportionate share of the difference between the value of the Fund's assets and the outstanding liabilities related to the Common Expenses of the Fund. This calculation ensures that the Per Unit Class A NAV of a Fund reflects the fact that the Class A Unitholders of that Fund bear the full cost of the management fees applicable to Class A Units of that Fund and a proportionate share of the Common Expenses of the Fund.

(b) The net asset value of the Class B Units of each Fund is determined by subtracting the management fees payable by the Fund in respect of the Class B Units from the Class B Units' proportionate share of the difference between value of the Fund's assets and the outstanding liabilities related to the Common Expenses of the Fund. This calculation ensures that the Per Unit Class B NAV of a Fund reflects the fact that the Class B Unitholders of that Fund bear the full cost of the management fees applicable to Class B Units of that Fund and a proportionate share of the Common Expenses of the Fund.

4. The Per Unit Class A NAV of each Fund is determined by dividing the net asset value of the Class A Units of the Fund by the number of Class A Units of the Fund outstanding at the Valuation Time. The Per Unit Class B NAV of each Fund is determined by dividing the net asset value of the Class B Units of the Fund by the number of Class B Units of the Fund outstanding at the Valuation Time. The Per Unit Class A NAV and Per Unit Class B NAV of each Fund is determined by the Manager at each Valuation Time and is the price at which a Class A Unit or Class B Unit may be purchased or redeemed by a unitholder prior to the Valuation Time on a day that includes the particular Valuation Time.

5. The current management fee payable in respect of a Class A Unit is an amount not exceeding XXXXXXXXXX% per annum of the Per Unit Class A NAV of the Fund. The current management fee payable in respect of a Class B Unit is an amount not exceeding XXXXXXXXXX% per annum of the Per Unit Class B NAV of the Fund.

6. The Manager also charges an additional fee not exceeding XXXXXXXXXX% per annum of the Per Unit Class B NAV to each of the Class B Unitholders, either directly or through an intermediary, in respect of each Class B Unit held by the unitholder. This fee is negotiated by the Manager with each Class B Unitholder or intermediary separately and is set out in a Class B Unitholder Agreement. The aggregate of the management fees payable by the Fund and the separate fee payable by the Class B Unitholder in respect of a Class B Unit is lower than the management fee payable by the Fund in respect of a Class A Unit. The purpose of this fee structure is to encourage major unitholders, such as registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and high net worth individuals, to invest significant amounts in Class B Units.

7. Each Fund is responsible for the payment of the Common Expenses of the Fund. Each unitholder of a Fund effectively bears a proportionate cost of the Common Expenses of the Fund based on the number of units of the Fund held by the unitholder relative to the total number of units of the Fund outstanding.

8. For purposes of determining the amount of income to be distributed to Class A Unitholders, the amount of net income or loss of each Fund will typically be determined by subtracting the management fee payable by the Fund in respect of Class A Units and the Class A Unitholders' proportionate share of Common Expenses of the Fund from the Class A Unitholders' proportionate share of the revenue of the Fund that has been included in computing the Fund's income. For this purpose, the Fund's revenue is determined without reference to any capital gains realized by the Fund. Thus, the Class A Unitholders of each Fund effectively bear the cost of the management fee payable by the Fund in respect of Class A Units and their proportionate share of the Common Expenses of the Fund.

9. Similarly, for purposes of determining the amount of income to be distributed to Class B Unitholders, the amount of net income or loss of each Fund will typically be determined by subtracting the management fee payable by the Fund in respect of Class B Units and the Class B Unitholders' proportionate share of the Common Expenses of the Fund from the Class B Unitholders' proportionate share of the revenue of the Fund that has been included in computing the Fund's income. For this purpose, the Fund's revenue is determined without reference to any capital gains realized by the Fund. Thus, the Class B Unitholders of the Fund effectively bear the cost of the management fee payable by the Fund in respect of Class B Units and their proportionate share of the Common Expenses of the Fund.

10. For purposes of determining the amount of any capital gains to be distributed to the unitholders of the Funds, the amount of net realized capital gains of each Fund is computed separately from the amount of net income or loss of the Fund. Unitholders of both classes of a Fund are entitled to receive such distributions from the Fund on a proportionate basis.

11. Generally, distributions out of the income of Fund 1 are paid to unitholders quarterly, and distributions out of the income of Fund 2 are paid annually. Distributions out of the capital gains of both Funds are paid annually.

12. At the option of the Class A Unitholder, the Class A Units of a Fund held by the unitholder may be reclassified on any day that includes a Valuation Time into Class B Units of the same Fund having an aggregate net asset value equal to the aggregate net asset value of the Class A Units being reclassified, provided that the Class A Unitholder has entered into an acceptable Class B Unitholder Agreement with the Manager in respect of that Fund. A unitholder is not entitled to any proceeds of disposition when Class A Units are reclassified nor are the reclassified units redeemed or cancelled upon such reclassification.

13. If the aggregate net asset value of Class B Units of a Fund held by a particular Class B Unitholder falls below the threshold established by the Manager, or if the unitholder otherwise ceases to be qualified to hold Class B Units in accordance with the terms of the Class B Unitholder Agreement, or if the unitholder chooses to do so in accordance with the Class B Unitholder Agreement, the unitholder's Class B Units are reclassified as Class A Units of the same Fund having an aggregate net asset value equal to the aggregate net asset value of the Class B Units being reclassified. A unitholder is not entitled to any proceeds of disposition when Class B Units are reclassified nor are the reclassified units redeemed or cancelled upon such reclassification.

Proposed Transactions

14. The Funds propose to create a third class of units for each Fund, referred to as Class C Units. Subject to an advance income tax ruling acceptable to the trustee of the Funds, the amendments to the Fund Agreement to create the Class C Units will become effective on or before XXXXXXXXXX .

15. Class C Units will be sold on a private placement basis to certain institutional investors. The minimum aggregate initial acquisition cost of Class C Units of the Fund will be $150,000. An investor will only be eligible to subscribe for Class C Units if the investor is entitled to purchase the units of a mutual fund trust without a prospectus under the relevant securities laws. The Manager may, at its discretion, accept or reject a subscription order for Class C Units from an eligible investor. It is expected that, at least initially, investors in Class C Units will be XXXXXXXXXX.

16. The major difference between the Class C Units and the other classes of units of each Fund will be the amount of the management fee payable in respect of the Class C Units. The management fee payable to the Manager by each Fund in respect of a Class C Unit will not exceed XXXXXXXXXX% per annum of the Per Unit Class C NAV.

17. The Manager will also charge an additional fee not exceeding XXXXXXXXXX% per annum of the Per Unit Class C NAV to each of the Class C Unitholders, directly or through an intermediary, in respect of each Class C Unit held by the unitholder. This fee will be negotiated by the Manager with each Class C Unitholder or intermediary separately and will be set out in a Class C Unitholder Agreement. The aggregate of the management fees payable by the Fund and the separate fee payable by the unitholder in respect of a particular Class C Unit will be lower than the aggregate management fees payable in respect of either a Class B Unit or a Class A Unit of that Fund. It is intended that this result will encourage certain institutional investors to invest significant amounts in Class C Units.

18. The Class C Unitholders of each Fund will effectively bear the cost of the management fee payable in respect of the Class C Units and the Class C Unitholders' proportionate share of the Common Expenses of the Fund. This result will be achieved by the manner in which the Per Unit Class C NAV and the distribution of income and capital gains of the Fund to the Class C Unitholders are determined.

19. The net asset value of the Class C Units of each Fund will be determined by subtracting the management fees payable by the Fund in respect of Class C Units from the Class C Units' proportionate share of the difference between value of the Fund's assets and the outstanding liabilities related to the Common Expenses of the Fund at the Valuation Time. This calculation ensures that the Per Unit Class C NAV of a Fund reflects the fact that the Class C Unitholders of that Fund bear the full cost of the management fees applicable to Class C Units of that Fund and a proportionate share of the Common Expenses of the Fund. The Per Unit Class C NAV of each Fund will be determined by dividing the net asset value of the Class C Units of the Fund by the number of Class C Units outstanding at the Valuation Time. The Per Unit Class C NAV of each Fund will be the price at which a Class C Unit may be purchased or redeemed by a unitholder.

20. For purposes of determining the amount of income to be distributed to Class C Unitholders, the amount of net income or loss of each Fund will typically be determined by subtracting the management fee payable by the Fund in respect of the Class C Units and the Class C Units' proportionate share of the Common Expenses of the Fund from the Class C Units' proportionate share of the revenue of the Fund that has been included in computing the Fund's income. For this purpose, the income of a Fund will be computed without reference to any capital gains realized by the Fund.

21. For purposes of determining the amount of capital gains to be distributed to Class C Unitholders, the amount of net realized capital gains of each Fund will be computed separately from the amount of net income or loss of the Fund. Unitholders of all three classes of a Fund will be entitled to receive such distributions on a proportionate basis.

22. Distributions payable to Class C Unitholders of a Fund will be paid at the same time as distributions payable to Class A and Class B Unitholders of the same Fund.

23. If a Class B Unitholder holds Class B Units having a net asset value of at least $150,000 and is otherwise entitled to purchase Class C Units, the Class B Unitholder may, at the discretion of the Manager, enter into a Class C Unitholder Agreement, pursuant to which the Class B Units may be reclassified into Class C Units of the same Fund, such Class C Units having an aggregate net asset value equal to the aggregate net asset value of the Class B Units being reclassified. A unitholder will not be entitled to any proceeds of disposition upon the reclassification of the Class B Units and the reclassified units will not be redeemed or cancelled upon such reclassification.

24. When a Class C Unitholder ceases to be eligible to hold Class C Units under the terms of the Class C Unitholder Agreement, the unitholder's Class C Units may, at the discretion of the Manager, be reclassified into either Class A Units of the same Fund having an aggregate net asset value equal to the aggregate net asset value of the Class C Units being reclassified, or into Class B Units of the same Fund having an aggregate net asset value equal to the aggregate net asset value of the Class C Units being converted, but not both. A unitholder will not be entitled to any proceeds of disposition upon the reclassification of the Class C Units and the reclassified units will not be redeemed or cancelled upon such reclassification.

Purpose of Proposed Transactions

25. The purpose of the proposed transactions is to permit the Manager to more effectively offer units of the Funds to certain institutional investors and to tailor the fees applicable to such investors by offering an additional class of units of each Fund.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The creation of the Class C Units of each Fund will not, in and of itself, result in existing unitholders of such Fund being considered to have disposed of their existing units of the Fund for the purposes of the Act.

B. The creation of the Class C Units of each Fund will not, in and of itself, result in a Fund being considered to have disposed of any of its property for purposes of the Act.

C. Unitholders whose Class B Units are reclassified into Class C Units of the same Fund, as described in paragraph 23 above, will not be considered to have disposed of their Class B Units solely by reason of such reclassification.

D. Unitholders whose Class C Units are reclassified into Class A Units or Class B Units of the same Fund, as described in paragraph 24 above, will not be considered to have disposed of their Class C Units solely by reason of such reclassification.

E. The proposed transactions described herein will not, in and by themselves, cause the provisions of subsection 104(7.1) of the Act to apply so as to deny a Fund a deduction in computing its income under paragraph 104(6)(b) of the Act.

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

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency provided that the amendment to the Fund Agreement is signed and effective within six months of the date of this letter.

The above rulings should not be construed as providing our views on whether the Funds will qualify as unit trusts or mutual fund trusts for purposes of the Act.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch