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: Does the use of derivatives by one mutual fund trust to mimic the return of another mutual fund trust that holds foreign property qualify to be a registered investment and if so, would such a transaction be subject to GAAR?
Position: Yes and GAAR is not applicable.
Reasons: The cost amount of the forward contract will be based on legal fees, brokerage fees and any similar fees related to the entering into of the forward contract (expected to be nominal). The forward contracts themselves are not foreign property based on the facts given. Thus, provided that the mutual fund trust limits its investments in foreign property to 20%, the mutual fund trust will qualify as a registered investment.
XXXXXXXXXX 991541
Attention: XXXXXXXXXX
XXXXXXXXXX , 1999
Dear Sirs/Mesdames:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.
We understand that, to the best of your knowledge, none of the issues involved in this ruling request are:
a) in an earlier return of the taxpayer or a related person;
b) being considered by a tax services office and/or a tax centre in connection with a tax return previously filed by the taxpayer or a related person;
c) under objection by the taxpayer or a related person;
d) before the courts; or
e) the subject of a ruling previously issued by this Directorate to the taxpayer or a related person.
In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
"Cost amount" means the cost amount of property as defined in subsection 248(1) of the Act;
"Counterparty" means a Canadian Branch of a major Canadian-resident financial institution, or a Canadian resident entity whose obligations are guaranteed by a Canadian resident financial institution, which has agreed to enter into a forward contract with any of the Funds;
XXXXXXXXXX
"Fund" means XXXXXXXXXX, individually;
"Funds" means XXXXXXXXXX, collectively;
XXXXXXXXXX.
"Underlying Fund" means XXXXXXXXXX, individually;
"Underlying Funds" means XXXXXXXXXX, collectively; and
"Manager" means XXXXXXXXXX; a Canadian-resident corporation which will be the manager, XXXXXXXXXX of the Funds. The Manager's business number is XXXXXXXXXX. The Manager files its tax returns with the XXXXXXXXXX.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
Facts
1. The office of the Manager is located at XXXXXXXXXX. The offices of the Funds will be located at the same address.
2. Each of the Underlying Funds, XXXXXXXXXX, is an open-end mutual fund trust as described in subsection 132(6) of the Act. XXXXXXXXXX. The securities issued by each of the Underlying Funds constitute foreign property for the purposes of Part XI of the Act.
Proposed Transactions
3. The Funds will be formed under the laws of XXXXXXXXXX pursuant to trust indentures dated on or about the date of the final simplified prospectus for the Funds. Units of each of the Funds will be offered for sale to the public in Canada pursuant to a simplified prospectus which has been filed with and accepted by the XXXXXXXXXX.
4. The Funds have not yet been assigned tax account numbers. The Funds will file their income tax returns with the XXXXXXXXXX Tax Centre.
5. The Funds will be open-end unit trusts as defined under paragraph 108(2)(a) of the Act. Each Fund expects to qualify as a mutual fund trust in 1999, but in any event will so qualify before the 91st day following the end of their first taxation year. Each Fund will elect under subsection 132(6.1) of the Act to be deemed to be a mutual fund trust from its inception.
6. Each Fund will apply to become a "registered investment" under paragraph 204.4(2)(c) of the Act for the purposes of registered retirement savings plans, registered retirement income funds and deferred profit sharing plans as of the date that the Fund satisfies all of the conditions necessary to qualify as a mutual fund trust.
7. Each Fund has a fundamental investment objective which is disclosed in its prospectus. Each Fund will seek to achieve its fundamental investment objective by investing in forward contracts or other derivative instruments permitted by National Policy No. 39 of the Canadian Securities Administrators (or any successor thereto) which are linked to the performance of the corresponding Underlying Fund. Each Fund may acquire securities of the corresponding Underlying Fund but at no time will the cost amount to a Fund of its foreign property investments exceed 20% of the cost amount to it of all its investments.
8. Initially, each Fund will enter into one or more forward contracts with a Counterparty. Each forward contract will be executed in Canada, will be governed by the laws of Canada and both parties to the contract will be resident in Canada. No such forward contract will be listed, or traded over-the-counter, on any stock exchange. A forward contract will be settled in Canada from time to time by means of a cash payment, with the result that a Fund will not acquire securities of an Underlying Fund as a consequence of entering into a forward contract nor will any of the Funds be entitled to acquire such a security under the forward contract. A sample forward contract was included with your submission.
9. All payments under the forward contracts will be linked to the investment returns of the appropriate Underlying Fund and will be governed by the following terms:
(a) each Fund will pay transaction costs to the Counterparty as required under the forward contract which are initially anticipated to approximate the Counterparty's bankers' acceptance rate plus approximately XXXXXXXXXX % of the nominal value of the forward contracts;
(b) if the net asset value of the Underlying Fund increases, the Counterparty will pay the Fund an amount equal to the increase in the exposure under the forward contracts; and
(c) if the net asset value of the Underlying Fund decreases, the Fund will pay the Counterparty an amount equal to the decrease in the exposure under the forward contract.
10. The Funds may be required to provide margin in respect of the forward contracts. The Funds will not pay brokerage fees, legal expenses or other expenses incidental to entering into the first forward contract with the first Counterparty. To the extent that any such expenses are incurred by the Manager, such expenses are considered to relate to the initial organization of the Funds and will not be charged back to the Funds. The Funds may be required to pay brokerage fees, legal expenses or other incidental expenses for entering into subsequent forward contracts.
11. Each Fund will provide cash cover for the nominal value of the forward contracts to the extent required and in the manner permitted under National Policy No. 39. The Fund will provide this cash cover by placing assets of the Fund on deposit with one or more major financial institution and/or by investing assets of the Fund in money market instruments, such as treasury bills or bankers' acceptances.
12. In order to hedge its obligation under the forward contract, the Counterparty may, but is not required to, acquire units of the Underlying Funds.
Purpose of Proposed Transactions
13. The purpose of the proposed transactions is to add XXXXXXXXXX mutual funds to the family of mutual funds managed by the Manager to provide a more comprehensive selection of investments to registered retirement plan investors seeking to increase exposure to foreign investments returns.
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. A forward contract described in paragraph 8, and which is substantially similar to the sample forward contract included with your submission, will not be considered to be foreign property for the purposes of Part XI of the Act.
B. For the purposes of subsections 248(1) and 206(2) of the Act, the cost amount to each Fund of its investment in a forward contract described in paragraph 8, and which is substantially similar to the sample forward contract included with your submission, will at the time entered into by a Fund, be equal to the brokerage fees, legal fees and other costs incidental to entering into the contract and will not include an amount in respect of the contract price or any amounts paid, if any, as margin.
C. Subsection 245(2) of the Act 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 70-6R3, Advance Income Tax Rulings, and are binding on Revenue Canada with respect to a forward contract as described in 8 above which is entered into or acquired by the Fund within six months of the date of this letter.
The above rulings should not be construed as providing Revenue Canada's views on whether the Funds will qualify as unit trusts, mutual fund trusts or registered investments for purposes of the Act.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1999
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1999
Email this Content