2003 Ruling 2003-0007243 - XXXXXXXXXX - Mutual Fund

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:

1. Whether a XXXXXXXXXX month delay before shares can be redeemed is offside of the requirement under 131(8)(c)(i) that the shares be redeemable" on demand."

2. Whether the conversion feature attached to the mutual fund shares cause XXXXXXXXXX

Position: 1. No.

2. No

Reasons: 1. This does not offend 131(8)(c)(i) in this situation. We have ruled that delays are permissible to permit liquidation of XXXXXXXXXX in an orderly manner to obtain funds to satisfy initial requests for redemptions. In the case at hand, the shares held are concentrated among a few corporations and are not liquid enough to support the expected number of redemption requests that would occur.

2. The general intent of the prescribed XXXXXXXXXX regulations is to ensure that a share would qualify for treatment as a XXXXXXXXXX only if the investor is truly at risk for the consideration for which the share was issued. The conversion privileges attached to the various series of shares within Class 1, and the right to exchange shares between classes at the net asset value of the share do not cause the XXXXXXXXXX to be prescribed under 6202.1.

XXXXXXXXXX 2003-000724

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
(collectively referred to herein as "the Applicants")
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested advance income tax rulings on behalf of the Applicants.

To the best of your knowledge, and that of the Applicants involved, none of the issues contained herein is:

(i) dealt with in an earlier return of one or any the Applicants or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the Applicants or a related person;

(iii) under objection by one or any of the Applicants or a related person;

(iv) is the subject of a ruling previously issued by the Income Tax Rulings Directorate except certain transactions XXXXXXXXXX; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

In this letter, the following terms have the meanings specified:

(a) "XXXXXXXXXX Transfer Agreement" means the transfer agreement entered into between LP C and Mutual Fund on XXXXXXXXXX under which LP C has, subject to satisfaction of certain conditions precedent, agreed to transfer all of its property that is eligible property to Mutual Fund in exchange for Series XXXXXXXXXX shares on or about XXXXXXXXXX.

(b) "XXXXXXXXXX Transfer Agreement" means the transfer agreement to be entered into between LP D and Mutual Fund under which LP D, subject to satisfaction of certain conditions precedent, will agree to transfer all of its property which is eligible property to Mutual Fund on or about XXXXXXXXXX, in exchange for Series XXXXXXXXXX shares.

(c) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(d) "Articles of Amendment" means the Articles of Amendment dated XXXXXXXXXX amending the Mutual Fund's articles of incorporation and creating XXXXXXXXXX classes of Fund Shares, issuable in series and consisting of an unlimited number of shares.

(e) XXXXXXXXXX;

(f) "Class 1 shares" means Class 1 Fund Shares of the Mutual Fund;

(g) "Class 2 shares" means Class 2 Fund Shares of the Mutual Fund;

(h) "Class 3 shares" means Class 3 Fund Shares of the Mutual Fund;

(i) "Class Net Asset Value" means the amount determined at each Valuation Time that is the value of the assets of the Class less its liabilities plus or minus any other items accrued on that Trading Day determined by the board of directors of the Mutual Fund to be relevant in determining net change in non-portfolio assets. The method of valuation operates by adjusting the Class Net Asset Value determined at the last Valuation Time to take into account net subscriptions and redemptions, income earned, and changes in the value of assets held.

(j) "Class Net Asset Value per Share" means the amount determined by dividing the Class Net Asset Value by the total number of shares of such class then outstanding as at such Valuation Time, prior to any issue or redemption (including an exchange) of shares of such class to be processed by the Mutual Fund immediately after the Valuation Time on that Trading Day.

(k) "Company Act" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

(l) "cost amount" has the meaning assigned by subsection 248(1) of the Act;

(m) "eligible property" has the meaning assigned by subsection 85(1.1) of the Act;

(n) XXXXXXXXXX;

(o) "Fund Shares" means the XXXXXXXXXX classes of shares of Mutual Fund created in the Articles of Amendment, issuable in series and consisting of an unlimited number of shares;

(p) XXXXXXXXXX;

(q) XXXXXXXXXX;

(r) "LP C" means XXXXXXXXXX, a limited partnership formed on XXXXXXXXXX under the laws of XXXXXXXXXX;

(s) "LP D" means XXXXXXXXXX, a limited partnership formed on XXXXXXXXXX under the laws of XXXXXXXXXX;

(t) XXXXXXXXXX;

(u) "ManageCo" means XXXXXXXXXX, a corporation incorporated under the Company Act on XXXXXXXXXX;

(v) "ManageCoC" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(w) "ManageCoD" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(x) "MF Shares" means the Mutual Fund shares issued prior to the Articles of Amendment of Mutual Fund;

(y) "Mutual Fund" means XXXXXXXXXX, a corporation incorporated under the Company Act on XXXXXXXXXX;

(z) XXXXXXXXXX;

(aa) XXXXXXXXXX;

(bb) "Mutual Fund Shares" means the series of Class 1 shares of Mutual Fund and authorized in the Articles of Amendment and designated as Mutual Fund Shares;

(cc) "New Fund Shares" means the classes of shares to be created as Class 2 Fund Shares and Class 3 Fund Shares of the Mutual Fund;

(dd) "Partnership Act" means the Limited Partnerships Act of XXXXXXXXXX;

(ee) "prescribed share" has the meaning assigned by section 6202.1 of the Income Tax Regulations;

(ff) XXXXXXXXXX;

(gg) "Series XXXXXXXXXX shares" means the series of shares issued as Class 1 shares of Mutual Fund and designated as Series XXXXXXXXXX Shares;

(hh) "Series XXXXXXXXXX shares" means the series of shares to be issued as Class 1 shares of Mutual Fund and designated as Series XXXXXXXXXX Shares; and

(ii) "Series XXXXXXXXXX shares" means the series of shares to be issued as Class 1 shares of Mutual Fund and designated as Series XXXXXXXXXX Shares;

(jj) "Trading Day" means XXXXXXXXXX; and

(kk) "Valuation Time" means the particular time on a Trading Day at which the Class Net Asset Value of a Class is determined by or under the authority of the board of directors of the Mutual Fund.

FACTS

The Mutual Fund

1. On XXXXXXXXXX, Mutual Fund elected to be a "public corporation" pursuant to paragraph (b) of the definition of "public corporation" in subsection 89(1) of the Act.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. Three series of Class 1 shares were authorized under the Articles of Amendment, and designated as Mutual Fund Shares, Series XXXXXXXXXX shares, and Series XXXXXXXXXX shares. Each MF Share outstanding at the effective date of the Articles of Amendment XXXXXXXXXX were exchanged for Mutual Fund Shares on a one-for-one basis.

5. The Articles of Amendment provide that the rights, privileges and conditions of the common share issued by Mutual Fund are that the holder thereof (i) is entitled to one vote at shareholders' meetings, (ii) is entitled to receive any dividend declared thereon, (iii) may, at any time, make a request requiring Mutual Fund to redeem the common share for a redemption price equal to $XXXXXXXXXX if any other shares of Mutual Fund are outstanding or, if no other shares are outstanding, for a redemption price equal to the net asset value of Mutual Fund, and (iv) is entitled, subject to the rights of holders of other shares, to receive the remaining property of Mutual Fund on liquidation, dissolution or winding up.

6. The Articles of Amendment provide that each of the XXXXXXXXXX classes of Fund Shares shall have rights, privileges, restrictions and conditions including:

(i) no right to vote at shareholders' meetings, except as required by the Company Act or applicable securities laws;

(ii) the right to receive dividends as may be declared thereon by the directors of Mutual Fund;

(iii) the right to be redeemed at the option of the holder by delivering a redemption notice to Mutual Fund at a price equal to the Class Net Asset Value per Share. The Class Net Asset Value per Share of a Class as of any date is determined in the method provided by the Articles of Amendment, the purpose of which is to value the assets of Mutual Fund attributable to that Class less the liabilities attributable to that Class. Redemption rights may be suspended in certain circumstances;

(iv) the right to be redeemed at the option of Mutual Fund at a price equal to the Class Net Asset Value per Share in order to fund the payment of expenses owing by the shareholder, or if necessary, to ensure that Mutual Fund complies with the provisions of the Act governing mutual fund corporations, as defined in subsection 131(8) of the Act, or other legislation or regulatory requirements or to ensure that Mutual Fund does not become subject to legislation under a foreign jurisdiction; and

(v) the right to be exchanged for shares of any other class of Fund Shares in respect of which shares are issued. The basis of the exchange would be that shares of the old class would be exchanged for shares of the new class through issuance of that number of shares of the new class equal to the number obtained by dividing the aggregate Net Asset Value of the old shares by the Class Net Asset Value per share of the new shares at the Valuation time on that Pricing Date. As of the date hereof, there are no shares of any other class for which Class 1 shares may be exchanged.

7. The Articles of Amendment also established the rights, privileges, restrictions and conditions attaching to the Mutual Fund Shares, Series XXXXXXXXXX shares, and Series XXXXXXXXXX shares, being the first three series of the Class 1 shares. The conditions are as follows:

(i) Mutual Fund Shares may be issued on or after XXXXXXXXXX. Mutual Fund Shares tendered for redemption on or before Friday in each week will be redeemed on such date for an amount equal to the Class 1 Net Asset Value per Share;

(ii) Series XXXXXXXXXX shares may first be issued on or after XXXXXXXXXX. Payment for Series XXXXXXXXXX shares tendered for redemption on or before XXXXXXXXXX will be made on XXXXXXXXXX based on the Class 1 Net Asset Value per Share on XXXXXXXXXX. Thereafter, Series XXXXXXXXXX shares tendered for redemption on or before Friday in each week will be redeemed on such date for an amount equal to the Class 1 Net Asset Value per Share;

(iii) Series XXXXXXXXXX shares may first be issued on or after XXXXXXXXXX . Payment for Series XXXXXXXXXX shares tendered for redemption on or before XXXXXXXXXX will be made on XXXXXXXXXX based on the Class 1 Net Asset Value per Share on XXXXXXXXXX. Thereafter, Series XXXXXXXXXX shares tendered for redemption on or before Friday in each week will be redeemed on such date for an amount equal to the Class 1 Net Asset Value per Share; and

(iv) The Series XXXXXXXXXX shares and Series XXXXXXXXXX shares will be automatically converted on a one-for-one basis for Mutual Fund Shares on XXXXXXXXXX of the year in which such shares are first issued.

8. Since the Mutual Fund Shares, Series XXXXXXXXXX shares and Series XXXXXXXXXX shares are of the same class (i.e. Class 1), they have the same Class Net Asset Value per Share. The principal difference between each series of shares is the dates on which they may be first issued or redeemed.

9. XXXXXXXXXX.

LP C

10. LP C's tax shelter registration number under subsection 237.1(3) of the Act is XXXXXXXXXX. A declaration of limited partnership was filed under the Partnership Act on XXXXXXXXXX. ManageCoC is the general partner of LP C. LP C is governed by an Amended and Restated Limited Partnership Agreement dated as of XXXXXXXXXX. In XXXXXXXXXX, LP C completed an offering to the public pursuant to a prospectus of XXXXXXXXXX limited partnership units at $XXXXXXXXXX per limited partnership unit.

11. LP C was formed to invest in common shares of corporations, each of which is a XXXXXXXXXX corporation and that are XXXXXXXXXX. LP C entered into agreements with XXXXXXXXXX corporations under which it subscribed for XXXXXXXXXX with an aggregate subscription price of $XXXXXXXXXX. The issuers of such XXXXXXXXXX have renounced to LP C XXXXXXXXXX. Such XXXXXXXXXX has been allocated pursuant to the partnership agreement of LP C to those persons who were limited partners at XXXXXXXXXX in proportion to the number of limited partnership units held at such date.

LP D

12. LP D's tax shelter registration number under subsection 237.1(3) of the Act is XXXXXXXXXX. A declaration of limited partnership was filed under the Partnerships Act on XXXXXXXXXX. ManageCoD is the general partner of LP D. LP D intends to offer limited partnership units to the public at a subscription price of $XXXXXXXXXX per unit pursuant to a prospectus filed in all of the provinces of Canada. An amended preliminary prospectus was filed on XXXXXXXXXX. LP D was formed to invest primarily in common shares of the corporations each of which is a XXXXXXXXXX corporation and whose shares are XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. In order to afford liquidity to limited partners of LP C, LP C entered into the XXXXXXXXXX Transfer Agreement. The Series XXXXXXXXXX shares to be issued will have an aggregate net asset value equal to the net asset value of LP C (disregarding the obligation of LP C to pay a performance bonus in Series XXXXXXXXXX shares to ManageCoC if such a bonus is payable) and Mutual Fund and LP C have agreed to file elections under subsection 85(2) of the Act in respect of each transferred property equal to the cost amount thereof, subject to the limitations set forth in subsection 85(1) and (2) of the Act. If a property does not have a cost amount (such as a XXXXXXXXXX), the elected amount will be $XXXXXXXXXX (in the case of all XXXXXXXXXX of a single issuer, the elected amount would be $XXXXXXXXXX). Any property of LP C that would not be eligible property will be distributed to the partners thereof prior to such transfer. Immediately following the transfer of the transferred assets to Mutual Fund and the payment of a performance bonus, if any, owed to ManageCoC, LP C will be dissolved. At such time, the only property of the partnership will be the remaining Series XXXXXXXXXX shares and ManageCoC will receive XXXXXXXXXX% of the remaining Series XXXXXXXXXX shares and the limited partners will receive XXXXXXXXXX% of the remaining Series XXXXXXXXXX shares, in proportion to the number of limited partnership units held. It is intended that subsection 85(3) of the Act apply to the dissolution.

14. LP D intends to enter into agreements with XXXXXXXXXX corporations under which it will subscribe for XXXXXXXXXX. Most, if not all, of these agreements will be entered into after the XXXXXXXXXX Transfer Agreement is entered into. XXXXXXXXXX. LP D may also invest in securities of other issuers, such as limited partnerships, that entitle it to an allocation of XXXXXXXXXX. The XXXXXXXXXX of LP D will be allocated, pursuant to the partnership agreement of LP D, to those persons who are limited partners at XXXXXXXXXX in proportion to the number of limited partnership units held at such date.

15. In order to afford liquidity to limited partners of LP D, LP D will enter into the XXXXXXXXXX Transfer Agreement. The Series XXXXXXXXXX shares to be issued will have an aggregate net asset value equal to the net asset value of LP D (disregarding the obligation of LP D to pay a performance bonus in Series XXXXXXXXXX shares to ManageCoD if such a bonus is payable) and LP D and Mutual Fund will agree to file elections under subsection 85(2) of the Act in respect of each of the transferred properties at an elected amount equal to the cost amount subject to the limitations set forth in subsections 85(1) and (2) of the Act. If a property does not have a cost amount (such as a XXXXXXXXXX), the elected amount will be $XXXXXXXXXX (and in the case of all XXXXXXXXXX of a single issuer, the elected amount would be $XXXXXXXXXX ). Any properties of LP D that would not be eligible property will be distributed to the partners thereof prior to such transfer. Immediately following the transfer of the transferred assets to Mutual Fund and the payment of a performance bonus, if any, owed to ManageCoD, LP D will be dissolved. At such time, the only property of LP D will be the remaining Series XXXXXXXXXX shares and ManageCoD will receive XXXXXXXXXX% of the remaining Series XXXXXXXXXX shares owned by LP D and the limited partners will receive XXXXXXXXXX% of the remaining Series XXXXXXXXXX shares owned by LP D, in proportion to the number of limited partnership units held. It is intended that subsection 85(3) of the Act will apply to the dissolution.

16. The Mutual Fund will file articles of amendment to create the Series XXXXXXXXXX shares of the Class 1 shares. The principal provisions of the Series XXXXXXXXXX shares will be that payment for Series XXXXXXXXXX shares tendered for redemption on or before XXXXXXXXXX will be made on XXXXXXXXXX based on the Class 1 Net Asset Value per Share on XXXXXXXXXX. Thereafter, Series XXXXXXXXXX shares tendered for redemption on or before XXXXXXXXXX will be redeemed on such date. The Series XXXXXXXXXX shares will be automatically converted on a one-for-one basis for Mutual Fund Shares on XXXXXXXXXX. The Series XXXXXXXXXX share provisions will be amended to provide, and the Series XXXXXXXXXX share provisions will provide, that such shares may not be exchanged for Fund Shares of another class before the first date on which redemptions of such shares first would be able to be made.

17. The other XXXXXXXXXX classes of Fund Shares authorized by the Articles of Amendment were authorized in order to permit the Mutual Fund to adopt a "switch fund" structure in the future, without the need for future shareholder approval, if it were determined to be desirable to do so. The Mutual Fund has determined that, subject to the receipt of rulings requested herein, it would be appropriate to designate by resolution of its directors the New Fund Shares to be issued by the Mutual Fund. The terms and conditions of each additional class of New Fund Shares will be identical to the terms and conditions of the Class 1 shares except that they would not be issued in series. Each class of Fund Shares would be treated for securities law purposes as a separate mutual fund and the investment portfolio allocated to the particular class would have a specific investment objective and would be subject to specific investment restrictions. The investment objective related to the first class of New Fund Shares (i.e., Class 2) would be long-term capital appreciation and would be achieved primarily through investment in XXXXXXXXXX. The investment objective related to the second class of New Fund Shares (i.e., Class 3) would be to provide a stable level of income while preserving capital through investment in a portfolio of XXXXXXXXXX. By virtue of the exchange feature in the provisions of the Class 1 shares, a holder could exchange each Class 1 share for such number of New Fund Shares as have the same net asset value as one Class 1 share.

PURPOSES OF THE PROPOSED TRANSACTIONS

18. The purpose of creating the Series XXXXXXXXXX shares is to permit the Mutual Fund to acquire the portfolio of XXXXXXXXXX and other property of LP D in exchange for Series XXXXXXXXXX shares and the purpose of including in the provisions of the Series XXXXXXXXXX shares a restriction that the first redemption of shares of that series not take place until XXXXXXXXXX (a date approximately XXXXXXXXXX months after the date of the first issuance of such shares on the acquisition of the portfolio from LP D) is so that the Mutual Fund is not required to liquidate immediately a substantial portion of the portfolio so acquired because of redemption requests received from former limited partners of LP D. If the first redemption date is so deferred, the Mutual Fund may complete an ordinary liquidation of the portfolio in order to fund redemption requests.

19. The purpose of creating the New Fund Shares is to afford former limited partners of XXXXXXXXXX limited partnerships who hold Class 1 shares with the ability to diversify their investments by switching, if desired, all or part of such Class 1 shares for New Fund Shares having the same net asset value but representing a different investment opportunity. Such a switch would occur on a tax-deferred basis pursuant to section 51 of the Act. As an investor would remain a shareholder of the Mutual Fund, ManageCo, which is the manager of the Mutual Fund, would continue to earn management fees in respect of the investors investment. This would not be the case if an investor were to redeem Class 1 shares in order to invest in a mutual fund sponsored by another investment manager.

RULINGS GIVEN

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, and provided that LP C, and LP D are partnerships at law, our rulings are as set forth below:

A. The deferral of the redemption date for the Series XXXXXXXXXX shares as described in paragraph 16 above will not, in and of itself, preclude Mutual Fund from satisfying the requirements of subparagraph 131(8)(c)(i) of the Act.

B. The designation and creation of the New Fund Shares that could be issued to a holder of Class 1 shares on an exchange of Class 1 shares, in and by themselves, will not cause a share issued by a XXXXXXXXXX corporation to LP C or LP D to be a prescribed share for purposes of the definition of XXXXXXXXXX.

Ruling A is conditional on Mutual Fund obtaining, from the XXXXXXXXXX, exemptions from the requirement in sections 10.3 and 10.4 of National Instrument 81-102 of the Canadian Securities Administrators, and on the Series XXXXXXXXXX shares being created and designated on or before XXXXXXXXXX.

Ruling B is conditional on the New Fund Shares being created and designated on or before XXXXXXXXXX.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002, and are binding provided that LP C is wound-up as described in paragraphs 12 above on or before XXXXXXXXXX and LP D is wound-up on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

OTHER COMMENTS

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein;

(b) whether or not XXXXXXXXXX, subsections 51(1), 55(1), XXXXXXXXXX or 85(1), (2) or (3) of the Act will apply to any transaction described above;

(c) the GST implications of any of the proposed transactions;

(d) whether a unit held by a partner of LP C or LP D is held on income or capital account; and

(e) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch