Section 132.2

Subsection 132.2(1) - Definitions re qualifying exchange of mutual funds

Qualifying Exchange

Administrative Policy

2017 Ruling 2016-0660321R3 - Reorg of REIT to simplify multi-tier structure

use of the s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP and a sub-trust

Background

Fund, which is a REIT under s. 122.1, holds notes and all the units of a unit trust (“Sub-Trust”). Sub-Trust owns the Class A LP Units of the Partnership (as well as the shares of the general partner - GP I) and the Partnership’s Class B (exchangeable) LP units are held by a taxable Canadian corporation (“Investor”), who also holds special voting units of Fund. Partnership directly and indirectly holds real-estate related assets, and also holds Opco. See also Crombie REIT Circular.

Proposed transactions
  1. Opco and a newly-incorporated subsidiary of Opco (GP II) will form Opco Partnership as a general partnership, with Opco transferring real estate to Opco Partnership on a s. 97(2) rollover basis.
  2. Opco Partnership will then be converted to a limited partnership, with no significant changes to the rights and obligations of the partners other than Opco becoming a limited partner.
  3. All intercompany amounts among the Fund, Sub-Trust and the Partnership including the notes owing by Sub-Trust to the Fund and by Partnership will be satisfied in cash or by issuing units.
  4. After the settling of a new unit trust (“MFT”), having redeemable retractable units, by a Canadian-resident third party, the Fund subscribes for MFT units for nominal cash consideration and the unit of the settlor is redeemed.
  5. Sub-Trust will transfer all its assets including the Class A LP Units and the GP I shares, to MFT for no consideration, with no s. 107.4(3)(a)(i) election being made and with MFT electing under (f)(v) of “disposition” in s. 248(1) that para. (f) thereof not apply.
  6. Fund will distribute a certain number of its MFT Units to the Fund Unitholders in accordance with applicable securities’ laws (with s. 218.3(2) withholding being made) such that MFT will qualify as a mutual fund trust (and with a s. 132(6.1) election made before the winding-up of MFT below).
  7. The Declaration of Trust of the Fund will be amended to provide for the consolidations in 9 and 18 below, for the in specie redemption of Fund units through distribution of securities of a Fund subsidiary including MFT Units and adding the Right of Renunciation utilized in 17 below.
  8. Pursuant to a transfer agreement between the Fund, MFT and an agent for the MFT Unitholders, MFT will transfer its assets to the Fund at the “MFT Transfer Time” in consideration for Fund Units being issued to the MFT Unitholders in payment of the redemption proceeds for their Units; and immediately after the MFT Transfer Time, MFT will redeem all of the MFT Units held by the Fund and the MFT Unitholders except for one MFT Unit which the Fund will continue to hold until the winding-up of MFT in 10 below. In due course, a joint s. 132.2 joint election will be filed.
  9. Immediately thereafter the outstanding Fund Units are consolidated so as to result in the same number as before.
  10. Ultimately, MFT will be wound up.
  11. Fund will incorporate MFC, subscribe for MFC Common Shares and (non-voting redeemable retractable) MFC Class A Shares for nominal cash consideration, list the MFC Class A Shares on the Exchange and subscribe for further MFC Class A Shares such that the total outstanding number of shares will now equal the number of outstanding Fund Units.
  12. The Fund will distribute to Fund Unitholders, as a return of capital, all of its MFC Class A Shares and, in due course, remit any applicable s. 218.3(2) withholding tax and elect to be a public corporation from the beginning of its taxation year.
  13. Partnership will transfer all of its Opco Shares and Note to MFC in consideration for MFC Class B Shares (having similar attributes to the MFC Class A Shares), with the s. 85(2) election to be filed by Amalco MFC and Partnership.
  14. MFC and Opco will amalgamate, with the Opco Shares and Notes being cancelled on the amalgamation and the outstanding shares of MFC being converted on the amalgamation into the equivalent number of Amalco MFC Class A, Class B and Common Shares.
  15. Amalco MFC will transfer all of its assets to the Fund in consideration for the assumption of its liabilities and the Fund’s agreement to issue Fund Units to the holders of the Amalco MFC Class A and B Shares in satisfaction of the redemption price for their shares (see 16 below), with a joint s. 132.2 election being made in due course.
  16. Immediately after the transfer in 15, Amalco MFC will redeem the Amalco MFC Class A and B Shares.
  17. Partnership will renounce all of its interest in the Fund, so that rather than receiving Fund Units, they will be cancelled.
  18. The outstanding Fund Units will be consolidated.
  19. Fund will contribute its Opco Partnership Units and its shares of GP II to Partnership, with a joint s. 97(2) election being filed.
  20. Opco Partnership will be wound-up under s. 98(3).
  21. GP II will sell its undivided interest in each property to Partnership for fair market value consideration and then will be wound up.
Purposes

The proposed transactions eliminate Sub Trust so that the Fund will hold its investment in the Partnership directly. In addition the proposed structure will eliminate corporate taxation on Opco’s income.

Rulings

The transfer in 5 will be a qualifying disposition under s. 107.4(1).

The transactions referenced in 8 and 15 will be qualifying exchanges as defined in s. 132.2(1).

Partnership will not realize any gain or loss on the disposition of its Fund Units as a result of the renunciation in 17 because the proceeds of disposition of such units should be equal to their ACB pursuant to s. 132.2(3)(g)(vi)(C)(I), and ss. 15(1), 56(2), 56(4), 69(1), 69(4), 105(1) or 246(1) will not apply in respect of the renunciation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(2) - Paragraph 107.4(2)(a) s. 107.4 transfer of sub-trust’s assets to sister MFT trust 398
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) drop down of LP 1 into LP 2 followed by immediate s. 98(3) wind-up of LP 1 into LP 2 and GP of LP1, followed by immediate taxable sale by GP to LP 2 120
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) no taxable benefit where wholly-owned partnership renounces the right to have consideration paid for the redemption of its shares in its limited partner (a mutual fund corporation) 309
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition no disposition on conversion of general to limited partnership or adding right of renunciation of a MFT unitholder 158
Tax Topics - Income Tax Act - Section 132.2 - Subsection 132.2(3) - Paragraph 132.2(3)(g) - Subaragraph 132.2(3)(g)(vi) - Clause 132.2(3)(g)(vi)(C) - Subclause 132.2(3)(g)(vi)(C)(I) renunciation by subsidiary partnership of transferee MFT of units that otherwise would be issuable on the redemption of its incestuous holding in transferor MFC 217

2013 Ruling 2013-0492731R3 - qualifying disposition -mutual fund trust

elimination of REIT subtrust through s. 107.4 transfer to new "in house" MFT and s. 132.2 merger of MFT into REIT

The elimination of the subtrust of an open-end listed mutual fund trust (the "Fund") was to be accomplished by the subtrust transferring its assets (being units of subsidiary real estate partnerships and the shares of the GPs thereof) under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of the REIT, with a small percentage of MFT's units then being distributed to the REIT unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into the REIT under s. 132.2.

See detailed summary under s. 107.4(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) elimination of REIT sub trust through s. 107.4 transfer to new "in house" MFT and s. 132.2 merger of MFT into REIT 580
Tax Topics - Income Tax Act - Section 132 - Subsection 132(6) MFT's trustee not to be a director of a sub 109

2013 Ruling 2013-0488351R3 - Conversion of a MFC to a MFT

conversion of MFC to MFT and subtrust elimination

The same (mutual fund corporation) taxpayer as for 2013 Ruling 2011-0395091R3 ("MFC to MFT Conversion") (immediately below) obtained essentially the same rulings for transactions which now reflected its acquisition of "Target" trust before the implementation of the merger of the taxpayer under s. 132.2 into REIT #1 (the internally-created replacement mutual fund trust) and the elimination of various subtrusts using s. 107.4 (or s. 248(1) – non-disposition) transfers and the s. 132.2 merger rules. To reflect the inclusion of Target in the starting structure, after the non-disposition transfers from the Direct Subtrusts of the taxpayer to Trust A (see step 2), Trust A, in turn, will effect a s. 107.4(3) transfer of all its property to Target, so that Trust A ceases to exist. Accordingly, the s. 107.4(3) transfer in step 8 will be by Target rather than Trust A. Furthermore, there will be similar transactions (involving "REIT#4" and "Target Operating Trust") for the elimination of a subtrust of Target.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) conversion of MFC to MFT and subtrust elimination 150
Tax Topics - Income Tax Act - Section 21 - Subsection 21(1) election of GP to capitalize loss before elimination of subtrust 190

2013 Ruling 2011-0395091R3 - MFC to MFT Conversion

Background

Taxpayer, which is a listed mutual fund corporation, wishes to convert to a mutual fund trust (so that following the conversions transactions its remaining assets will be nominal) and to eliminate subsidiary (non-personal trust) subtrusts, including OT and various Direct Subtrusts. OT is the limited partner of MLP. According to the summary, the Taxpayer was a taxable Canadian corporation before it became a mutual fund corporation.

Transaction overview

Taxpayer will settle a subtrust with modest assets, and distribute the units of the subtrust to its public shareholders, who thus will now hold assets of a "good" mutual fund trust ("REIT #1"), albeit with nominal assets. Next, Taxpayer will merge into REIT #1 under s. 132.2, so that REIT #1 is now the successor to substantially all its assets. However, it will not be released under its covenant under convertible debentures, which will be assumed by REIT #1 only on an "internal" assumption. In order to get rid of a subtrust which now is an assets of REIT #1 (and which was the result of an earlier s. 248(1) – disposition, (f) consolidation of four predecessor subtrusts into one), there will be s. 107.4 transfers of all its assets to a new subtrust ("REIT #2"), followed by a distribution of its units by REIT #1 to the REIT #1 unitholders. REIT #2 then will be merged into REIT #1 under s. 132.2. The same steps will then be repeated for a lower-tier subtrust.

Proposed transactions
  1. In order "to capitalize the non-capital losses of OT into the capital cost of MLP's depreciable property," the general partner of MLP will file late elections under s. 21.
  2. The Direct Subtrusts will simultaneously transfer their assets to Trust A (newly formed by Taxpayer, which holds one unit) for no consideration other than the assumption of their liabilities, so that they cease to exist; and Trust A will not file the election in s. 248(1) – disposition, (f)(v) with a view to that disposition exclusion applying.
  3. Taxpayer will settle REIT #1, whose unit terms will comply with s. 108(2)(a), with a nominal amount.
  4. Taxpayer will distribute units of REIT #1 to its shareholders on the basis of one unit for each common share, as well as distributing a nominal amount of cash on a pro rata basis (in order to permit Taxpayer to withhold Part XIII.2 tax where applicable). Thereafter, REIT #1 will satisfy s. 132(6)(c). The terms of convertible debentures owing by Taxpayer (the Debentures) will be modified (but not as a novation) so that they also are convertible into units of REIT #1. S. 248(25)(b)(iii) will not apply in respect of any Debentureholder in relation to REIT #1.
  5. Taxpayer will effect a s. 132.2 merger with REIT #1 (with s. 132.2 elections filed in due course for this and the mergers below). Accordingly, Taxpayer will transfer all or substantially all its property to REIT #1 in exchange for (a) the assumption by REIT #1 of Taxpayer liabilities including a covenant of REIT #1 to Taxpayer to be responsible for interest payments on the Debentures and a REIT #1 guarantee of those Debentures, and the assumption of mortgage bonds, and (b) the issuance of units of REIT #1 with an aggregate fair market value equal to that of the transferred property minus the aggregate amount of assumed liabilities.
  6. All or substantially all the issued and outstanding shares of Taxpayer will then be disposed of by the shareholders to Taxpayer in exchange for units of REIT #1 with an equivalent fair market value. REIT #1 will subscribe a nominal amount for one Taxpayer common share, and the number of REIT #1 units then will be consolidated to equal the number of Taxpayer common shares outstanding immediately before the merger.
  7. Taxpayer will settle REIT #2, whose unit terms will comply with s. 108(2)(a), with a nominal amount.
  8. Trust A will transfer all of its property to REIT #2 for no consideration other than the assumption of secured debts (with any unsecured debts being paid off by Trust A) – so that Trust A will cease to exist. REIT #2 will file the election in s. 248(1) – disposition, (f)(v) for s. 107.4(3) to apply instead and Trust A will not file the election in s. 107.4(3)(a)(i) to have the transfer occur otherwise than at cost amount.
  9. REIT #1 will make a capital distribution of units of REIT #2 to its unitholders, so that thereafter, REIT #2 will satisfy s. 132(6)(c). REIT #1 will not claim any deduction under s. 104(6)(b) in respect of any income resulting from this distribution.
  10. REIT #2 will effect a s. 132.2 merger with REIT #1 under which:

(a) it will transfer all or substantially all its property to REIT #1 in exchange for the assumption of any REIT #2 liabilities and the issuance of REIT #1 units; and

(b) the units of REIT #2 (other than one unit held by REIT #1) will then be disposed of their holders to REIT #2 in exchange for units of REIT #1, with the units of itself received by REIT #1 being cancelled and the outstanding REIT #1 units being consolidated to equal the number of Taxpayer common shares outstanding immediately before the merger in 5.

  1. The steps in 7 to 10 above essentially will be repeated in order to transfer all the assets of a OT (a subtrust acquired by REIT #1 in 5 above) to REIT #1.
Rulings
  • The transfers from the Direct Subtrusts to Trust A in 2 will not be considered a "disposition" by virtue of s. 248(1) – disposition, (f)(v), and Trust A will be deemed, to be the same trust as, and a continuation of, each of the Direct Subtrusts by virtue of s. 248(25.1); therefore the ACB of Taxpayer's interest in Trust A will be equal to the aggregate ACB of Taxpayer's interests in the Direct Subtrusts before the transfer.
  • 5 and 6, and 10 (and the subsequent merger in 11) will be qualifying exchanges.
  • The guarantee in 5 will not cause REIT #1 to not be a MFT.
  • S. 20(1)(c) ruling re assumed obligation of REIT #1 in 5 (and re interest obligation of Taxpayer on legally retained Debentures).
  • The transfer in 8 (and similarly re 11) will be a qualifying disposition under s. 107.4(1).
  • S. 245(2) will not be applied.

5 May 1995 T.I. 951193 (C.T.O. "Newly Established Fund")

Where a mutual fund corporation transfers its assets to a newly established unit trust that will not meet the distribution requirements under Regulation 4801 until it issues units to the mutual fund corporation for distribution to the mutual fund corporation's shareholders, such trust will qualify as a mutual fund trust at the time of the transfer provided that it elects under s. 132(6).

Articles

Hugh Chasmar, "Corporate Class Funds", Canadian Tax Highlights, Vol. 25, No. 8, August 2017, p. 6

Expansion of s. 132.2 to permit division of multi-class MFC into multiple MFTs (p. 7)

[Under] proposed section 132.2…a multi-class MFC with 20 classes may transfer its assets to 20 different MFTs on a class-by-class basis….

Technical issues re expanded s. 132.2 merger rule (pp. 7-8)

All property of the various classes of the MFC must be transferred to the respective MFTs at the same time….

There may be some funds within the MFC that do not qualify for a merger or that are undesirable for inclusion in the merger—for example, small funds that are not expected to have a sufficient number of unit holders to qualify the funds as MFTs. Or a transferee MFT may have significant losses carried forward…Those funds should be removed from the MFC - in a fully taxable transaction…

Many multi-class MFCs in the marketplace are fund-of-fund structures: the only asset of many of the classes in the MFC is units of an MFT offered by the same fund manager…. A concern exists that trust units may not be transferred to that trust. … In TI 9608465, the CRA concluded that in a proposed merger of two trusts (the one trust being the “top fund” and the other being the “bottom fund” of a fund-of-fund structure), the top fund could not transfer units of the bottom fund to that fund: the proposed merger was not a qualifying exchange. The Department of Finance is aware of this issue.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 131 - Subsection 131(4.1) 258

Subsection 132.2(3) - General

Paragraph 132.2(3)(a)

Articles

Darcy De Moche, Greg Johnson, "Recent Developments and Transactions Affecting Income Funds and Royalty Trusts", 2005 Conference Report, c. 17.

Forms

T1169 "Election On Disposition Of Property By A Mutual Fund Corporation (Or A Mutual Fund Trust) To A Mutual Fund Trust

Paragraph 132.2(3)(g)

Subaragraph 132.2(3)(g)(vi)

Clause 132.2(3)(g)(vi)(C)

Subclause 132.2(3)(g)(vi)(C)(I)

Administrative Policy

2017 Ruling 2016-0660321R3 - Reorg of REIT to simplify multi-tier structure

renunciation by subsidiary partnership of transferee MFT of units that otherwise would be issuable on the redemption of its incestuous holding in transferor MFC
Background

As a result of quite a number of other transactions, a REIT (the “Fund”) holds the Class A LP Units of the Partnership (as well as the shares of the general partner - GP I, but not the Partnership’s Class B exchangeable LP units, and the Partnership holds Amalco MFC Class B shares of a mutual fund corporation (whose Amalco MFC Class A shares are held by the unitholders of Fund).

Transactions
  1. Amalco MFC will transfer all of its assets to the Fund in consideration for the assumption of its liabilities and the Fund’s agreement to issue Fund Units to the holders of the Amalco MFC Class A and B Shares in satisfaction of the redemption price for their shares (see 2 below), with a joint s. 132.2 election being made in due course.
  2. Immediately after the transfer in 1, Amalco MFC will redeem the Amalco MFC Class A and B Shares.
  3. Partnership will renounce all of its interest in the Fund, so that rather than receiving Fund Units, they will be cancelled.
Ruling

Partnership will not realize any gain or loss on the disposition of its Fund Units as a result of the renunciation in 3 because the proceeds of disposition of such units should be equal to their ACB pursuant to s. 132.2(3)(g)(vi)(C)(I).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 132.2 - Subsection 132.2(1) - Qualifying Exchange use of the s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP and a sub-trust 924
Tax Topics - Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(2) - Paragraph 107.4(2)(a) s. 107.4 transfer of sub-trust’s assets to sister MFT trust 398
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) drop down of LP 1 into LP 2 followed by immediate s. 98(3) wind-up of LP 1 into LP 2 and GP of LP1, followed by immediate taxable sale by GP to LP 2 120
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) no taxable benefit where wholly-owned partnership renounces the right to have consideration paid for the redemption of its shares in its limited partner (a mutual fund corporation) 309
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition no disposition on conversion of general to limited partnership or adding right of renunciation of a MFT unitholder 158