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:
Where a class of units of a unit trust is issued in two series:
1. in Reg. 4801(a)(i), is it sufficient if only one of the series of the class is qualified for distribution to the public?
2. in Reg. 4801(b), does the requirement that there be at least 150 unitholders pertain to a class rather than to each series in the class?
3. in Reg. 4803(1), in determining the number of units that constitutes a block, is it possible to have different block sizes depending on the value of each series of units? E.g. if the FMV of the first series is $10 per unit and the FMV of the second series is $40, is it appropriate to consider a block of units to consist of 100 units of the first series or 25 units of the second series?
Position:
1. Yes.
2. Yes.
3. Generally no.
Reasons:
1. If there are units of one series of a class that are qualified for distribution to the public, then there are units of that class that are so qualified per Reg. 4803(2)(a). This is consistent with the other two positions adopted herein since they do not make any distinction based on series.
2. There is no rule for trusts that is similar to the rule for corporations in subsection 248(6) that treats each series of a class of shares as a class itself. Accordingly, where units of a class are issued in more than one series, there must be at least 150 unitholders each of whom owns a block of units of any series of the class. In the hypothetical example, if there are 100 unitholders of one series, there must be at least 50 unitholders of the other series.
3. Since 248(6) does not treat a reference to a class of units of a trust as a reference to a series within the class, it is not generally appropriate to determine different block sizes for different series. If only units of the second class were issued, the block size would be 25 since the fair market value of the units would be at least $25 but less than $100. If there were also units of the first series issued but there were 150 unitholders each holding 25 units of the second series, the trust should still be able to qualify on the basis of having a sufficient number of unitholders of the second series. That is, the fact that two series are issued should not detract from the ability of the trust to qualify if it were to have not issued any units of the first series. However, where the number of unitholders of both series must be considered, it is our view that the block size for the class should be based on the value of the cheaper series.
In summary, if the first series qualified for distribution to the public, any of the following scenarios would enable the trust to qualify:
150 unitholders of 100 units of the first series;
150 unitholders of 25 units of the second series;
(150 - N) unitholders of 100 units of the first series + N unitholders of 100 units of the second series.
XXXXXXXXXX J.D. Brooks
2002-016754
February 12, 2003
Dear XXXXXXXXXX:
Re: Section 4801 of the Income Tax Regulations
This is in reply to your letter dated October 9, 2002, in which you requested our views on section 4801 of the Income Tax Regulations as it would apply in a hypothetical situation in which the units of a unit trust consist of one class issued in two series, one of the series having a fair market value of less than $25 per unit and the other having a fair market value of more than $25 but less than $100 per unit.
The situation outlined in your letter appears to relate to an actual situation. Confirmation of the tax implications of proposed transactions is given only in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular situation relates to transactions that have been completed, the enquiry should be directed to the local tax services office where the taxpayer's returns are filed. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.
Where shares of a corporation are issued in series, subsection 248(6) of the Income Tax Act (the Act) treats each series as a class; however, there is no similar provision dealing with units of a trust and thus the tests must be applied on a class basis rather than a series basis.
With respect to the requirement in subparagraph 4801(a)(i) of the Regulations that a class of units must be qualified for distribution to the public, it is our view that this requirement would be met even if only one of the series of a class were qualified for distribution to the public since paragraph 4803(2)(a) of the Regulations does not distinguish between series and class.
One of the requirements of paragraph 4801(b) of the Regulations is that there be at least 150 unitholders each of whom holds at least a block of units of a class that meets the test in paragraph 4801(a) of the Regulations. If subsection 248(6) of the Act were amended to treat each series as a class, there would have to be at least 150 unitholders each of whom held at least one block of units of the series that met the test in paragraph 4801(a) of the Regulations. Since the test does not distinguish between a class and a series of a class, there must be at least 150 unitholders each of whom holds at least one block of units of any series of the class. In the hypothetical example, if there were 100 unitholders each holding one or more blocks of one series, there would have to be at least 50 unitholders each holding one or more blocks of the other series. The following paragraph addresses the issue of the meaning of a block of units.
A block of units is defined in subsection 4803(1) of the Regulations with respect to any class of units of a trust, and means a certain number of units, which number depends on the fair market value of the units of the class. The definition does not contemplate there being more than one series in a class of units. In the hypothetical example, if only units of the first series were issued, the block size would be 100 since the fair market value of the units would be less than $25. On the other hand, if only units of the second series were issued, the block size would be 25 since the fair market value of the units would be at least $25 but less than $100. If both series were issued and there were at least 150 unitholders each holding at least 25 units of the second series, it would be appropriate to consider the block size for the class to be 25 units. That is, if there is a sufficient number of unitholders of one series to enable the trust to qualify if one considered only the fair market value of units of that series, it should be inconsequential that there is not a sufficient number of unitholders of the other series if one considered only the fair market value of units of that other series. However, if both series were issued but there were not 150 unitholders each holding at least 25 units of the second class, it is our view that, for purposes of determining block size, it would be appropriate to consider the least valuable unit in the class. Thus, continuing with the hypothetical example, the block size would be 100 and thus if there were 100 unitholders of the first series each holding at least 100 units, and there would have to be at least 50 unitholders of the second series, each holding at least 100 units.
We trust that these comments are of assistance to you. These comments represent an expression of opinion which, as indicated in paragraph 22 of Information Circular 70-6R5, is not an advance income tax ruling and, accordingly, is not binding on the Canada Customs and Revenue Agency.
Yours truly,
Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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