2014-0523221R3 Amalgamation of mutual funds

Principal Issues: 1. Whether acquisition of control of smaller fund. 2. Application of 69(11). 3. Application of 111(5.5).

Position: 1. Yes 2. No. 3. No.

Reasons: Application of relevant provisions of the Act.

Author: XXXXXXXXXX
Section: 256(7)(b), 69(11), 87, 111(5.5)

XXXXXXXXXX                                                                                                                        2014-052322

XXXXXXXXXX, 2014

Attention:  XXXXXXXXXX

Dear Sir/Madam:

Re:         XXXXXXXXXX (the “Taxpayers”)
              Advance Income Tax Ruling

We are writing in response to your letters of XXXXXXXXXX (and related emails) in which you requested an advance income tax ruling on behalf of the Taxpayers.  The documents submitted as part of your request are part of this document only to the extent described herein.

You have advised that, to the best of your knowledge, and that of the Taxpayers, none of the issues involved in this ruling request:

(i)   relates to an earlier return of the Taxpayers or a related person;

(ii)  is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a related person;

(iii) is under objection by the Taxpayers or a related person;

(iv)  is before the courts; or

(v)   is the subject of a ruling previously considered by the Directorate, though a prior proposed merger of the Taxpayers was the subject of an advance income tax ruling request in XXXXXXXXXX at a time when the facts were materially different.

The Taxpayers also represent that the transactions described herein will not result in the Taxpayers or any related person being unable to pay its existing outstanding tax liabilities.

Unless otherwise noted: all references to monetary amounts are in Canadian dollars; all references to Paragraphs are references to the numbered paragraphs in this letter; and the following terms have the meanings specified below.

“Act” means the Income Tax Act, R.S.C. 1985. c.1 (5th Supp.), as amended to the date hereof and unless otherwise stated, every reference to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;

“affiliated” has the meaning assigned by subsection 251.1(1);

“Amalco” means the corporation to be formed on the amalgamation of the Corporations;

“Board” means the board of Directors of a Corporation;

“C1” means XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

“C2” means XXXXXXXXXX;

XXXXXXXXXX;

“Corporations” means C1 and C2, and “Corporation” means any one of them;

“CRA” means the Canada Revenue Agency;

“Director” means a director of a Corporation;

“Fund” means a portfolio of investments held by a Corporation that correlates to one or two specific classes of shares issued by the Corporation and is subject to regulation as a mutual fund under Canadian securities legislation;

“GAAR” means the general anti-avoidance rule in subsection 245(2);

“Manager” means XXXXXXXXXX;

“Mutual Fund Shares” means shares of a Corporation issuable in series that are of a class other than voting common shares;

“NI 81-102” means National Instrument 81-102 – Mutual Funds;

“NI 81-107” means National Instrument 81-107 – Independent Review Committee for Investment Funds”;

“related” has the meaning assigned by subsection 251(2);

XXXXXXXXXX; and

XXXXXXXXXX.

Facts

1.    Each Corporation had represented that it meets the conditions to be a “mutual fund corporation” as that term is defined in subsection 131(8).  The taxation year of each Corporation ends on XXXXXXXXXX.

2.    The office of each Corporation is located at XXXXXXXXXX. 

3.    XXXXXXXXXX

4.    Manager is a “taxable Canadian corporation” as that term is defined in subsection 89(1). 

5.    C1 was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX and is authorized to issue: (i) an unlimited number of voting common shares; and (ii) an unlimited number of Mutual Fund shares.

6.    C2 was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX and is authorized to issue (i) an unlimited number of voting common shares; and (ii) an unlimited number of Mutual Fund Shares. 

7.    Each of XXXXXXXXXX and XXXXXXXXXX own XXXXXXXXXX common shares of C1.  The fair market value of the common shares of C1 is nominal.

8.    Each of XXXXXXXXXX and XXXXXXXXXX owns XXXXXXXXXX common shares of C2.  The fair market value of the common shares of C2 is nominal.

9.    XXXXXXXXXX

10.   XXXXXXXXXX

11.   XXXXXXXXXX

12.   XXXXXXXXXX

13.   XXXXXXXXXX

14.   XXXXXXXXXX

15.   XXXXXXXXXX

16.   XXXXXXXXXX

17.   XXXXXXXXXX

18.   No person has a contractual right (in equity or otherwise, either immediately or in the future, either absolutely or contingently) to or to acquire a common share of a Corporation or to control or limit the voting rights of a common share of a Corporation or to cause a Corporation to redeem, acquire or cancel any common share issued by it.

19.   There is nothing in either Corporation’s Articles or by-laws or securities legislation that gives any particular shareholder a unique advantage to cause the wind-up of the Corporation.

20.   The common shareholders of a Corporation have not entered into any agreement, arrangement or understanding that limits the voting power attaching to the common shares or that grants a right to nominate one or more directors.

21.   The business and affairs of each Corporation are managed or supervised by its Board.  The Board is entitled to exercise all powers granted to it by the Business Corporations Act (XXXXXXXXXX) other than those required by statute (including NI 81-102) to be exercised by the holders of Mutual Fund Shares.  More specifically, there is nothing in the Articles or By-laws of a Corporation or an agreement among all the shareholders of a Corporation that in any way restricts the powers of the Board to manage, or supervise the management of, the business and affairs of the Corporation.

22.   XXXXXXXXXX

23.   Each Corporation has XXXXXXXXXX Directors, XXXXXXXXXX of whom are independent of the Manager.  The term “independent Director” is used here to refer to an individual who is not a director, officer or employee of any of the Manager, an affiliate of the Manager, an investment advisor to a Fund or an affiliate of an investment advisor to a Fund.  In addition, an independent Director is independent of management of the Manager and free from any interest and any business or other relationship that could, or could reasonably be perceived to, materially interfere with the Director’s ability to act with the view to the best interests of the Corporation.

24.   All of the Directors are knowledgeable and experienced business people.  They are informed with respect to the issues relevant to the Corporations and to the mutual fund industry, generally.  They regularly attend Board meetings and participate as members of the Board in the management and supervision of each Corporation’s business and affairs.

25.   Meetings of each Board are held at least XXXXXXXXXX and more often as required to manage or supervise the business and affairs of a Corporation.

26.   Under Canadian securities law, each investment portfolio held by a Corporation is regarded as a separate mutual fund (i.e., a “Fund”) that correlates to one or two classes of mutual fund shares issued by the Corporation.  The holders of the class or classes of mutual fund shares that correlate to a particular investment portfolio are regarded as investors in that Fund.  Each Fund is managed separately from the other Funds, even though the Funds have no separate legal identity from each other or from the Corporation to which they relate.

27.   XXXXXXXXXX classes of Mutual Fund Shares of C1 are issued and outstanding, in several series.  Each class of Mutual Fund Shares correlates to a separate Fund so that there are XXXXXXXXXX Funds within C1.  The Mutual Fund Shares of C1 are widely held by the public.  No person or group of persons owns XXXXXXXXXX% or more of the shares of C1, whether measured by number or value.

28.   XXXXXXXXXX of Mutual Fund Shares of C2 are issued and outstanding, in several series.  There are XXXXXXXXXX Funds within C2.  Of those Funds, XXXXXXXXXX correlate to a single class of Mutual Fund Shares and the other XXXXXXXXXX correlate to XXXXXXXXXX classes of Mutual Fund Shares.  The Mutual Fund Shares of C2 are widely held by the public. No person or group of persons owns XXXXXXXXXX% or more of the shares of C2, whether measured by number or value.

29.   Each Fund is subject to regulation as a mutual fund under Canadian securities legislation (including NI 81-102 and NI 81-107).  Similarly, the holders of the correlated class or classes of Mutual Fund Shares are granted rights and protections under Canadian securities legislation as investors in the Fund. 

30.   By virtue of Part 5 of NI 81-102, a majority of the votes cast at a meeting of the holders of Mutual Fund Shares of a class is required before certain changes affecting the corresponding mutual fund and/or those shareholders can be made, including

(a)   an increase in fees or expenses that may be charged to the mutual fund or those shareholders;

(b)   a change of the manager of the mutual fund, unless the new manager is an affiliate of the current manager;

(c)   a decrease in the frequency of calculation of the net asset value of the mutual fund shares of the class;

(d)   a change in the fundamental investment objectives of the mutual fund; and

(e)   certain reorganizations of the mutual fund.

31.   XXXXXXXXXX

32.   XXXXXXXXXX

33.   XXXXXXXXXX

34.   As at XXXXXXXXXX, C1 had net assets of approximately $XXXXXXXXXX in XXXXXXXXXX Funds.  XXXXXXXXXX.  As at XXXXXXXXXX, C1 had a capital loss carry forward of approximately $XXXXXXXXXX and a non-capital loss carry forward of $XXXXXXXXXX.  As of XXXXXXXXXX, C1 had net realized capital gains of approximately $XXXXXXXXXX and net unrealized capital gains of approximately $XXXXXXXXXX.

35.   As XXXXXXXXXX, C2 had net assets of approximately $XXXXXXXXXX in XXXXXXXXXX Funds.  In XXXXXXXXXX, C2 had net assets of $XXXXXXXXXX in XXXXXXXXXX Funds.

As at XXXXXXXXXX, C2 had a capital loss carry forward of approximately $XXXXXXXXXX and a non-capital loss carry forward of $XXXXXXXXXX. As of XXXXXXXXXX, C2 had net realized capital gains of approximately $XXXXXXXXXX and net unrealized capital gains of approximately $XXXXXXXXXX.

Proposed Transactions

36.   The Corporations will amalgamate into a single corporate entity (Amalco) on XXXXXXXXXX.

37.   On the amalgamation, all of the property of each Corporation will become the property of Amalco and the shareholders of each Corporation will become the shareholders of Amalco.

38.   Amalco will be authorized to issue: (i) an unlimited number of voting common shares; and (ii) an unlimited number of Mutual Fund Shares.

39.   The voting common shares of Amalco will be issued XXXXXXXXXX% to XXXXXXXXXX. Each class of mutual fund common shares of Amalco will be issued to the shareholders of the comparable class of Mutual Fund Shares of each Corporation on a XXXXXXXXXX basis.

40.   Within the parameters stipulated by paragraph 111(4)(e), in its return of income for the taxation year ending immediately before the amalgamation, C1 will designate capital property on which it has an accrued gain so that the capital property will be deemed to be disposed of for such an amount that will permit C1 to realize sufficient capital gains for that taxation year to deduct the maximum possible amount of:

(a)   any capital losses deemed to be realized by virtue of paragraph 111(4)(d); and

(b)   undeducted net capital losses from preceding years.

Purpose of Proposed Transaction

41.   XXXXXXXXXX

42.   XXXXXXXXXX

43.   An investor in a Fund that was formerly part of C1 will be able to convert his or her Mutual Fund Shares for shares of a Fund that was formerly part of C2 (and vice versa) on a tax-deferred basis under section 51, consistent with the expectation of investors in a mutual fund corporation.  XXXXXXXXXX.

Rulings

Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, Proposed Transactions, additional information and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A.    Provided that each of C1 and C2 is a taxable Canadian corporation within the meaning assigned by subsection 89(1), subsection 87(1) will apply in respect of the amalgamation described in Paragraph 36.   

B.    As a result of the amalgamation described in Paragraph 36, there will be an acquisition of control of C1 pursuant to subparagraph 256(7)(b)(iii), and there will not be an acquisition of control of C2.  Subsections 69(11) and 111(5.5) will not apply to the Proposed Transactions, in and of themselves.

C.    Subsection 245(2) will not apply to the Proposed Transactions as described in Paragraphs 36 to 40, to re-determine the tax consequences confirmed in the rulings above.

Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter.  Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.

Our Comments

Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:

(a)   to the FMV or ACB of any asset, PUC of any share or the characterization of any share or other property; or

(b)   to any tax consequences relating to any transaction described herein other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs 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 the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2014

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 redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, 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, 2014