2015-0606141R3 XXXXXXXXXX

Principal Issues: What is the characterization of the particular XXXXXXXXXX for the purposes of the Income Tax Act (Act)?

Position: The XXXXXXXXXX is a contractual arrangement that is not a person or a taxpayer for the purposes of the Act and the Canada-XXXXXXXXXX Treaty.

Reasons: The XXXXXXXXXX is an unincorporated contractual arrangement that has no legal personality and is being established such that each investor has an undivided co-ownership interest in the underlying properties of the subfunds.

Author: XXXXXXXXXX
Section: 215, Part XIII of the Act

XXXXXXXXXX                                                                                                            2015-060614

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:  Pension Fund of XXXXXXXXXX Advance Income Tax Ruling

 We are writing in reply to your letter of XXXXXXXXXX, with subsequent revisions dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.  We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this letter:

(i)   is in an earlier tax return of the taxpayer or a related person;

(ii)  is being considered by a Tax Services Office or a Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;

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

(iv)  is before the courts or, if a judgement has been issued, the time limit for appeal has not expired; or

(v)   is the subject of an advance income tax ruling previously issued by the Directorate.

Unless otherwise stated, all statutory references herein are to the corresponding provisions of the Income Tax Act, R.S.C. 1985, (5th Supplement) c.1, as amended (the “Act”), to the date of this advance income tax ruling. For greater certainty, all the documents and information submitted in support of your request are part of this letter only to the extent described herein and any reference to these documents is provided solely for the convenience of the reader. The rulings given herein are based solely on the Facts, Proposed Transactions and the Purpose of the Proposed Transactions described below.

Definitions

In this letter the following terms have the meanings specified:

a)    “Annex” means the annex to the Fund Contract prepared by the Management Company dated XXXXXXXXXX, in place of the prospectus or simplified prospectus required by XXXXXXXXXX, in accordance with XXXXXXXXXX of the Fund Contract;

b)    “Authority” means the XXXXXXXXXX, responsible for the implementation of the XXXXXXXXXX and financial market legislation;

c)    “Canadian Corporation” has the meaning assigned by subsection 89(1);

d)    “Canadian Sub-custodian” means XXXXXXXXXX, a Canadian resident and sub-custodian of the XXXXXXXXXX;

e)    “Canadian Agreement” means the agreement entered into force on XXXXXXXXXX between the Canadian Sub-custodian and the Custodian Bank;

f)    XXXXXXXXXX;

g)    XXXXXXXXXX;

h)    XXXXXXXXXX;

i)    “Class” means a particular class of Units issued by the XXXXXXXXXX, where each Unit embodies an entitlement to a share in the undivided assets of the Subfund concerned. Subfunds are not subdivided into sub-classes or series;

j)    XXXXXXXXXX;

k)    XXXXXXXXXX;

l)    “CRA” means the Canada Revenue Agency;

m)    “Custodian Bank” means XXXXXXXXXX, having its registered office at XXXXXXXXXX and acting as custodian with respect to the XXXXXXXXXX property as set out in the Fund Contract;

n)    “Designated Stock Exchanges” has the meaning assigned by section 262;

o)    XXXXXXXXXX;

p)    “Fund Contract” means the fund contract dated XXXXXXXXXX, entered into force on XXXXXXXXXX between the Investor, the Management Company and the Custodian Bank, providing for the establishment of the XXXXXXXXXX;

q)    “Investment” means a permitted investment set out in Section XXXXXXXXXX of the Fund Contract;

r)    “Investor” has the meaning assigned in the Fund Contract and is currently restricted to the Pension Fund;  

s)    “Management Company” means XXXXXXXXXX, having its registered office at XXXXXXXXXX, acting in its capacity as the fund management company of the XXXXXXXXXX as set out in the Fund Contract;

t)    “Non-Resident” has the meaning assigned by subsection 248(1);

u)    “Open-ended XXXXXXXXXX” means a XXXXXXXXXX, established under the laws of XXXXXXXXXX, authorised by the Authority pursuant to XXXXXXXXXX;

v)    “Open-ended XXXXXXXXXX with Subfunds” means an Open-ended XXXXXXXXXX, established under the laws of XXXXXXXXXX, authorized by the Authority pursuant to XXXXXXXXXX;

w)    “Other Securities Funds” means Open-ended XXXXXXXXXX, established under the laws of XXXXXXXXXX, authorized by the Authority pursuant to XXXXXXXXXX that are neither securities funds nor real estate funds;

x)    “Pension Fund” means XXXXXXXXXX Pension Fund, a pension fund that provides occupational benefits for employees and members of the public authorities of XXXXXXXXXX formed under the laws of XXXXXXXXXX and is described in XXXXXXXXXX;

y)    “Related Persons” has the meaning assigned by subsection 251(2);

z)    “Subfund” means, XXXXXXXXXX, each a XXXXXXXXXX, in its own right, within an Umbrella Fund;

aa)   “Taxpayer” has the meaning assigned by subsection 248(1);

bb)   “Tax Treaty” means the Convention between Canada and XXXXXXXXXX For the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital signed on XXXXXXXXXX as amended by the Protocol of XXXXXXXXXX;

cc)   “TCP” means taxable Canadian property as defined in subsection 248(1);

dd)   “Umbrella Fund” means, an Open-ended XXXXXXXXXX with Subfunds;

ee)   “Unit” means a claim against the Management Company conferring entitlement to the assets and income of a Subfund of a XXXXXXXXXX; and

ff)   “Unitholder” means any Investor holding a Unit of a Subfund as being the holder of a Unit such holder being legally entitled to a share in the undivided assets of the Subfund, which are not segmented.

Facts

Background

1.    XXXXXXXXXX are established under XXXXXXXXXX law and are arrangements by which investors pool their assets to be managed by a fund company on the account of the investors.

2.    In general, a XXXXXXXXXX is one form of a XXXXXXXXXX. It is a XXXXXXXXXX undertaking that is an unincorporated body without legal personality. By contractual arrangement between a fund management company, a custodian bank and investors, the fund management company agrees to involve investors in accordance with the number of type of units which the investors acquire in a subfund and will manage the fund’s assets in accordance with the fund contract.

3.    XXXXXXXXXX

4.    XXXXXXXXXX

5.    The Authority monitors whether XXXXXXXXXX, including XXXXXXXXXX, comply with specifications set out in their fund contracts and prospectus. The Authority’s assessment is based on an annual audit of the schemes’ financial statements and prospectus by an audit firm and on annual regulatory audit of the fund management company’s compliance with regulatory requirements, including provisions, of the fund contract. In addition, the Authority also conducts its own periodic case-related audits.

XXXXXXXXXX

6.    XXXXXXXXXX

7.    The XXXXXXXXXX does not have separate legal personality, is transparent for XXXXXXXXXX tax purposes and is not an entity that is taxable in its own right. On this basis, the XXXXXXXXXX is not subject to XXXXXXXXXX tax on its income or gains.

8.    The XXXXXXXXXX was created by way of the Fund Contract, entered into by the Investor, the Management Company and the Custodian Bank, which sets out the rights and duties of the Investors, the Management Company and the Custodian Bank.

9.    Units of the Subfunds are issued pursuant to the Fund Contract, which provides, among other things, the following:

a)    Units are available only in those jurisdictions and to those persons where and to whom they may be lawfully offered for sale, and therein only by persons permitted to sell such securities.

b)    Units of the Subfunds may be further divided into different Classes to accommodate different entitlements due to class-specific costs or distributions or class-specific income.

c)    Each Unit represents a claim against the Management Company in respect of a participation in the assets and income of a Subfund of the Umbrella Fund. Thus Unitholders have a legally enforceable right to their share of the income and profits accrued to them.

d)    No Unit shall confer any interest or share in any particular part of the assets of the XXXXXXXXXX.

e)    The Unitholders are legally entitled to participate and share in the assets and income of the XXXXXXXXXX, including, without limitation, income arising thereon and profits derived therefrom as such income and profits arise, as participants and, accordingly income accrues to Unitholders as it arises.

f)    The provisions of the Fund Contract dictate the legal relationship between the Unitholders, the Management Company and the Custodian Bank.

g)    The liabilities of a Unitholder, as such a holder, shall be limited to the amount agreed to be contributed by it for the subscription of units.

h)    The Units of the Subfunds do not have any voting rights. Neither the Unitholders, nor their heirs or successors, have rights with respect to the representation or management of the XXXXXXXXXX. The incapacity, failure or insolvency of a Unitholder shall have no effect on the existence of the XXXXXXXXXX.

i)    Units in any Class within the XXXXXXXXXX are issued in registered form only and do not take the form of actual certificates.

j)    Unitholders can resign the Fund Contract on a monthly basis. Redemption orders are accepted on the order day up to a certain cut-off time specified in the Annex. Units of a Subfund may be redeemed in cash or in-kind in accordance with the Fund Contract.

10.   Pursuant to the Fund Contract, on concluding a contract or subscribing and paying in cash, the Unitholders acquire, own and share in the property of the XXXXXXXXXX as co-owners, evidenced in the form of fund Units. As such, the Unitholders are entitled to an undivided interest as tenants in common in the assets held by the XXXXXXXXXX, and are entitled to all income and gains derived from same as such income or gains arise in accordance with the Units they acquire.

11.   Each Unitholder of a Subfund will be an Investor beneficially holding the Units, or a custodian or trustee holding Units for the benefit of such an Investor.

12.   The sole Unitholder of the XXXXXXXXXX Subfunds is the Pension Fund, a tax exempt entity resident in XXXXXXXXXX. Currently there are no intentions of allowing other investors into the XXXXXXXXXX.  The Pension Fund meets the requirements for exemption from Part XIII on dividends paid by corporations resident in Canada tax under XXXXXXXXXX of the Tax Treaty.

13.   The XXXXXXXXXX investment objectives differ amongst the Subfunds and are to allow the Investor to participate in returns on;

a)    bonds denominated in XXXXXXXXXX or other currencies while at the same time achieving a balanced risk diversification;

b)    foreign currency inflation-linked bonds while at the same time achieving a balanced risk diversification; and

c)    domestic and foreign equities and real estate securities while at the same time achieving a balanced risk diversification.

14.   On behalf of the XXXXXXXXXX, the Management Company may not acquire participation rights which in total represent more than XXXXXXXXXX% of the voting rights in a company or which would enable it to exert material influence on the management of an issuing company, unless an exception is granted by the Authority.

15.   Currently, the XXXXXXXXXX portfolio contains no publicly traded shares of Canadian Corporations listed on Canadian stock exchanges or markets or shares of private Canadian Corporations.

Management Company

16.   The Management Company of the XXXXXXXXXX is a Non-Resident of Canada.

17.   XXXXXXXXXX provides that the Management Company and its agents are subject to duties of loyalty, due diligence and disclosure. It acts independently and exclusively in the interests of the Investors. It is entitled to be released from the liabilities assumed in the proper execution of its tasks, and to be reimbursed for expenses incurred in connection with such liabilities.

18.   Pursuant to the Fund Contract, the Management Company, among other things, manages the Subfunds at its own discretion and in its own name, but for the account of the Investors. It decides in particular on the issue of Units, the Investments and their valuation. It calculates the net asset value of the Subfunds and determines the issue and redemption prices of Units as well as distributions of income. It exercises all rights associated with the Umbrella Fund and Subfunds.

19.   The Management Company can establish different Classes and can also merge or dissolve Classes for each Subfund at any time subject to the consent of the Custodian Bank and the approval of the Authority.

20.   The Management Company in conjunction with the Custodian Bank must make an enforced redemption of Units if, among others,

a)    the participation of the Investor in a Subfund is such that it could have a significant detrimental impact on the economic interests of the other investors, in particular if the participation could result in tax disadvantages for the Umbrella Fund or a Subfund in XXXXXXXXXX, or

b)    The Investor has acquired or holds their Units in violation of provisions of a law to which they are subject either in XXXXXXXXXX, or in violation of the provision of the present Fund Contract,

21.   The XXXXXXXXXX provides that, in consideration of the services to be performed by the Management Company under the Fund Contract, the Management Company is entitled to receive fees stipulated in the Fund Contract.

22.   The Management Company is authorized and supervised by XXXXXXXXXX and subject to an annual regulatory and financial audit.

Custodian Bank

23.   The Custodian Bank of the XXXXXXXXXX is a Non-Resident of Canada.

24.   The XXXXXXXXXX provides that, the Custodian Bank and its agents are subject to duties of loyalty, due diligence and disclosure. It acts independently and exclusively in the interests of the Investors. It is entitled to be released from the liabilities assumed in the proper execution of its tasks, and to be reimbursed for expenses incurred in connection with such liabilities.

25.   Pursuant to the Fund Contract, the Custodian Bank is responsible for the safekeeping of the assets of the Subfunds. It handles the issue and redemption of Units as well as payments on behalf of the Subfunds.

26.   The Custodian Bank will delegate the safekeeping of the assets of a Subfund to third-party custodians and collective depositories in XXXXXXXXXX. It is liable in applying due diligence when choosing and instructing the third parties, as well as for monitoring constant compliance with the selection criteria. The Custodian Bank intends to use the services of the Canadian Sub-custodian with respect to the Canadian securities held by the XXXXXXXXXX.

27.   The Custodian Bank ensures that the Management Company complies with the law and the Fund Contract. It checks whether the calculation of the net asset values and of the issue and redemption prices of the Units as well as the investment decisions are in compliance with the law and the Fund Contract and whether the income is appropriated in accordance with the Fund Contract.

28.   The XXXXXXXXXX provides that, in consideration of the services to be performed by the Custodian Bank under the Fund Contract, the Custodian Bank is entitled to receive fees stipulated in the Fund Contract.

29.   The Custodian Bank is authorized and supervised by XXXXXXXXXX and subject to an annual regulatory and financial audit.

Canadian Sub-custodian

30.   Pursuant to the Canadian Agreement, the Custodian Bank has appointed the Canadian Sub-custodian as custodian of Canadian securities received by the Canadian Sub-custodian from or on behalf of the Custodian Bank.

31.   The Canadian Agreement provides, among other things, that the Canadian Sub-custodian is responsible for withholding any Part XIII tax on Canadian dividends paid on Canadian securities in its custody and remitting the amount to the CRA.

32.   Other duties of the Canadian Sub-custodian include custody, handling of corporate actions, cashing and transferring dividend and interest payments.

33.   The Custodian Bank will deliver all Canadian securities held by the XXXXXXXXXX to the Canadian Sub-custodian, who will act as custodian in respect of such Canadian securities.

Proposed Transactions

34.   The securities currently held by the XXXXXXXXXX do not include shares of corporations resident in Canada. In addition to securities already held by the XXXXXXXXXX as of the date of this letter, the XXXXXXXXXX will invest in publicly traded shares of Canadian Corporations listed on Designated Stock Exchanges.

35.   In addition to securities already held by the XXXXXXXXXX as of the date of this letter, the XXXXXXXXXX will invest in shares of private Canadian Corporations whose intention is to become publicly listed on a Designated Stock Exchange within the next 12 months.

Purpose of the Proposed Transactions

36.   The purpose of the Proposed Transactions is to provide the Pension Fund (and possible other investors) with the opportunity to access an array of pooled Canadian securities to be managed by the Fund Company. This structure is the market practice in XXXXXXXXXX as it facilitates commercial valuations and liquidity.

37.   XXXXXXXXXX are generally only viable as pooling vehicles for institutional investors’ property if they do not materially increase the tax costs incurred by institutional investors.  Accordingly, it is of critical importance that the XXXXXXXXXX is treated as fiscally transparent for Canadian tax purposes to allow the Pension Fund to claim treaty benefits in respect of the income and gains it earns from its ownership of the XXXXXXXXXX assets, based on an application of the Tax Treaty.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and Purposes of the Proposed Transactions, we rule as follows, in reliance on such statements and subject to the comments below:

A.    The XXXXXXXXXX, including each of its Subfunds, is not a person or a taxpayer for the purposes of the Act and as such, the XXXXXXXXXX and each of its Subfunds is treated as fiscally transparent for the purposes of the Act.

B.    For the purposes of Part XIII withholding and section 116, any amount paid or credited by a payer to the Canadian Sub-custodian in respect of the property held by the Subfund on behalf of the Pension Fund, including purchase consideration for such property, will be considered an amount paid or credited to the Pension Fund in proportion to its participation in the assets and income of the particular Subfund.

The above-noted rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 issued by the CRA on April 22, 2016, and are binding on the CRA provided that the proposed transactions are entered into before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

In particular, nothing in this ruling should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether:

(a) any Unitholder would be considered to be carrying on business in Canada because of the provision of services to the Unitholder by the Sub-Custodian in reference to the Unitholder’s investments in Canadian securities and consequently, whether the income in respect of the investments referred to herein would be taxable under Part I or Part XIII;

(b)   any Unitholder is a resident of a country with which Canada has entered into a Tax Treaty, or the manner in which any article of a Tax Treaty applies to any Unitholder; or

(c)   a Canadian payer and the Canadian Sub-custodian have complied with the withholding requirements under Part XIII (including guidance in respect of financial intermediaries provided in IC76-12R6 “Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention”, and on the CRA webpage “Pending updates to IC76-12, Applicable rate of part XIII tax on amounts paid or credited to persons in countries with which Canada has a tax convention related to forms NR301, NR302, and NR303” in respect of the amounts paid or credited to the Canadian Sub-custodian and the amounts paid or credited by the Canadian Sub-custodian to Unitholders.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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