1997 Ruling 9722993 - UNIT-TRUST - NON-RESIDENT UNITHOLDERS

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.

Principales Questions:

Does the exemption of withholding provided by Article XXII, paragraph 2, of the Canada-U.S. Income Tax Convention (1980) apply to the Fund where it pays income to U.S. residents?

Position Adoptée:

Provided that the Fund is not carrying on a business, the income paid or payable by the Fund to unitholders that are residents of the United States for the purposes of the Canada-U.S. Income Tax Convention (1980) (the "Convention") will be exempt from withholding tax under paragraph 212(1)(c) of the Act pursuant to paragraph 2 of Article XXII of the Convention where the income is derived from sources outside Canada

Raisons POUR POSITION ADOPTÉE:

Technical notes on Article XXII, paragraph 2 of the Convention and CCM #3-952708 and 3-963582 and 5-941261

XXXXXXXXXX 3-972299
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your request of XXXXXXXXXX and your subsequent correspondence in which you requested an advance income tax ruling on behalf of XXXXXXXXXX, in respect of the tax consequences under the Income Tax Act (Canada) (the "Act") resulting from distributions made by the Fund to U.S. resident unitholders as described below. Unless otherwise stated, all statutory references are to the Act.

We understand that, to the best of your knowledge and that of the taxpayers involved:

(a) none of the matters considered in the requested ruling is being considered by an office of Revenue Canada, in connection with a tax return already filed; and

(b) none of the matters considered in the requested ruling is under objection or appeal.

These statements also apply to the U.S. resident unitholders of the Fund.

FACTS AND PROPOSED TRANSACTION

Our understanding of the facts and the proposed transaction is as follows:

1. The Fund is a trust which was established under the laws of Canada on XXXXXXXXXX. The trustee of the Fund is XXXXXXXXXX, a trust company continued under the laws of Canada.

2. The Fund is a "unit trust" within the meaning of subsection 108(2).

3. The Fund is not a "mutual fund trust" as defined in subsection 132(6)

4. The units of the Fund will be widely held. Unitholders of the Fund will include some individuals who are resident in the United States. Currently, approximately XXXXXXXXXX% of the Fund's units are held by residents of Canada and XXXXXXXXXX expects this figure to increase in the future.

5. XXXXXXXXXX is a Canadian resident corporation. XXXXXXXXXX is responsible for determining the investment policies of the Fund and for providing the investment analysis, advice and recommendations to implement those policies.

6. The purpose of the Fund is to provide a vehicle through which a number of individual investors can pool their money to be invested in accordance with the investment philosophy, objectives and methodologies established by XXXXXXXXXX. The Fund will be managed for the benefit of the unitholders and accordingly, all income, gains and losses, net of management fees and other expenses, will accrue to the benefit of the uni tholders.

7.

XXXXXXXXXX

The Fund will purchase equities listed on U.S. stock exchanges to hold for the purpose of earning dividend income and long term capital appreciation (the "U.S. long position"). The Fund will also, from time to time, sell short U.S. listed securities (the "U.S. short position").

8. The Fund will have four principal sources of income and gains: interest on U.S. treasury bills, dividends from U.S. corporations, net realized capital gains on the U.S. long position, and net realized ordinary income from the U.S. short position.

9. All securities transactions will be carried out on U.S. stock exchanges by a U.S. independent agent.

10. XXXXXXXXXX of the trust agreement concluded on XXXXXXXXXX (the "Trust Agreement"), provides the rule for the distribution of income and net realized capital gains to unitholders. XXXXXXXXXX of the Trust Agreement defines the expression "net realized capital gains" as follows:

XXXXXXXXXX

XXXXXXXXXX provides, inter alia, specification in respect of the distribution of income and capital gains to unitholders. This article reads, in part, as follows:

XXXXXXXXXX

11. The Fund's first taxation year was the period from inception to XXXXXXXXXX. No distributions have yet been made to the unitholders.

12.

XXXXXXXXXX

13. The Fund proposes to distribute all its net income and net capital gains for the XXXXXXXXXX year to the unitholders on the last business day of the year. It is our understanding that unitholders are entitled to enforce payment (for the purpose of subsection 104(24)) on the last business day of the year. In each subsequent taxation year, the Fund will make a similar year end distribution.

PURPOSE OF THE PROPOSED TRANSACTION

14. The purpose of the proposed transaction is to ensure that the Fund operates as a "flow-through entity" so that any income and gains are taxed at the unitholder level and therefore the Fund will not be subject to either Part I or Part XIII tax.

RULING REOUESTED AND GIVEN

Provided that the above statements of facts and the proposed transaction are accurate and constitute complete disclosure of all of the relevant facts and proposed transaction, and assuming that the proposed transaction is carried out as described above in paragraph 13, our ruling in respect of the proposed transaction is as follows:

Provided that the Fund is not carrying on a business, net income and net capital gains paid or payable at the end of the year by the Fund to unitholders, that are residents of the United States for the purposes of the Canada-U.S. Income Tax Convention (1980) (the "Convention"), will be exempt from withholding tax under paragraph 212(1)(c) pursuant to paragraph 2 of Article XXII of the Convention where the income is derived from sources outside Canada and the provisions of section 215 will not apply in respect of such distribution of income.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and is binding on the Department for distributions made by the Fund before

XXXXXXXXXX.

COMMENTS

Whether the activities of the Fund constitute carrying on business is a question of fact. As such, nothing in this ruling should be construed as a confirmation by this Department that the Fund is carrying on business. However, should such activities constitute carrying on business in Canada, the income from such a business will be considered to arise in Canada.

Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch