2013-0492731R3 qualifying disposition -mutual fund trust

Principal Issues: 1. Will proposed transactions to eliminate trust on trust structure to direct ownership result in a qualifying disposition?

Position: 1. Yes

Reasons: 1. all conditions are met

Author: XXXXXXXXXX
Section: 107.4

XXXXXXXXXX                                                                                                                          2013-049273

XXXXXXXXXX, 2013

Attention XXXXXXXXXX

Re:   XXXXXXXXXX
        Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-named taxpayer.  We also acknowledge the information you provided in your subsequent submission of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i)   in an earlier tax return of the taxpayer or a related person;
(ii)  being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv)  before the courts; or
(v)   the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

This document is based solely on the facts and proposed transactions described below.  The documentation submitted with your request does not form part of the facts and proposed transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act") and the regulations thereunder (the "Regulations"), and all terms and conditions used herein that are defined in the Act and Regulations have the meaning given in such definitions unless otherwise indicated.

I. Definitions

In this letter, the following terms have the meanings specified:

“BCA” means the Business Corporations Act (XXXXXXXXXX);

“Declaration of Trust” means the declaration of trust dated XXXXXXXXXX, as amended and restated on XXXXXXXXXX, as it may be further amended and restated from time to time;

“FMV” means fair market value;

“Fund” means XXXXXXXXXX, an open-ended trust formed under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;

“Fund Unit” means a unit of the Fund, other than a Special Voting Unit, as described in paragraph 4 below;

“Fund Unitholder” means a holder of a Fund Unit;

“GP Inc.” means XXXXXXXXXX, a corporation incorporated under the BCA, and the general partner of LP owning a nominal general partner interest in LP;

“GP II Inc.” means XXXXXXXXXX, a corporation incorporated under the BCA, and the general partner of LP II, owning a nominal general partner interest in LP II;

“GP III Inc.” means XXXXXXXXXX, a corporation incorporated under the BCA, and the general partner of LP III, owning a nominal general partner interest in LP III;

“Investor” means XXXXXXXXXX, an individual residing in XXXXXXXXXX;

“Intercompany Amount” means an amount owed by Sub Trust to LP, LP II, LP III or the Fund, or an amount owed by LP, LP II, LP III or the Fund to Sub Trust, as the case may be; 

“LP” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX;

“LP II” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX;

“LP III” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX;

“LP Class A Unit” means an interest of a limited partner in LP, designated as a LP Class A Unit of LP;

“LP II Class A Unit” means an interest of a limited partner in LP II, designated as a LP II Class A Unit of LP II;

“LP III Class A Unit” means an interest of a limited partner in LP III, designated as a LP III Class A Unit of LP III;

“MFT” means a trust to be formed under the laws of the Province of XXXXXXXXXX, as described in paragraphs 20 and 22 below;

“MFT Unit” means a trust unit of MFT with the terms and conditions described in paragraph 22 below;

“Regulations” means the Income Tax Regulations (Canada), as amended;

“Special Voting Units” means a unit of the Fund described in paragraph 5 below;

“Sub Trust” means XXXXXXXXXX, an unincorporated open-ended trust established under the laws of the Province of XXXXXXXXXX;

“Transfer Time” has the meaning described in paragraph 24 below; and

“Trust Units” means a trust unit of Sub Trust with the terms and conditions described in paragraph 13 below.

II. Facts

1.    The Fund is “mutual fund trust” as defined in subsection 132(6), which was established to, among other things, XXXXXXXXXX. The Fund has a XXXXXXXXXX year end for purposes of the Act.

2.    The principal office of the Fund is located at XXXXXXXXXX. The Fund files its tax returns at the XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.  The Fund’s business number is XXXXXXXXXX.

3.    Under the terms of the Declaration of Trust, the Fund may issue an unlimited number of Fund Units and Special Voting Units.

4.    All Fund Units are of the same class with equal rights and privileges.  Each Fund Unit represents an equal fractional undivided beneficial interest in the Fund and distributions by the Fund, whether of income, net realized capital gains or other amounts, and in the event of termination or winding-up of the Fund, in the net assets of the Fund remaining after satisfaction of all liabilities.  Each Fund Unit is redeemable at the option of the holder, is transferable, fully paid and non-assessable and entitles the holder thereof to one vote at all meetings of unitholders for each Fund Unit held. The Fund Units are traded on the XXXXXXXXXX.

5.    Special Voting Units entitle the holder of an exchangeable security to such number of votes at meetings of unitholders as is equal to the number of Fund Units into which such exchangeable security (other than an exchangeable security owned by the Fund or any subsidiary of the Fund) is then exchangeable or convertible for.  For greater certainty, holders of Special Voting Units are not entitled, by virtue of their holding of Special Voting Units, to distributions of any nature whatsoever from the Fund nor do they have any beneficial interest in any assets of the Fund on termination or winding up of the Fund. Special Voting Units are not transferable without consent of the Fund and are automatically redeemed and cancelled upon the exercise or conversion of such exchangeable security. Special Trust Units are not listed on any stock exchange. 
6.    The Fund Units are widely held by the public and to the knowledge of the trustees of the Fund, other than the Investor, no person beneficially owns, directly or indirectly, or exercises control or direction over, more than 10% of the issued and outstanding Fund Units. 

7.    The Investor beneficially owns or controls a number of the outstanding Fund Units which, together with the securities he beneficially owns or controls which are exchangeable at his option for Fund Units for no additional consideration and the associated Special Voting Units, represent approximately a XXXXXXXXXX% voting interest in the Fund.

8.    The Fund was not established and has not been maintained primarily for the benefit of non-residents.

9.    XXXXXXXXXX of the Fund’s XXXXXXXXXX trustees are individuals who are resident in Canada.  Pursuant to the Declaration of Trust, the holders of Fund Units are entitled to vote with respect to the election or removal of the trustees of the Fund.

10.   The Fund directly holds all of the issued and outstanding Trust Units.

11.   Sub Trust qualifies as a “unit trust” pursuant to the Act and was formed to, among other things, invest in securities of various entities.  It currently owns securities of GP Inc., GP II Inc., GP III Inc., LP, LP II and LP III.

12.   The principal office of Sub Trust is located at XXXXXXXXXX and the account number for Sub Trust is XXXXXXXXXX.

13.   Under the terms of the declaration of trust of Sub Trust, Sub Trust may issue an unlimited number of Trust Units. Each Trust Unit represents an equal undivided beneficial interest in any distributions by Sub Trust, whether of income, net realized capital gains or other amounts, and in the event of termination or winding-up of Sub Trust, in the net assets of Sub Trust remaining after satisfaction of all liabilities. Each Trust Unit is redeemable at the option of the holder and entitles the holder thereof to one vote at all meetings of holders of Trust Units.

14.   Sub Trust has one trustee who is resident in Canada.

15.   Sub Trust currently owns cash, all of the issued and outstanding LP Class A Units, LP II Class A Units and LP III Class A Units and all of the issued and outstanding shares of GP Inc., GP II Inc. and GP III Inc.

16.   Each of LP, LP II and LP III have limited partners in addition to Sub Trust; however such limited partners own a different class of limited partnership units than Sub Trust (the other limited partners own Class B, C, D, or E units, as applicable).

17.   Each of LP, LP II and LP III holds a portfolio of assets that consists principally of real property.

18.   The proposal to modify the organizational structure to eliminate Sub Trust has been approved by a vote of the Fund Unitholders and holders of Special Voting Units. 

III. Proposed Transactions

19.   All Intercompany Amounts will be satisfied in full by the payment of cash, or alternatively, by the issuance of additional securities (Trust Units, LP Class A Units, LP II Class A Units or LP III Class A Units, as applicable), having a FMV equal to the Intercompany Amount at issue.  Following such payment or issuance, all Intercompany Amounts will be settled and extinguished.

20.   A Canadian resident third party settlor will settle MFT with a nominal cash contribution in exchange for one MFT Unit with the terms and conditions described in paragraph 22 below.

21.   The Fund will subscribe for MFT Units for a nominal cash consideration. The initial MFT Unit that will be issued to the third party settlor, as described in paragraph 20 above, will be repurchased by MFT for an amount equal to the cash received from the third party settlor.

22.   Pursuant to the declaration of trust of MFT, MFT will be authorized to issue an unlimited number of MFT Units with the following terms and conditions:

(a)   Each MFT Unit will represent an equal undivided interest in MFT;

(b)   Each MFT Unit will participate pro-rata in any distributions;

(c)   Each MFT Unit will participate pro-rata in the net assets of MFT in the event of termination or winding-up of MFT;

(d)   Each MFT Unit will entitle the holder thereof to one vote at all meetings of holders of MFT Units;

(e)   Each MFT Unit will be redeemable at the option of MFT for an amount equal to the FMV of the MFT Unit. The redemption price will be payable in cash or Fund Units; and

(f)   Each MFT Unit will be redeemable at the option of the holder at FMV. The redemption price will be payable in cash or Fund Units.

23.   The declaration of trust of MFT will provide that the only undertaking of MFT will be activities described in paragraph 132(6)(b) and its terms will be substantially the same as the terms of the declaration of trust of Sub Trust. The trustee of MFT will be an individual resident in Canada and will not be a director of any of GP Inc., GP II Inc. or GP III Inc.

24.   Pursuant to an agreement to be entered into between Sub Trust and MFT, immediately prior to the Transfer Time (the point in time at which the transfer of the assets described in paragraph 32 will occur and for greater certainty, will be the transfer time referred to in the definition of “qualifying exchange” in subsection 132.2(1)), Sub Trust will transfer all of the cash, LP Class A Units, LP II Class A Units, LP III Class A Units and the shares of GP Inc., GP II Inc. and GP III Inc. it owns to MFT for no consideration. MFT will file a written election with the Minister of National Revenue within the time period specified in subparagraph (f)(v) of the definition of “disposition” in subsection 248(1) that paragraph (f) will not apply to the transfer.

25.   Sub Trust will not make the election in subparagraph 107.4(3)(a)(i) of the Act.

26.   Following the transfer described in paragraph 24 above, the Fund will own all of the Trust Units and all of the MFT Units and will continue to indirectly hold all of the cash that was previously held by Sub Trust, the issued and outstanding LP Class A Units, LP II Class A Units, LP III Class A Units and all of the issued and outstanding shares of GP Inc., GP II Inc. and GP III Inc., by reason of its ownership of all of the MFT Units.  Sub Trust will then be wound-up.

27.   The Fund will distribute a certain number of its MFT Units acquired in paragraph 21 above to all of the Fund Unitholders on a pro rata basis as a distribution of capital.  The Fund will remit to the Receiver General of Canada, on behalf of each Fund Unitholder that is a non-resident, an amount equal to the amount required to be withheld on behalf of that Fund Unitholder in respect of the return of capital, pursuant to subsection 218.3(2).

28.   Before the distribution described in paragraph 27 above, the Fund will obtain a prospectus and registration exemption under applicable securities legislation to allow for distribution of MFT Units without the filing of a prospectus, registration statement or similar document.

29.   There will be a lawful distribution of the MFT Units within the meaning of paragraph 4801(a) of the Regulations.  In addition, the number of MFT Units distributed by the Fund to the Fund Unitholders will be such that MFT will satisfy all of the conditions to be a mutual fund trust pursuant to subsection 132(6) of the Act and section 4801 of the Regulations immediately after the distribution described in paragraph 27 above.  In particular, there will be at least XXXXXXXXXX unitholders of MFT, each holding at least XXXXXXXXXX MFT Units with an aggregate FMV of at least $XXXXXXXXXX. The FMV of each MFT Unit will be $XXXXXXXXXX or more but will be less than $XXXXXXXXXX. For purposes of satisfying the requirements of section 4801 of the Regulations, the unitholders of MFT would include groups of unitholders that collectively meet such requirements, as determined in accordance with subsections 4803(3) and 4803(4) of the Regulations.

30.   Following the transactions described in paragraphs 28 and 29 above, but prior to the winding-up of MFT described in paragraph 40 below, MFT will file an election to be deemed to have been a “mutual fund trust” from the beginning of its first taxation year within the prescribed time in subsection 132(6.1).

31.   Before the transactions described in paragraph 32 below, the provisions in the Declaration of Trust of the Fund in respect of the consolidation of Fund Units will be amended to provide that the consolidation of Fund Units described in paragraph 37 below will be automatic and not require the consent of the Fund Unitholders.

32.   At the moment that is the Transfer Time, pursuant to the terms and conditions of a transfer agreement:

(a)   MFT will transfer all of the cash, LP Class A Units, LP II Class A Units, LP III Class A Units and the shares of GP Inc., GP II Inc. and GP III Inc. it acquired in paragraph 24 above to the Fund at the Transfer Time; and

(b)   as consideration for the transfer, the Fund will issue Fund Units having an aggregate FMV equal to the aggregate FMV of the assets transferred to the Fund.

33.   At the Transfer Time, each of the Fund and MFT will qualify as a “mutual fund trust” for purposes of the Act.

34.   At the Transfer Time, MFT will have no material outstanding liabilities and the only material assets of MFT will be cash, all of the issued and outstanding LP Class A Units, LP II Class A Units, LP III Class A Units and all of the issued and outstanding shares of GP Inc., GP II Inc. and GP III Inc.

35.   Within XXXXXXXXXX days after the Transfer Time, MFT will redeem all of the issued and outstanding MFT Units held by the Fund and the Fund Unitholders except for one MFT Unit which the Fund will continue to hold until the winding-up of MFT described in paragraph 40 below.  MFT will satisfy the redemption price for such MFT Units by transferring the Fund Units acquired in paragraph 32 above.  No consideration other than the Fund Units will be received by the Fund and the Fund Unitholders on the redemption of the MFT Units.

36.   The Fund Units that will be received by the Fund upon the redemption of the MFT Units described in paragraph 35 above will be cancelled upon receipt.

37.   Immediately after the transactions described in paragraphs 35 and 36 above, the outstanding Fund Units held by the Fund Unitholders will be consolidated on a basis such that the number of Fund Units outstanding following such consolidation will be equal to the number of Fund Units outstanding immediately before the reorganization.  No Fund Units will be cancelled or redeemed and the Fund Unitholders will not receive, and shall not be entitled to receive, any proceeds of disposition as a consequence or this consolidation.

38.   Following the transactions described in paragraph 32 through 37 above, but prior to the winding-up of MFT described in paragraph 40 below, MFT will jointly elect with the Fund, in prescribed form and within the prescribed time in paragraph (c) of the definition of “qualifying exchange” in subsection 132.2(1), to have the rules in section 132.2 apply to the transactions described in paragraphs 32 and 34 through 36 above.

39.   MFT will not be wound-up but will continue to exist, at least until the later of the last day on which the election under paragraph (c) of the definition of “qualifying exchange” referred to in paragraph 38 above and the election under subsection 132(6.1) described in paragraph 30 above can be filed.

40.   After the elections described in paragraph 39 above have been filed, MFT will be wound-up.  The one MFT Unit held by the Fund will be cancelled for no consideration.

IV. Purpose of the Proposed Transactions

41.   The purpose of the proposed transactions is to eliminate Sub Trust so that the Fund will hold its investments in each of LP, LPII, LPIII, GP Inc., GP II Inc. and GP III Inc. directly. 

V. RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and the purpose thereof, we rule as follows:
A.    The transfer by Sub Trust of all of the cash, LP Class A Units, LP II Class A Units, LP III Class A Units and the shares of GP Inc., GP II Inc. and GP III Inc. it owns to MFT, as described in paragraph 24 above, will be a “qualifying disposition” within the meaning of subsection 107.4(1) of the Act, such that the rules in subsection 107.4(3) will apply to Sub Trust and MFT in respect of such transfers.

B.    Provided that:

a)    at the Transfer Time, as defined in paragraph 24 above, each of MFT and the Fund is a mutual fund trust within the meaning of subsection 132(6);

b)    at the Transfer Time, the property transferred by MFT to the Fund has an aggregate FMV equal to at least 90% of the FMV of all property owned by MFT; and

c)    MFT and the Fund jointly elect, in prescribed form within the prescribed time in paragraph (c) of the definition of “qualifying exchange” in subsection 132.2(1),

the transactions described in paragraphs 32 and 34 through 36 above will constitute a “qualifying exchange” under section 132.2.

C.    The proposed transactions in paragraphs 19 to 40 above will not, in and by themselves, adversely affect the qualification of the Fund as a mutual fund trust within the meaning of subsection 132(6).

D.    The consolidation of the Fund Units held by Fund Unitholders, as described in paragraph 37, will not in itself result in a disposition of Fund Units by the Fund Unitholders.

E.    Subsection 245(2) will not apply to redetermine any of the tax consequences confirmed in rulings given above solely as a result of the transactions described herein.

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular,

*     we express no opinion with respect to any transactions which Fund Unitholders and holders of Special Voting Units may have approved that are not specifically described herein;

*     we express no opinion with respect to whether Fund or MFT is a mutual fund trust within the meaning of subsection 132(6) of the Act at any particular time;

*     we express no opinion with respect to whether Sub Trust is a unit trust at any particular time; and

*     we have made no determination of the fair market value of any property referred to herein.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter.
Yours truly,     

XXXXXXXXXX
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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