2003 Ruling 2003-000348D - Mutual Fund Trust - Capital Gain Allocation

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: A mutual fund trust proposes to modify its trust indenture to maximize the distribution of the trust's net capital gains to XXXXXXXXXX unitholders (capital gains will first be allocated to XXXXXXXXXX unitholders and then to the remaining unitholders), thereby reducing the perceived inefficiencies in the capital gains refund formula in section 132.

The rulings requested are:

A) The trust may deduct the taxable portion of the capital gains payable to a XXXXXXXXXX unitholder (104(6)(b)).

B) The taxable portion of the capital gain paid to a XXXXXXXXXX unitholder will be included in including his income (104(13)).

C) The taxable portion of the capital gain paid to a XXXXXXXXXX unitholder will be deemed to be a taxable capital gain of the unitholder (104(21)).

D) The proceeds of disposition of the redeemed units will be equal to the excess of the NAV of the units over the capital gains distributions in respect of those units.

E) Variable A of 132(4) "capital gains redemptions" will be equal to the aggregate proceeds of disposition of all units redeemed, net of any capital gains distribution on those units.

F) 107(4.1) will not apply.

G) 245(2) will not apply.

Position: The rulings are granted.

Reasons: Consistent with rulings previously issued. The amended trust indenture indicates the amounts of net capital gains to be allocated to the XXXXXXXXXX unitholders and the trustee cannot exercise any discretion in making that determination.

XXXXXXXXXX 2003-000348

XXXXXXXXXX, 2003

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 taxpayer. We also acknowledge our subsequent telephone conversations and correspondence concerning your request.

To the best of your knowledge, and that of the taxpayer named above, none of the issues involved in this advance income tax ruling request:

(a) is considered in an earlier return of the taxpayer or a person related to the taxpayer;

(b) is being considered by a tax services office or a taxation centre in connection with a previously filed income tax return of the taxpayer or a person related to the taxpayer;

(c) is under objection by the taxpayer or a person related to the taxpayer;

(d) is or has been before the courts; or

(e) is the subject of a ruling previously considered by the Income Tax Rulings Directorate in respect of the taxpayer or a person related to the taxpayer.

The following definitions are applicable to this document:

"Adjusted Cost Base" means the 'adjusted cost base' of a Unit as computed under the Tax Act as determined by the Manager;

"Class" means one of the XXXXXXXXXX Classes of Units;

"Classes of Units" means the XXXXXXXXXX classes of Units described in the XXXXXXXXXX, namely: XXXXXXXXXX. The holders of XXXXXXXXXX have different management fee and administrative expenses. Holders of XXXXXXXXXX receive fixed monthly distributions consisting of Net Income (paragraph XXXXXXXXXX of the Trust Declaration), Net Capital Gains (paragraph XXXXXXXXXX of the Trust Declaration) and return of capital. Holders of XXXXXXXXXX will receive annual distributions of Net Income and Net Capital Gains;

"Corporation" means XXXXXXXXXX, a corporation resident in Canada;

"Fund" means the Fund named XXXXXXXXXX, a trust created by the Trust Declaration and governed by the laws of the Province of XXXXXXXXXX. Its mailing address is XXXXXXXXXX;

"XXXXXXXXXX Unitholder" means a Unitholder for whom an agent or nominee of the Unitholder makes an information return in prescribed form under section 230 of the Regulations in respect of the Unitholder's Units, as a result of the application of subsection 230(6) of the Regulations;

"Management Fee Distribution" means an amount distributed to a Unitholder that is equal to the amount, if any, by which the management fee with respect to Units held by that Unitholder is reduced;

"Manager" means the Corporation;

"XXXXXXXXXX Cost Base" means the Adjusted Cost Base of a Unit during a particular calendar year determined without reference to the aggregate of the amounts, if any, received by the Unitholder during that calendar year in respect of the Unit to which subparagraph 53(2)(h)(i.1) applies;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

"Net Capital Gains of a Class" for a particular taxation year means the Net Capital Gains of the Fund recalculated by the Trustee for each Class as though each Class was a Fund, provided the Net Capital Gains of the Fund, before the deduction of distributions, will be allocated by the Trustee rateably among the Classes from time to time based on the relative XXXXXXXXXX of the Classes and provided that no class of the Fund may have Net Capital Gains which is less than zero for a taxation year of the Fund when another Class of the Fund has Net Capital Gains that is greater than zero;

"Net Capital Gains of the Fund" for a particular taxation year means the amount, if any, by which the excess of the capital gains over the capital losses of the Fund arising from the disposition of assets comprising all or part of the Fund property in such taxation year exceeds the amount determined by the Trustee in respect of net capital losses, if any, for prior taxation years, in respect of which an amount may be deductible under the Tax Act in the taxation year. The Net Capital Gains of the Fund may be adjusted, as determined by the Trustee;

"Net Income of a Class" for a particular taxation year means the Net Income of the Fund recalculated by the Trustee for each Class as though each Class was a Fund, as indicated in Article XXXXXXXXXX of the Trust Declaration;

XXXXXXXXXX;

"XXXXXXXXXX Unitholder" means a Unitholder (other than an XXXXXXXXXX Unitholder) who has redeemed Units at any time during a period that starts at the beginning of a particular calendar year and ends on the last day of the Fund's taxation year that ends in that particular calendar year;

"Regulations" means the Income Tax Regulations, CRC 1978, c.945, as amended;

"Tax Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended;

"Trust Declaration" means the Declaration of Trust of the Fund dated XXXXXXXXXX;

"Trustee" means the Corporation;

"Units" means the units into which the Fund is divided, including a unit of a Class and, where appropriate, includes a fraction of a unit;

"Unitholder" means any individual, firm, trust, corporation, association, partnership, society, fund or other organization which has purchased and continues to own Units;

"XXXXXXXXXX Capital Gain" means the amount, if any, by which the XXXXXXXXXX Per Unit of a XXXXXXXXXX Unitholder's Units that were redeemed, exceeds the aggregate XXXXXXXXXX Cost Base of those Units as of the time those Units were redeemed.

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

FACTS

1. The Fund is resident in Canada for purposes of the Tax Act. The Fund does not yet have a tax account number.

2. The Fund is a "unit trust" within the meaning of paragraph 108(2)(a) of the Tax Act. Before the XXXXXXXXXX day after the end of its first taxation year, and at all times thereafter, the Fund will qualify as a "mutual fund trust" within the meaning of subsection 132(6) of the Tax Act. The Fund is not a money market fund as defined in National Instrument 81-102 Mutual Funds of the Canadian Securities Administrators.

3. In its tax return for its first taxation year, the Fund will elect under subsection 132(6.1) of the Tax Act such that it will be deemed to be a mutual find trust under the Tax Act from the beginning of its first taxation year.

4. The Fund will elect under subsection 132.11(1) of the Tax Act to have its taxation year end on XXXXXXXXXX of each year.

5. The Fund was formed principally for the purpose of providing investors with professional money management and portfolio diversification services on a cost-effective basis.

6. The Trust Declaration permits the Fund to issue Units in more than one class provided that the requirements of XXXXXXXXXX of the Trust Declaration are satisfied. The Trustee has complied with the requirements of XXXXXXXXXX of the Trust Declaration such that the Fund is currently authorized to issue the Classes of Units.

7. Prior to December 31 of each calendar year, the Trustee will declare and make payable to the Unitholders their share of the Net Income of a Class, and a sufficient portion of their share of the Net Capital Gains of a Class, so that the Fund will not be subject to tax under Part I of the Tax Act for its taxation year ending in the particular calendar year. For holders of Class F Units, Class O Units and Fund Units, the distribution is expected to occur between XXXXXXXXXX of the calendar year that includes the end of the Fund's taxation year. XXXXXXXXXX.

8. Where Units are redeemed by a XXXXXXXXXX Unitholder, the Fund will pay to such XXXXXXXXXX Unitholder, out of the assets of the Fund, an amount equal to the aggregate XXXXXXXXXX per Unit of the Units being redeemed (determined as of the applicable valuation day in respect of the redemption) plus the proportionate share attributable to such Units of any distributions of Net Income of a Class, Net Capital Gains of a Class and any Management Fee Distributions which have been declared but not paid, less any redemption fees or other fees payable by the Unitholder.

9. The Trustee will prepare such information slips as are required under the Tax Act and Regulations in order to report the amount of income and taxable capital gains allocated to the Unitholders of the Fund. In cases where subsection 230(6) of the Regulations apply, the nominee or agent of an XXXXXXXXXX Unitholder will prepare information slips required under section 230 of the Regulations in respect of XXXXXXXXXX Unitholder's Units.

PROPOSED TRANSACTIONS

10. The Trust Declaration XXXXXXXXXX will be amended ("Amended Trust Declaration"), with effect from the date that advance income tax rulings satisfactory to the Trustee are obtained, to include additional provisions (XXXXXXXXXX) which will enable the Trustee to provide for the distribution to XXXXXXXXXX Unitholders of their respective share of the Net Capital Gains of a Class for the taxation year that includes the date of redemption. Net Capital Gains of a Class for the taxation year that are not distributed to XXXXXXXXXX Unitholders on a redemption of Units during that taxation year will be distributed to Unitholders in the manner described in paragraph 7 above.

11. The Amended Trust Declaration will contain the following substantive changes:

(a) XXXXXXXXXX of the Amended Trust Declaration authorizes the Trustee to distribute a portion of the Net Capital Gains of the Fund to a XXXXXXXXXX Unitholder. The amount so distributed will be paid out of the total amount otherwise payable on the redemption of the Units and will thus reduce the proceeds of disposition received by the XXXXXXXXXX Unitholder.

(b) The portion of the Net Capital Gains of the Fund distributed to a XXXXXXXXXX Unitholder ("Capital Gains Distribution") will be determined in accordance with XXXXXXXXXX of the Amended Trust Declaration. XXXXXXXXXX of the Amended Trust Declaration allocates to a XXXXXXXXXX Unitholder, that Unitholder's share of the Net Capital Gains of the Fund for its taxation year. XXXXXXXXXX of the Amended Trust Declaration, provides a test for determining which of the two allocation methods in XXXXXXXXXX of the Amended Trust Declaration is to be used for determining the amount of each XXXXXXXXXX Unitholder's Capital Gains Distribution. If it is determined at the end of the Fund's taxation year that the Net Capital Gains of a Class for the year are not less than the aggregate value of the Unitholder Capital Gains realized in the year by XXXXXXXXXX Unitholders of that Class, XXXXXXXXXX of the Amended Trust Declaration will apply. Under XXXXXXXXXX of the Amended Trust Declaration, the Capital Gains Distribution allocated to a particular XXXXXXXXXX Unitholder will be equal to his or her Unitholder Capital Gain. If it is determined at the end of the Fund's taxation year that the Net Capital Gains of a Class for the year are less than the aggregate value of the Unitholder Capital Gains realized in the year by the XXXXXXXXXX Unitholders of that Class, XXXXXXXXXX of the Amended Trust Declaration will apply. Under XXXXXXXXXX of the Amended Trust Declaration, the Capital Gains Distribution made to each XXXXXXXXXX Unitholder during that year will be equal to the product determined by the formula contained in that paragraph. XXXXXXXXXX. In cases where XXXXXXXXXX of the Amended Trust Declaration applies, XXXXXXXXXX of the Amended Trust Declaration may also apply in cases where the Net Capital Gains of the Fund for a taxation year are not optimally allocated due to the existence of multiple Classes within the Fund.

12. Pursuant to XXXXXXXXXX of the Amended Trust Declaration, all Capital Gains Distributions made by the Fund during its taxation year will be paid to the XXXXXXXXXX Unitholders in cash.

13. In accordance with XXXXXXXXXX of the Amended Trust Declaration, the amount that a XXXXXXXXXX Unitholder is entitled to receive on a redemption of Units will be reduced by an amount equal to the amount of the Capital Gains Distribution received in respect of the redeemed Units.

14. The Fund will make a designation under subsection 104(21) of the Tax Act in its income tax return such that the taxable portion of a Capital Gains Distribution paid to a XXXXXXXXXX Unitholder will be deemed to be a taxable capital gain realized by that Unitholder in that particular calendar year.

PURPOSE

The purpose of the proposed transactions is to allow the Net Capital Gains of the Fund for a year to be allocated among its Unitholders in a more equitable manner.

RULINGS

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 Fund may deduct from its income for a taxation year in accordance with paragraph 104(6)(b) of the Tax Act, the taxable portion of a Capital Gains Distribution that was payable in the taxation year to a XXXXXXXXXX Unitholder in respect of his or her redeemed Units.

B. The taxable portion of a Capital Gains Distribution made by the Fund that was payable in the taxation year to a XXXXXXXXXX Unitholder will be included in computing that XXXXXXXXXX Unitholder's income for the year in accordance with subsection 104(13) of the Tax Act.

C. To the extent that the Fund makes the proper designations in its return of income for the taxation year, the taxable portion of a Capital Gains Distribution paid to a XXXXXXXXXX Unitholder will be deemed to be a taxable capital gain of the XXXXXXXXXX Unitholder in accordance with subsection 104(21) of the Tax Act.

D. In computing a XXXXXXXXXX Unitholder's gain in respect of his or her redeemed Units, the proceeds of disposition for the redeemed Units will be XXXXXXXXXX.

E. In accordance with subsection 132(1) of the Tax Act, in computing the amount of the Fund's "capital gains refund" for a taxation year under subsection 132(1) of the Tax Act in respect of the capital gains of the Fund which are subject to tax in the Fund, variable "A" in the calculation of the "capital gains redemptions" of the Fund for a taxation year in subsection 132(4) of the Tax Act will be equal to the aggregate of the proceeds of disposition for all Units redeemed during the year as determined under Ruling D above.

F. The implementation of the proposed transactions described herein, will not, in and by itself, cause subsection 104(7.1) of the Tax Act to apply so as to deny the Fund a deduction under paragraph 104(6)(b) of the Tax Act.

G. The provisions of 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.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 and are binding on Canada Customs and Revenue Agency (the "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 Fund qualifies as a mutual fund trust for purposes of the Act.

Yours truly,

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

XXXXXXXXXX