2014-0521951E5 Qualifying Environmental Trusts - Purpose

Principal Issues: Whether "principal purpose requirement" is observed in the wording of the Model Trust Agreement proposed by the National Energy Board.

Position: Yes.

Reasons: Wording in accordance with the purpose of the QET rules.

Author: Pinero, Veronica
Section: 211.6(1)(b) "qualifying environmental trust"

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                                                                                                                                                    2014-052195
                                                                                                                                                    Veronica Pinero

August 22, 2014

Dear XXXXXXXXXX:

Re:  National Energy Board Decision – MH-001-2013

We are writing in response to your letter dated July 22, 2014 that was submitted on behalf of XXXXXXXXXX. In your letter you requested the technical interpretation of the Canada Revenue Agency (the “CRA”) with respect to certain aspects of clauses 2.04 and 2.05 in the Model Trust Agreement (the “Model Trust Agreement”).
I.    BACKGROUND
On May 29, 2014, the National Energy Board (“NEB”) in its decision MH-001-2013 on set-aside and collection mechanisms (the “Decision”) proposed a Model Trust Agreement to provide pipeline companies with guidelines for establishing qualifying environmental trusts (the “QET”) as defined in subsection 211.6(1) of the Income Tax Act (the “Act”) for dealing with reclamation obligations when abandoning pipelines.

Clauses 2.04 and 2.05 of the Model Trust Agreement read as follows:

2.04 The Trust: appropriation of surplus funds
If property remains in the Fund after all Reclamation Obligations of the Beneficiaries are discharged, then the Trustee, with the approval of the Tribunal, may distribute the Fund or any part thereof among any of the Beneficiaries and Orphan Pipeline Fund as the Trustee in its sole discretion sees fit.

2.05 The Trust: duration (or term) of the Trust
[In the case where the jurisdiction selected has abolished the rule against perpetuities]: This Agreement shall have no specific term but shall commence on the date first mentioned above and shall continue until terminated in writing by the Company, with the approval of the Tribunal.
OR [In the case where the jurisdiction selected has not abolished the rule against perpetuities]: This Agreement terminates (the “Trust Term”) no later than the expiration of 21 years after the date of death of the last surviving lineal descendent of Queen Elizabeth II who was alive on the date the Trust is created, or in the case of Ontario, Alberta, British Columbia, the Northwest Territories, the Yukon, and Nunavut, upon the expiration of the period permitted by the perpetuities or perpetuity legislation respectively of those jurisdictions. Not more than five years prior to the expiration of the Trust Term, and provided that the Company is not in Default, the Trustee shall pay the Fund to the Company, and the Company covenants upon receipt of the Funds, to establish, at once, a new irrevocable trust upon the terms and subject to the same conditions set out in this Agreement (“the New Trust Fund”), and to contribute to the New Trust Fund the entirety of the Fund.

The Model Trust Agreement defines some of the terms referred in clauses 2.04 and 2.05: 

1.01 In this trust agreement, the following words or phrases have the following meanings:
…
b) “Agreement” means this instrument, as amended from time to time, which instrument is the vehicle for the trust here created;
…
d) “Beneficiary” and “Beneficiaries” mean the person or persons, including the “company” (as defined hereafter), having, while entitled to benefit from the “fund” (as defined hereafter), “reclamation obligations” (as defined hereafter), in respect of the “site” (as defined hereafter);
…
f) “Company” means the person holding the regulatory authorization(s) for the time being to operate the pipeline described in Schedule “A” to this Agreement;
…
j) “Default” has the meaning set out in section 4.05 of this Agreement;

k) “Fund” means collectively: (i) all amounts held from time to time by the “trustee”, (as defined hereafter), in accordance with this Agreement, including any amounts paid to the “trustee” (as defined hereafter) under any section of this Agreement, and (ii) any interest or return from investing such amounts;
…
n) “New Trust Fund” has the meaning set out in section 2.05 of this Agreement (if applicable);
[This definition is to be removed if the law applicable to the trust is one which has abolished the rule against perpetuities.]
…
o) “Orphan Pipeline Fund” means a not-for-profit organization to be established pursuant to a statute of the Parliament of Canada whose purpose includes paying for the cost to Abandon a pipeline constructed or operated under a statute of the Parliament of Canada;
…
r) “Reclamation Obligations” means:
i) the duty to carry out the physical Abandonment, Decommissioning or Deactivation of the Pipeline, including costs incurred to satisfy any conditions imposed by the tribunal (as defined hereafter) in any order or direction approving the Decommissioning or Deactivation of the Pipeline or granting leave to Abandon the Pipeline;
ii) the duty to develop an Abandonment plan, and to prepare an application for leave to Abandon or for approval of the Deactivation or Decommissioning of the Pipeline; and
iii) the duty to carry out post-abandonment monitoring and remediation of the “site” (as defined hereafter), where post-abandonment refers to the period of time after a Company has satisfied the conditions of an order or direction issued by the tribunal (as defined hereafter) granting leave to Abandon;
and all costs incurred and consequent thereon.
…
u) “Tribunal” means the National Energy Board, a board established under the NEB Act or any successor administrative body having authority to regulate the Company in respect of the operation and Abandonment of the Pipeline;

v) “Trust” means the relationship between a “trustee” (as defined hereafter) and a Beneficiary or Beneficiaries, including the obligations of the “trustee” (as defined hereafter) towards the Beneficiary or Beneficiaries both personal and with regard to the Fund, and the corresponding rights of a Beneficiary, whether those obligations and rights are created at law or by the terms of this Agreement;

w) “Trustee” means a trust company licenced under the Trust and Loan Companies Act (Canada) for the time being appointed under this Agreement to hold the office of trustee; and

x) “Trust Term” or “Term” shall have the meaning set out in section 2.05 of this Agreement.
[The definition of Trust Term is to be deleted if the law applicable to the trust is the law of a jurisdiction that has abolished the rule against perpetuities.]
II.   INTERPRETATIONS REQUESTED
As a result of the NEB’s Decision, pipeline companies are currently drafting their trust agreements. Consequently, XXXXXXXXXX has requested the CRA’s interpretation with respect to two issues:
1.    That the inclusion of clause 2.04 allowing the distribution of surplus funds to the Beneficiaries or an Orphan Pipeline Fund (the “OPF”) after all the Beneficiaries’ reclamation obligations have been satisfied is in accordance with the requirement in paragraph (b) of the definition of “qualifying environmental trust” in subsection 211.6(1) of the Act that the trust “is maintained for the sole purpose of funding the reclamation of a qualifying site” (the “Sole Purpose Requirement”) and does not result in the Trust not being a QET. 
2.    That the inclusion of clause 2.05 requiring the distribution and re-contribution of funds to the New Trust Fund is in accordance with the Sole Purpose Requirement and does not result in the Trust not being a QET.
III.  CRA COMMENTS
As you have noted, paragraph (b) of the definition of “qualifying environmental trust” in subsection 211.6(1) sets out the Sole Purpose Requirement for the purposes of the QET rules. It is the CRA’s interpretation that the wording of clauses 2.04 and 2.05, and the wording of their defined terms do not, in and of themselves, offend the Sole Purpose Requirement for the purposes of the QET rules.

This technical interpretation is solely based on the specific issues described above. Our comments should not be construed as providing you with an interpretation of any other issue that may arise under the Model Trust Agreement. In particular, we are not providing a technical interpretation regarding whether a trust that uses the specific wording mentioned above or any other clause of the Model Trust Agreement will qualify as a QET. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

We trust our comments will be of assistance.

Yours truly,

Original signed by

Mark Symes
Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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