2001 Ruling 2000-0045323 - Forward Contract Mimic Foreign Returns

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: Are the proposed Forward Contracts considered to be foreign property and if not, would such a transaction be subject to GAAR? What is the cost amount of the Forward Contracts?

Position: The contracts are not foreign property, GAAR is not applicable and the cost amount includes the amount paid to enter into the contract and legal fees, brokerage fees and other fees incidental to entering the contract.

Reasons: The definition of foreign property in 206(1) of the Act includes property which is exchangeable for, convertible to or confers a right to acquire foreign property. Since the Forward Contract described in the ruling is settled in Canadian dollars, does not entitle the Funds to units of the Underlying Funds, would not otherwise be considered foreign property based on the situs of the contract and does not involve the indebtedness of a non-resident person, we can conclude that the Forward Contract is not foreign property. XXXXXXXXXX .

XXXXXXXXXX 2000-004532

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
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 in respect of the income tax consequences arising from 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 contained in this advance income tax ruling are:

(a) contained in earlier returns of the taxpayers or a related person;

(b) being considered by a tax services office 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 the Directorate to the taxpayers or a related person other than XXXXXXXXXX.

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 meaning specified:

"Cash Settlement Amount" means the sum (net of the financing charge imposed on the Fund by the Counterparty) of the Cumulative Payment Amount and an amount equal to the Cumulative Notional Units multiplied by an amount that is the XXXXXXXXXX price XXXXXXXXXX of a Notional Unit as at one XXXXXXXXXX Business Day prior to the Termination Date minus the Weighted Average Forward Price;

"Cost Amount" means the cost amount of property as defined in subsection 248(1);

"Counterparty" means XXXXXXXXXX and, in either case, is a resident of Canada;

"Cumulative Notional Amount" means the sum of the Initial Payment Amount and the aggregate of all amounts, each of which is a positive or negative amount that is calculated as the product obtained by multiplying the number of Notional Units added to or subtracted from the number of Notional Units on which the Forward Contract is based as a result of a particular amendment to the Forward Contract by the XXXXXXXXXX price of a Notional Unit on the XXXXXXXXXX Business Day preceding the day of such amendment to the Forward Contract;

"Cumulative Notional Units" means the number of Notional Units upon which the payment by the Counterparty to the Fund on the Termination Date is based, which number is equal to the number of Notional Units specified in the Forward Contract on the Trade Date, adjusted to reflect the total of all increases and decreases in the number of such Notional Units as specified in any amendment to the Forward Contract prior to the Termination Date;

"Cumulative Payment Amount" is an amount equal to the sum of the Initial Payment Amount plus an amount (positive or negative) equal to the product obtained by multiplying the number of Notional Units added to or subtracted from the Forward Contract as a result of amendments to the Forward Contract by the XXXXXXXXXX price XXXXXXXXXX of a Notional Unit on the preceding XXXXXXXXXX Business Day;

"Forward Contract" and "Forward Contracts" have the meaning set out in paragraphs 7 and 8;

"Fund" means XXXXXXXXXX;

"Funds" means each Fund collectively;

XXXXXXXXXX;

"Initial Payment Amount" means the amount payable by the Fund to enter into the Forward Contract with the Counterparty and is equal to the product obtained by multiplying the number of Notional Units specified in the Forward Contract on the Trade Date by the XXXXXXXXXX price XXXXXXXXXX for a Notional Unit on the XXXXXXXXXX Business Day preceding the Trade Date;

"Manager" means XXXXXXXXXX the manager and trustee of the Funds; XXXXXXXXXX business number is XXXXXXXXXX and its Tax Services Office is XXXXXXXXXX;

"XXXXXXXXXX Business Day" means any day that is a business day in XXXXXXXXXX;

"Notional Unit" and "Notional Units" mean the number of underlying XXXXXXXXXX specified in the Forward Contract as adjusted from time to time as the basis upon which payments under the Forward Contract are determined;

"Trade Date" means the date on which a Forward Contract commences;

"Termination Date" means the date on which a Forward Contract will be settled XXXXXXXXXX;

"Units" means units of a Fund; and

"Weighted Average Forward Price" means an amount equal to the quotient obtained by dividing the Cumulative Notional Amount by the Cumulative Notional Units.

The tax services office of the Funds is the XXXXXXXXXX Tax Services Office and the Funds will file their returns at the XXXXXXXXXX.

Facts

1. The Manager is a taxable Canadian corporation within the meaning of the Act.

2. The Notional Units are foreign property within the meaning of subsection 206(1) and are qualified investments for an entity that is a registered investment within the meaning of subsection 204.4(2).

Proposed Transactions

3. The Manager will establish the Funds pursuant to a declaration of trust. The only activity of each of the Funds, as described below, will be the investing of its funds in property (other than real property or an interest in real property).

4. Each Fund will apply to become a "registered investment" under subsection 204.4(2) forthwith after it is established with effect from the date that it is established.

5. Units will be offered to the public by each Fund pursuant to the terms of a prospectus to be filed by the Funds with the securities regulatory authorities of each province and territory of Canada. The Units will be sold to residents of Canada and it is reasonable to consider that none of the Funds will be established or maintained primarily for the benefit of persons who are not residents of Canada.

Each of the Funds intends to comply with the conditions prescribed in section 4801 of the Income Tax Regulations (the "Regulations") for the purposes of paragraph 132(6)(c) so as to qualify as a mutual fund trust under the Act. It is expected that each Fund will comply with such conditions before the filing date for its respective 2001 income tax return and, pursuant to subsection 132(6.1), each Fund will elect in their respective income tax returns for 2001 to be deemed to have been a mutual fund trust from the time it was established.

6. Each Fund will invest its funds, including the proceeds of the public offering, any amounts received under a Forward Contract and income earned on its investments net of the expenses incurred by the Fund, primarily in Forward Contracts. Each Fund may invest its funds temporarily in Canadian money market securities or short-term deposits pending the investment of such funds in a Forward Contract.

7. From time to time, each Fund will enter into one or more Forward Contracts with the Counterparty. Under the terms of the sample Forward Contract submitted for our review, a Fund will pay the Initial Payment Amount to the Counterparty on the Trade Date. The Forward Contract will be adjusted each day, if necessary, to reflect the net cash received by the Fund from subscriptions and cash paid by the Fund in respect of the redemption of Units. On the Termination Date, the Counterparty will pay the Cash Settlement Amount to the Fund. The amount of the Cash Settlement Amount is linked to the investment returns generated by the Notional Units.

8. Each Forward Contract will be executed in Canada and will be governed by the laws of Canada and both parties will be resident in Canada. No Forward Contract will be listed on any stock exchange or traded over-the-counter. None of the Forward Contracts will be convertible into, exchangeable for, or provide the Fund with any right to acquire property that is foreign property. Each Forward Contract will be settled by means of a cash payment, in Canadian dollars, and will be subject to any risk of default by the Counterparty. Each Forward Contract will be for a term not exceeding XXXXXXXXXX but will be subject to renewal at the option of the parties. All the terms of the Forward Contracts will be in accordance with industry practice. The Counterparty and Fund each represent that they are entering into the Forward Contracts as principal with respect to the other party and not as agent or in any other capacity, fiduciary or otherwise with respect to the other party.

9. When it is considered appropriate, the obligations of the Counterparty under the Forward Contract will be guaranteed by another person who may or may not be resident in Canada pursuant to a guarantee agreement that is substantially the same as the draft guarantee agreement submitted for our review. The Counterparty, and not the Fund, will incur any costs arising in connection with such a guarantee and thus, the Cost Amount to the Fund of the guarantee will be nil.

10. As a result of a Fund entering into a Forward Contract, the return on the investment in Units will approximate the investment return on the Notional Units less the financing charge required to be paid by the Fund to the Counterparty under the Forward Contract and any other expenses of the Fund. The public documents relating to the public offering will state that the Units are only suitable for investment by investors that are subject to the foreign property limits under Part XI of the Act.

11. At the end of any month, the aggregate Cost Amount for purposes of the Act of the Forward Contract and any other assets held by each Fund that are not foreign property will equal or exceed 70% of the Cost Amount of all the property of the Fund.

12. In order to hedge its obligation under the Forward Contract, the Counterparty may, but is not obliged to, acquire Notional Units.

Purpose of the Proposed Transactions

13. The purpose of the proposed transactions is to provide investors that are subject to foreign property limits under Part XI of the Act an opportunity to realize investment returns that are linked to the returns realized on Notional Units without increasing the amount of foreign property held by the investors.

Rulings Given

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:

A. Provided that each of the Funds is accepted as a registered investment as set out in subsection 204.4(2) and has not been notified of a revocation of such status under subsection 204.4(3), the Units will not be foreign property as defined in subsection 206(1).

B. A Forward Contract entered into between a Fund and the Counterparty, and which is substantially similar to the draft Forward Contract submitted will not be considered to be foreign property as defined in subsection 206(1).

C. Provided that the Cost Amount at the end of a particular month of each of the Fund's Forward Contract and any other property of the Fund that is not foreign property is not less than 70% of the Cost Amount of all property of the Fund, the Fund will not be liable for tax under subsection 206(2) for that month.

D. For the purposes of subsection 248(1) and section 5000 of the Regulations, the Cost Amount to a Fund of its investment in a Forward Contract which is substantially the same as the draft contract submitted will be equal to the Cumulative Payment Amount, brokerage fees, legal fees and other costs incurred by the Fund and incidental to entering into or acquiring the investment.

E. Subsection 245(2) will not apply to redetermine the tax consequences arising from the above rulings.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency (CCRA) provided the proposed transactions are completed within six months of the date of this letter. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments thereto.

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

Yours truly,

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