Regulation 4801

Paragraph 4801(a)

Administrative Policy

11 September 2001 External T.I. 2001-0072575 - Units of Trust - Distribution to Public

addition of 4801(a)

In response to a query as to "whether a mutual fund trust's status under the...ITA...would be adversely affected if the Ontario Securities Commission (the "Commission")...refused to issue a receipt for any prospectus filed with the Commission following the filing of an earlier prospectus which had been accepted by the Commission, CRA stated:

...a distribution of units of a class in accordance with the initial prospectus accepted by the Commission would satisfy the essential requirement of paragraph 4803(2)(a) of the Regulations such that the class of units so distributed would be qualified for distribution to the public. The fact that subsequent events preclude the trust from issuing any further units of that class to new or existing unitholders does not alter the fact that a lawful distribution of units of that class has previously been made in accordance with a properly receipted prospectus.

Please note that it is currently proposed that for trusts created after 1999, paragraph 4801(a) of the Regulations be amended to permit a trust that does not have a class of units which are qualified for distribution to the public to qualify as a mutual fund trust if there has been a lawful distribution in a province to the public of units of the trust and a prospectus, registration statement or similar document was not required under the laws of the province to be filed in respect of the distribution, and the other conditions necessary to qualify as a mutual fund trust are met.

29 March 2012 External T.I. 2011-0403161E5 - Meaning of "shareholder" in 130.1(6)(d)

RRSP is separate unitholder

For the purposes of the 20-shareholder test in s. 130.1(6)(d), an individual and the individual's RRSP and TFSA trusts would each count as a separate shareholder unless s. 104(2) was applied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 130.1 - Subsection 130.1(6) individual and RRSP counted separately 32

Subparagraph 4801(a)(i)

Clause 4801(a)(i)(A)

See Also

Grenon v. The Queen, 2021 TCC 30

distribution of units that included significant purchases by minors and by adults who did not pay for their own units, was unlawful

In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he and/or two business colleagues had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis of 171 individuals (the “Investors”) - being immediate and extended family members, friends, employees of businesses run by him, business associates and others - each subscribing $750 for units. This distribution of units to such individuals was intended to be exempted from the requirement to qualify the distribution through filing a prospectus, by relying an offering memorandum exemption.

The taxpayer’s RRSP then invested a large sum (e.g., over $150 million for one of the Income Funds) in subscribing for additional units. The Income Funds invested in the underlying businesses (sometime through a multi-tier “flow-through” structure under which the Income Fund held a sub trust, which held a master limited partnership, which held individual LPs that carried on the various businesses.)

Given that there were over 150 unitholders in each Income Fund holding a qualifying block of units, whether the units of the Income Funds qualified (under Reg. 4900(1)(d)) as units of mutual fund trusts turned principally on whether there had been a “lawful distribution in a province to the public of units of the trust and a prospectus … was not, under the laws of the province, required to be filed in respect of the distribution” (Reg. 4801(a)(i)(A)). In concluding that this requirement had not been satisfied because the distribution of the units had not been lawful, Smith J found that the RRSP had not displaced the Minister’s assumptions that many (over 30) of the Investors were minors and that many of the adult subscribers did not sign their own subscription documents (e.g., acknowledgements of risk) and did not pay for their own units. In this regard, Smith J found (at para. 266) that the subscribing “minors were not legally competent to sign the Risk Acknowledgement form” required to be given by them and that “the Alberta and BC securities commission intended that this document would only be signed by adult subscribers who had legal capacity,” that the minors’ subscriptions “were … unlawful” (para. 291) and (regarding over 25 of the subscriptions by adult Investors) the Minister’s unrebutted “assumption that these adults did not pay for their own units was sufficient to indicate that they had not purchased the units as principal for their own account” (para. 313). Furthermore, although it may have been possible to rely on other exemptions to establish a lawful distribution, this did not matter because in the reporting of the distribution to the Commissions, reliance had been placed only on the offering memorandum (OM) exemption (paras. 269-271).

After rejecting the taxpayer’s submission that there had been 171 distributions to the initial investors, so that the “lawful distribution” requirement would have been satisfied if as few as one of those distributions had been lawful, and instead finding that there had been only one distribution to that group, which was not lawful, as described above, Smith J stated obiter (at para. 207) that if, for example, there had been a lawful distribution to 50 investors relying on the “Friends, Family and Business Associates Exemption” and there had been a simultaneous second distribution to at least 100 investors, relying on the OM exemption, the first distribution might be sufficient to satisfy the lawful distribution requirement.

Furthermore, the OM had stated that the offerings were to a minimum of 160 investors. In this regard, Smith J stated (at paras. 208, 348):

[I]n this instance ... “a lawful distribution …under the laws of the province” required a distribution to no fewer than 160 investors. Anything less than that would not be “a lawful distribution” since it would be contrary to the precise terms of the OM. …

The Income Funds did not qualify as a “mutual fund trust” because they failed to satisfy the prescribed condition that there be “a lawful distribution …to the public of units” under the laws of the provinces of Alberta and BC to not fewer than 160 investors as required by the OM. Even if the Court considers for a moment that “a lawful distribution” should be interpreted to refer to a distribution to “no fewer than 150 beneficiaries of the trust”, as set out in paragraph (b) of Regulation 4801, the Income Funds have not met that bright-line test.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) purported establishment of “alter ego” MFTs through which an RRSP could invest in operating businesses was an abuse engaging GAAR 605
Tax Topics - Income Tax Act - Section 204.2 - Subsection 204.2(1.1) alleged distribution from non-qualified investment was not an over-contribution 277
Tax Topics - General Concepts - Window Dressing window-dressing is a deception about intention 312
Tax Topics - Income Tax Act - Section 207.1 - Subsection 207.1(1) non-qualified investments not “included” in annuitant’s income because it was never assessed 346
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) CRA’s assessing listed taxable RRSPs in a T3GR global return was not of the taxpayer’s (also listed) RRSP /inappropriate reliance in legal opinion on certificate of fact was carelessness 441
Tax Topics - Income Tax Act - Section 207.2 - Subsection 207.2(3) CRA’s assessment of Pt. XI.1 shown on the T3GR for all RRSPs of one type did not start the normal reassessment period for the taxpayer’s RRSP since no tax shown for it 370
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(d.2) distribution was not lawful because the issuer had not complied with the OM exemption, which was the exemption that it had chosen to rely on 291

Paragraph 4801(b)

Administrative Policy

12 August 2020 External T.I. 2019-0833841E5 - MIC Shareholder Count - Joint holders

joint tenants potentially treated as single security holder

S. 130.1(6)(d) requires inter alia that a mortgage investment corporation have at least 20 shareholders. How is this test applied where a husband and wife hold a share as joint tenants (with rights of survivorship)?

After noting that under a joint tenancy, “the joint tenants have concurrent ownership and possession of the same property,” CRA stated:

[W]here two or more joint owners of a share of a corporation are considered one shareholder under relevant corporate law or are entitled to jointly receive any dividend paid on the share by the corporation, the joint owners of the share will generally be counted as one shareholder for purposes of paragraph 130.1(6)(d) … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 130.1 - Subsection 130.1(6) - Paragraph 130.1(6)(d) joint tenants holding a share may be one shareholder, not two 199

8 June 2020 External T.I. 2019-0822901E5 - Mutual Fund Trusts

an individual and their registered plans can constitute multiple beneficiaries under the 150 MFT beneficiary test

An individual has a non-registered account and is a holder of a TFSA and an annuitant of a RRSP. The individual is also a contributor to a spousal or common-law partner RRSP. The non-registered account and each of the registered plan trusts hold units of the same class of the mutual fund trust (“MFT”) that satisfy the requirement of being a block of units having a fair market value of at least $500.

CRA stated:

[T]here are four beneficiaries for purposes of satisfying the 150 beneficiary requirement. The individual and each registered plan trust count as a separate beneficiary.

Notwithstanding our general view described above, we note that the CRA has previously applied … GAAR … in situations where mutual fund trust status was artificially achieved to facilitate abusive tax avoidance.

The CRA summary noted:

There is no requirement to look through the registered plan trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 132 - Subsection 132(6) - Paragraph 132(6)(c) individual's RRSP or TFSA counts as a separate beneficiary for 150-beneficiaries test purposes 56

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