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:
This ruling request involves proposed transactions that will be undertaken by a group of mutual funds. Under the proposals, the trust agreements governing the Funds will be amended to introduce a new method of allocating capital gains which will provide unitholders with a more equitable allocation of capital gains. That is capital gains will first be allocated to unitholders who redeemed units during the year, and then allocated pro-rata among unitholders of record at the end of the year.
1) On the redemption of a unit will the proceeds of disposition equal the amount paid less the XXXXXXXXXX Capital Gains allocated in respect of that unit?
2) Will subsection 104(7.1) apply to the proposed transactions?
3) Will subsection 245(2) apply to the proposed transactions?
Position TAKEN
1) Yes 2) No 3) No
Reasons FOR POSITION TAKEN
The position taken with respect to the allocation of capital gains to redeeming unitholders and for determining the proceeds of disposition on such redemptions is consistent with the position taken in a previous ruling (Doc # 981758). Subsection 104(7.1) is an anti-avoidance provision intended to prevent the streaming by commercial trusts of income and capital to different beneficiaries depending on their taxable status. However, as outlined above, the main purpose of the proposed transactions is to provide for a more equitable allocation of capital gains to unitholders. Although the proposals will result in some unitholders having a percentage interest in a Fund that is greater than their interest in the capital gains of the Fund and others may have a greater percentage interest in the capital gains than in the property of the Fund, this result was not one of the main purposes of the proposed transactions and subsection 104(7.1) should not apply.
Also, since there are good business reasons for undertaking the proposed transactions, the proposals are not avoidance transactions and GAAR should not be applied.
XXXXXXXXXX 2000-004136
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs/Mesdames:
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 on behalf of the above-noted taxpayers and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
(a) in an earlier return of the taxpayers or related persons;
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
(c) under objection by the taxpayers or related persons;
(d) before the courts; or
(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.
In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
"MCo" means XXXXXXXXXX.
"Fund" means a Fund listed in Appendix A.
"Funds" means, collectively, the funds listed in Appendix A.
"TCo" means XXXXXXXXXX.
"Exchange" means the XXXXXXXXXX Stock Exchange.
"gross-up factor" means the reciprocal of the capital gains inclusion rate for the year (i.e., the fraction that would be used for the particular year under section 38).
"unitholder(s) of record" means a unitholder who owns units at the end of a particular day.
MCo deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. The Funds file their returns with the XXXXXXXXXX Centre and deal with the XXXXXXXXXX Tax Services Office.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
FACTS
1. Each Fund is a trust governed by the laws of the province of XXXXXXXXXX. The trustee of each Fund is TCo. Accordingly, each Fund is resident in Canada for the purposes of the Act. MCo is the manager of each Fund.
2. Each Fund is currently, and will continue to be, a "mutual fund trust" within the meaning of subsection 132(6).
3. The Funds were formed principally for the purpose of providing individual investors with professional money management and portfolio diversification on a cost effective basis. Each Fund invests the unitholders' subscription monies in various financial instruments, including stocks and bonds, according to the specified investment objectives of the Fund. Consequently, the Fund earns ordinary income (dividends, interest, other income) and realizes capital gains and capital losses from the disposition of capital property.
4. The trust agreement for each Fund (the "Current Agreement") authorizes a Fund to have one class of units issued and outstanding. An unlimited number of units may be issued and no unit has any preferences or priorities over any other units. XXXXXXXXXX. Both the manager and the trustee may be unitholders of a Fund.
5. The "XXXXXXXXXX" of a Fund is the fair market value of the Fund's assets at a particular time less its liabilities at that time. "XXXXXXXXXX" is defined as the quotient obtained by dividing the XXXXXXXXXX of the Fund by the total number of outstanding units. The XXXXXXXXXX and XXXXXXXXXX per Unit are calculated on each "Valuation Day" (i.e., December 31 and each day the Exchange is open for business, or any other such day as agreed to by the manager and trustee).
6. The net income and a portion of net realized capital gains of the Fund for each year is to be made payable to and allocated to its unitholders. However, where the Fund has a loss for the year or a non-capital loss for a prior year which it is permitted to deduct in computing its income or taxable income for the year, the manager may reduce the amount of net income or net realized capital gains of the Fund otherwise payable to the unitholders. The "net income" of the Fund is determined exclusive of capital gains and losses for the year and is the sum of the dividends received, interest (recognized on an accrual basis), and other income amounts less those Fund expenses which are deductible in computing income for purposes of the Act. Fund expenses and other income amounts are both determined in accordance with generally accepted accounting principles. The "net realized capital gains" of the Fund for a calendar year is the gross-up factor times the amount, if any, by which the Fund's taxable capital gains for the year exceed the sum of the Fund's allowable capital losses for the year, the Fund's net capital losses for prior years which the Fund is entitled to deduct in computing its taxable income for the year, the portion of Fund expenses not deducted in computing the Fund's net income for the year, and the maximum amount of taxable capital gains for the year that can be retained in the Fund without giving rise to a tax liability in excess of the capital gains refund available under section 132.
7. Net income may be distributed periodically throughout a year or at the end of the year. Net realized capital gains are distributed at the end of each year. Distributions are made on a pro-rata basis among unitholders at the applicable distribution date. As an exception, a portion of net income may be distributed to certain unitholders as a management fee distribution.
8. The manager is entitled to receive from each Fund an annual management fee for its overall direction of the Fund's activities. As there is only one class of units in each Fund the same management fee is effectively charged with respect to each unit of a Fund, except in the case of management fee distributions. To encourage large investments in a Fund, the manager may reduce the management fee that it would be entitled to receive from a Fund with respect to an investment in the Fund provided that the amount of such reduction (a "management fee distribution") is distributed to the unitholder for whose benefit the fee was reduced. An amount payable as a management fee distribution is considered a distribution of the Fund's net income for the year in which the amount becomes payable, except to the extent that the manager has determined the amount to be a distribution of the Fund's net realized capital gains for the year or a distribution of any other amount.
9. Where units of a Fund are redeemed, the trustee must pay to the unitholder, out of the assets of the Fund, an amount equal to the XXXXXXXXXX per unit (determined as of the Valuation Day in respect of the redemption) multiplied by the number of units redeemed plus any allocated but undistributed income and realized capital gains attributable to such units. No fee or other charge shall be deducted by the manager, trustee or the Fund in respect of such payment.
10. XXXXXXXXXX.
11. Each Fund satisfies its liability to pay net income or net realized capital gains to a unitholder by issuing additional units having a value equal to the amount payable. A unitholder may elect to receive cash instead of additional units.
PROPOSED TRANSACTIONS
12. The Current Agreement governing each Fund will be amended, with effect from XXXXXXXXXX, to provide for the distribution of capital gains to unitholders who redeem units during a year. Any remaining capital gains will continue to be distributed on a pro-rata basis at the end of the year to unitholders. In addition, the amendments will restate XXXXXXXXXX and will require each Fund to elect a XXXXXXXXXX taxation year-end. A copy of the proposed amended trust agreement (the "Amended Agreement") was included with your ruling request.
13. The Amended Agreement for each Fund will contain the following provisions regarding distributions of the Fund's income and capital gains:
a) XXXXXXXXXX defines "XXXXXXXXXX Income" of the Fund for a taxation year to be an amount equal to the Fund's income for the year that would be determined under the Act if no amount were included or deducted in respect of capital gains and capital losses, the full amount of taxable dividends from corporations resident in Canada (but no additional amount in respect of such dividends) were included, and no amount were deducted in respect of amounts that became payable to unitholders minus the amount that may be deducted in computing the Fund's taxable income for the year in respect of the Fund's non-capital losses for prior taxation years.
b) XXXXXXXXXX provides that an amount out of the Fund's XXXXXXXXXX Income will become payable to each unitholder of record on the Income Distribution Day for each Income Distribution Period in the taxation year. An "Income Distribution Period" means each period in a taxation year that the manager has divided the taxation year into for the purpose of distributing the Fund's XXXXXXXXXX Income or, where the year has not been so divided, the taxation year. The "Income Distribution Day" for the last Income Distribution Period in the taxation year is the Fund's Valuation Day that is no earlier than the last Valuation Day of that period and no later than the last Valuation Day in the calendar year in which the taxation year ends. Where the Income Distribution Day is for the last Income Distribution Period in the taxation year, the amount payable will be the unitholder's share of the Fund's XXXXXXXXXX Income (less the portion of such XXXXXXXXXX Income that became payable to unitholders before the Income Distribution Day or any management fee distributions that became payable on that day) determined pro-rata based on the number of units held by the unitholder at the end of the Income Distribution Day relative to the total number of units held by each unitholder of record on that day. Where the Income Distribution Day is for any other Distribution Period in the taxation year, the amount payable will be the unitholder's pro-rata share of such amount as is determined by the manager in its absolute discretion.
c) XXXXXXXXXX defines "XXXXXXXXXX Capital Gains" of the Fund for the year to be a gross-up factor times the amount, if any, by which the taxable capital gains for the year exceeds the sum of the allowable capital losses for the year, the net capital losses of prior years deductible in computing taxable income for the year, the amount that would be the non-capital loss for the year if there were no taxable capital gains, and the maximum amount of the taxable capital gains for the year that can be retained in the Fund without giving rise to a tax liability in excess of the capital gains refund available under section 132.
d) XXXXXXXXXX.
e) XXXXXXXXXX.
14. Each Fund will make designations under subsection 104(21) so that the taxable portion of each amount that is a distribution to a unitholder out of the XXXXXXXXXX Capital Gains pursuant to XXXXXXXXXX of its Amended Agreement is deemed to be a taxable capital gain of the unitholder.
PURPOSE OF PROPOSED TRANSACTIONS
15. XXXXXXXXXX.
RULINGS GIVEN
Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are legally effective and carried out as described herein, our advance income tax rulings are as follows:
A. With respect to the amount payable to a unitholder on the redemption of a unit during the taxation year that will be a distribution out of the XXXXXXXXXX Capital Gains as described in 13(d) above:
(i) For the purposes of paragraph 104(6)(b), the Fund may deduct from its income for a taxation year the taxable portion of the XXXXXXXXXX Capital Gains that were payable in the year to such a unitholder.
(ii) Pursuant to subsection 104(13), the taxable portion of the XXXXXXXXXX Capital Gains of a Fund that became payable in the year to such a unitholder will be included in computing that unitholder's income for the year. To the extent that the Fund makes the proper designations in its return of income for a taxation year, the amount of the XXXXXXXXXX Capital Gains of a Fund determined to be the unitholder's taxable capital gain will be the unitholder's taxable capital gain in accordance with subsection 104(21).
(iii) In computing such a unitholder's gain in respect of the units which were redeemed, the proceeds of disposition for those units will be the amount by which the XXXXXXXXXX of the units redeemed exceeds the amount that, in respect of those units, was the unitholder's share of the XXXXXXXXXX Capital Gains for the year.
B. In computing the amount of the "capital gains refund" for the year under subsection 132(1) in respect of the capital gains of a Fund which are subject to tax in the Fund, amount A in the calculation of the "capital gains redemptions" of a Fund for a taxation year in subsection 132(4) will be equal to XXXXXXXXXX.
C. The implementation of the proposed transactions described herein, will not, in and by themselves, cause subsection 104(7.1) to apply so as to deny the Funds a deduction under subsection 104(6)(b).
D. Subsection 245(2) will not be applied to redetermine the tax consequences of Rulings A to C above solely as a result of the implementation of the proposed transactions described herein.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency (CCRA) provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act, which if enacted into law, could have an effect on the rulings provided herein.
The above rulings should not be construed as providing the CCRA's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.
After the proposed transactions are implemented, a Fund's continued entitlement to a capital gains refund under subsection 132(1) may not be consistent with the policy intent of this provision. As a result, the Department of Finance has been advised of our concerns in this regard.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
XXXXXXXXXX
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