2016-0660321R3 Reorg of REIT to simplify multi-tier structure

Principal Issues: 1. Will the status of the Fund as a mutual fund trust be affected by the proposed reorg; 2. Will changes to the Declaration of trust cause a resettlement of the trust; 3. Will the proposed reorg be a qualifying exchange?; 4. Will GAAR apply to the transactions?

Position: 1. No 2. No 3. Yes 4. No

Reasons: 1. 132(6) will still be met. 2. Changes not significant enough to cause a resettlement. 3. 132.2 requirements will be met. 4. In line with previous rulings - gaar does not apply

Author: XXXXXXXXXX
Section: 132.2; 132(6); 87; 97

XXXXXXXXXX                                                                                         2016-066032

XXXXXXXXXX, 2017

Dear Sir:

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

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted Fund. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. You have advised that to the best of your knowledge, and that of the Fund, none of the issues contained herein:

(a)   involves a previously filed tax return of the Fund or a related person;

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

(c)   is under objection by the Fund or a related person;

(d)   is before the courts; or

(e)   is the subject of a ruling previously considered by the Directorate.

You have also advised that to the best of your knowledge, and that of the responsible officers of the Fund, the Proposed Transactions will not result in the Fund or any related person described herein being unable to pay its existing outstanding tax liabilities.

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter (the “Act”) and each reference to a technical tax term has the same meaning as such term has in the Act.  Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

I. Definitions

In this letter, the following terms have the meanings specified and where the circumstances so require, the singular should be read as plural and vice versa:

“ACB” means adjusted cost base as defined in section 54 of the Act;

“Amalco MFC” means the corporation to be formed on the amalgamation of MFC and Opco under the CBCA, as described in paragraphs 47 and 48 below;

“Amalco MFC Class A Shares” means the Class A shares of the capital stock of Amalco MFC with the same terms and conditions as the MFC Class A Shares described in subparagraph 38(b) below;

“Amalco MFC Class B Shares” means the Class B shares of the capital stock of Amalco MFC with the same terms and conditions as the MFC Class B Shares described in subparagraph 38(c) below;

“Amalco MFC Common Shares” means the common shares of the capital stock of Amalco MFC with the same terms and conditions as the MFC Common Shares described in subparagraph 38(a) below;

“CBCA” means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

“Class A LP Units” means the Class A limited partnership units issued by the Partnership, of which XXXXXXXXXX were issued and outstanding on the date hereof;

“Class A Redemption Price” means the fair market value of any consideration for which the MFC Class A Shares were issued plus any declared and unpaid dividends on such shares at the date of redemption or retraction;

“Class B LP Units” means the Class B limited partnership units issued by the Partnership, of which XXXXXXXXXX were issued and outstanding on the date;

“Class B Redemption Price” means the fair market value of any consideration for which the MFC Class B Shares were issued plus any declared and unpaid dividends on such shares at the date of redemption or retraction;

“Class C LP Units” means the Class C limited partnership units to be authorized as described in subparagraph 28(c) below;

“Class C Exchange Agreement” means the agreement respecting the exchange of class C LP Units into Fund Units to be entered into as described in subparagraph 28(d) below;

“Convertible Debentures” means, XXXXXXXXXX, which are convertible into Fund Units, subject to and in accordance with the terms of such debentures;

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

“Exchange Agreement” means the agreement respecting the exchange of Class B LP Units into Fund Units, dated XXXXXXXXXX;

“FMV” means fair market value;

“Fund” means XXXXXXXXXX, an open-ended, limited purpose trust established pursuant to the Declaration of Trust;

“Fund Unit” means a unit of the Fund, other than a Special Voting Unit, as described in paragraph 3 below;

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

“GP I Inc.” means XXXXXXXXXX, a corporation formed under the XXXXXXXXXX, which holds the XXXXXXXXXX% general partnership interest in the Partnership;

“GP II Inc.” means the corporation to be incorporated, as described in paragraph 16;

“Investor” means XXXXXXXXXX, a taxable Canadian corporation; 

“LP Indebtedness” means amounts owed by the Partnership to Sub-Trust, payable on demand, totalling $XXXXXXXXXX as at XXXXXXXXXX, and having the following characteristics, (i) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; (ii) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; (iii) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; (iv) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; and (v) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum;

“MFC” means a taxable Canadian corporation to be formed under the CBCA, as described in paragraphs 37 and 38 below;

“MFC Class A Shares” means the Class A Shares of the capital stock of MFC described in subparagraph 38(b) below;

“MFC Class B Shares” means the Class B Shares of the capital stock of MFC described in subparagraph 38(c) below;

“MFC Common Shares” means the common shares of the capital stock of MFC described in subparagraph 38(a) below;

“MFC Transfer Time” has the meaning described in paragraph 45 below;

“MFT” means the trust to be settled under the laws of XXXXXXXXXX, as described in paragraphs 18 to 19;

“MFT Transfer Time” has the meaning described in paragraph 22 below;

“MFT Unit” means a trust unit of MFT with the terms and conditions described in paragraph 19 below;

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

“Opco” means XXXXXXXXXX, a corporation formed under the CBCA;

“Opco Note” means a promissory note owed by Opco to the Partnership, payable on demand and having a principal amount as at XXXXXXXXXX of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum;

“Opco Partnership” means the partnership to be formed, as described in paragraph 16;

“Opco Partnership Agreement” means the partnership agreement that will govern Opco Partnership, as described in paragraph 16;

“Opco Partnership Unit” means an interest of a limited partner in Opco Partnership;

“Opco Shares” means the common shares of the capital stock of Opco;

“Partnership” means XXXXXXXXXX, a limited partnership formed on XXXXXXXXXX, pursuant to the laws of XXXXXXXXXX and a “Canadian partnership” for the purposes of the Act;

“Partnership Agreement” means the limited partnership agreement governing the Partnership dated XXXXXXXXXX, as amended from time to time;

“Right of Renunciation” means the right of a Fund Unitholder that is a Subsidiary of the Fund to renounce, release and surrender, for no consideration, all rights and benefits in and to the Fund Units specified in a delivered written notice of renunciation;

“Receiver General” means the Receiver General of Canada;

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

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

“Sub-Trust” means XXXXXXXXXX, an open-ended, limited purpose trust established pursuant to the Sub-Trust Declaration of Trust;

“Sub-Trust Declaration of Trust” means the declaration of trust establishing the Sub-Trust under the laws of XXXXXXXXXX on XXXXXXXXXX, as amended and restated on XXXXXXXXXX and as may be further amended from time to time;

“Sub-Trust Indebtedness” means certain indebtedness, other than the Sub-Trust Notes, owing from Sub-Trust to the Fund which is payable on demand, totalling $XXXXXXXXXX as at XXXXXXXXXX, and having the following characteristics, (i) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; (ii) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; (iii) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; (iv) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum; and (v) principal amount of $XXXXXXXXXX, bearing interest at XXXXXXXXXX% per annum;

“Sub-Trust Notes” means the series 1 notes issued by Sub-Trust in the principal amount of $XXXXXXXXXX on the date hereof, bearing an interest rate of XXXXXXXXXX% per annum;

“Sub-Trust Units” means units of the Sub-Trust; and

“Subsidiary of the Fund” means any entity, corporation, trust, or partnership in which the Fund holds, either directly or indirectly (through one or more Subsidiaries), XXXXXXXXXX% or more of the beneficial interest therein, including, without limitation, in respect of a corporation, XXXXXXXXXX% or more of the shares of each class of the capital stock of the corporation, in respect of a trust, XXXXXXXXXX% or more of the beneficial interest in the trust, and in respect of a partnership, XXXXXXXXXX% or more of the partnership units or interest in the partnership.

II. Facts

1.    The Fund is a “mutual fund trust” and qualifies as a “real estate investment trust” for the purposes of the Act.  The Fund Units are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX.  The Fund has a XXXXXXXXXX taxation year for the purposes of the Act.  A majority of the trustees of the Fund is resident in Canada.

2.    The principal office of the Fund is located at XXXXXXXXXX.  The account number for the Fund is XXXXXXXXXX.  The Fund files its returns at XXXXXXXXXX and deals with the XXXXXXXXXX.

3.    Under the Declaration of Trust, the Fund may issue an unlimited number of Fund Units and Special Voting Units.  Each Fund Unit represents an equal and undivided beneficial interest in the distributions made by the Fund, as well as the net assets of the Fund in the event of termination or winding-up of the Fund.  Each Fund Unit is transferable, entitles the holder to one vote and is redeemable at the demand of the holder at a redemption price determined by a formula.  The Declaration of Trust precludes non-residents of Canada from owning more than XXXXXXXXXX% of the Fund Units.

4.    Each Special Voting Unit entitles the holder thereof to a vote at all meetings of the Fund equal to the number of Fund Units which may be obtained upon the surrender or exchange of Class B LP Units.  A Special Voting Unit is not transferable separately from the Class B LP Unit issued in connection with it. The Special Voting Units are entitled to a nominal return of capital on a liquidation, dissolution or winding up of the Fund.

5.    There are XXXXXXXXXX Fund Units issued and outstanding as of the date hereof.  The Fund is not maintained primarily for the benefit of non-resident persons, and to the knowledge of the trustees of the Fund, non-residents of Canada beneficially own less than XXXXXXXXXX%, collectively, of the issued and outstanding Fund Units, Special Voting Units and Convertible Debentures.

6.    The Fund Units are widely held by the public and, other than the Investor, no person owns beneficially, directly or indirectly, or exercises control or direction over, more than XXXXXXXXXX% of the aggregate of the issued and outstanding Fund Units and the Special Voting Units.

7.    The Investor owns a XXXXXXXXXX% voting and economic interest in the Fund, represented by XXXXXXXXXX Fund Units and XXXXXXXXXX Class B LP Units which are exchangeable into Fund Units at the Investor’s option for the associated Special Voting Units and no further consideration.

8.    The Sub-Trust qualifies as a “unit trust” for the purposes of the Act.  The Sub-Trust has a XXXXXXXXXX taxation year for the purposes of the Act.  A majority of the trustees of Sub-Trust is resident of Canada.  The principal office of the Sub-Trust is located at XXXXXXXXXX.  The account number for the Sub-Trust is XXXXXXXXXX.

9.    Under the Sub-Trust Declaration of Trust, the Sub-Trust may issue an unlimited number of Sub-Trust Units.  Each Sub-Trust Unit represents an equal and undivided beneficial interest in the distributions made by the Sub-Trust, as well as the net assets of the Sub-Trust in the event of termination or winding-up of the Sub-Trust.  Each Sub-Trust Unit is transferable, entitles the holder to one vote and is redeemable at the demand of the holder at a redemption price determined by a formula.

10.   The Partnership was established to acquire, directly or indirectly, certain real estate related assets. The fiscal year end of the Partnership is XXXXXXXXXX.  The Partnership’s identification number is XXXXXXXXXX.  The Partnership is authorized to issue an unlimited number of Class A LP Units and Class B LP Units.  Class B LP Units are exchangeable into Fund Units in accordance with their terms and the Exchange Agreement.  Holders of Class A LP Units and Class B LP Units are entitled to a share of the distributions and income of the Partnership, such that the distributions on each Class B LP Unit are equivalent to the distributions on each Fund Unit (both in terms of quantum and timing of payment).  Class B LP Units are non-voting; however, holders of Class B LP Units are entitled to one Special Voting Unit in respect of each Class B LP Unit held.  The Class B LP Units are not transferable (except on an exchange for Fund Units, on the winding-up, dissolution or amalgamation of the holder, upon the death of an individual holder or upon a takeover bid situation, in which case the Investor may transfer the Class B LP Units to a related party).

11.   Sub-Trust owns a XXXXXXXXXX% limited partnership interest in the Partnership, represented by XXXXXXXXXX% of the issued and outstanding Class A LP Units.  The remaining XXXXXXXXXX% limited partnership interest in the Partnership, represented by XXXXXXXXXX% of the issued and outstanding Class B LP Units, is owned by the Investor.

12.   The Fund owns XXXXXXXXXX% of the issued and outstanding Sub-Trust Units and Sub-Trust Notes.

13.   Sub-Trust owns the following assets:

XXXXXXXXXX

14.   The assets owned by the Partnership include:

XXXXXXXXXX

15.   Opco owns the following assets:

XXXXXXXXXX

III. Proposed Transactions

Preliminary Step 1 - Opco transfers its Real Estate Properties to Newly Formed Opco Partnership

16.   The following steps will be undertaken to facilitate the transfer of the beneficial interests in the real properties held by Opco to Opco Partnership:

a)    Opco will incorporate GP II Inc. under the XXXXXXXXXX;

b)    Opco and GP II Inc. will enter into the Opco Partnership Agreement pursuant to the laws of XXXXXXXXXX to form Opco Partnership as a general partnership.  Opco will own a XXXXXXXXXX% partnership interest and GP II Inc. will own a XXXXXXXXXX% partnership interest;

c)    Opco will transfer its beneficial interest in all of the real estate properties it owns, in exchange for partnership units having a FMV equal to the FMV of the assets so transferred.  Opco will continue to hold legal title to the real estate properties that will be beneficially transferred to Opco Partnership; however, it will hold such titles as a nominee corporation;

d)    Opco, as transferor, and GP II Inc., in its capacity as a general partner of Opco Partnership, will file a joint election pursuant to subsection 97(2) of Act to have the transfers occur on a tax-deferred basis.  All applicable provincial filings will be filed; and

e)    Opco and GP II Inc. will agree to convert Opco Partnership into a limited partnership under the XXXXXXXXXX.  Opco will be the limited partner and GP II Inc. will be the general partner.  The name of Opco Partnership will be changed to include the word “Limited” in its name, and an interest of a limited partner therein will be described as an “Opco Partnership Unit”.  There will be no significant changes in the rights and obligations of the partners other than the change to the limited liability status.  Specifically, there will be no change to contributed capital accounts of any partners and there will be no difference in the percentage interest in the partnership of any of the partners.  The business of the partnership will not change.  Furthermore, the percentage of interest of each partner in the profits will not change and the percentage liability for losses of each partner will not change save for the potential limit on liability of the limited partners.  The limited partnership agreement will indicate that Opco and any eventual limited partner:

i.    have a liability in respect of the debts, liabilities and obligations of Opco Partnership which is limited to the amount that it contributed to Opco Partnership plus any undistributed income and should a limited partner's liability not be limited for any reason, GP II Inc. is required to indemnify the limited partner for such liability unless such liability arises out of any act or omission of the limited partner;

ii.   cannot control or manage the business of Opco Partnership;

iii.  cannot execute any document binding Opco Partnership or GP II Inc.;

iv.   cannot undertake any obligation or responsibility on behalf of Opco Partnership;

v.    cannot bring any action for partition or sale of property of Opco Partnership; and

vi.   cannot take any action which jeopardizes the status of Opco Partnership as a limited partnership.

Preliminary Step 2 – Settlement of Inter-Company Amounts

17.   All intercompany amounts among the Fund, Sub-Trust and the Partnership including specifically, the Sub-Trust Notes, the Sub-Trust Indebtedness and the LP Indebtedness will be satisfied in full by the payment of cash, or alternatively, by the issuance of additional securities (i.e., Sub-Trust Units or Class A LP Units, as applicable), having a FMV equal to the intercompany amount at issue.  Following such payment or issuance, all intercompany amounts among the Fund, the Sub-Trust and the Partnership will be settled and extinguished.

Elimination of Sub-Trust

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

19.   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 a Fund Unit; 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.

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

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 above, will be repurchased by MFT for an amount equal to the cash contribution of the third party settlor.

22.   Pursuant to an agreement to be entered into between Sub-Trust and MFT, immediately prior to the distribution of MFT Units described in paragraphs 24 to 26 below and prior to the “MFT Transfer Time” (i.e. the point in time at which the transfer of the assets described in paragraph 29 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 assets it owns, including for greater certainty, cash, near-cash investments, the Class A LP Units and the shares of GP I Inc., to MFT for no consideration. Sub Trust will not make the election referred to in subparagraph 107.4(3)(a)(i) of the Act.  MFT will file a written election with the Minister of XXXXXXXXXX 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.  All equivalent provincial elections will be filed.

23.   Following the transfer described in paragraph 22 above, the Fund will own all of the Sub-Trust Units and all of the MFT Units and will continue to indirectly hold all of the assets that were previously held by Sub-Trust (i.e., cash and near-cash investments, all the issued and outstanding Class A LP Units and all of the issued and outstanding shares of GP I Inc.) by reason of its ownership of all of the MFT Units.  Sub Trust will then be wound-up.

24.   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, 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) of the Act.

25.   Before the distribution described in paragraph 24 above, the Fund will obtain a prospectus and registration exemption, if applicable, under applicable securities legislation to allow for the distribution of MFT Units without the filing of a prospectus, registration statement or similar document.

26.   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 24 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 less than $XXXXXXXXXX.  For purposes of satisfying the requirements of section 4801 of the Regulations, the unitholders of MFT would include groups of MFT Unitholders that collectively meet such requirements, as determined in accordance with subsections 4803(3) and 4803(4) of the Regulations.

27.   Following the transactions described in paragraphs 24 to 26 above, but prior to the winding-up of MFT described in paragraph 36 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).  Applicable equivalent provincial elections will be filed.

28.   Before the transactions described in paragraph 29 below,

a)    The provisions in the Declaration of Trust will be amended as follows:

i.    the provisions in respect of the consolidation of Fund Units will be amended to provide that the consolidation of Fund Units described in paragraphs 33 and 53 below will be automatic and not require the consent of the Fund Unitholders;

ii.   the provisions regarding in specie redemption of Fund Unitholders will be amended to provide that the redemption proceeds may be paid and satisfied by way of a distribution in specie of securities of a Subsidiary of the Fund;

iii.  to remove all references to the Sub-Trust, the Sub-Trust Notes and to add references to the Partnership as applicable;

iv.   the provisions regarding distributions by the Fund will be amended to permit the distribution of MFT Units contemplated by paragraph 24;

v.    the Right of Renunciation will be added to the Fund Units held by a Subsidiary of the Fund; and

vi.   the terms of the Special Voting Units will be amended to permit their issuance on the acquisition of XXXXXXXXXX a Class B LP Unit XXXXXXXXXX.

Neither the nature nor the residency of the Fund will change as a result of the above proposed amendments to the Declaration of Trust.

b)    The Exchange Agreement will be amended to remove references to the Sub-Trust, and to add to the definition of “excluded persons”, individuals and trusts (other than “specified investment flow-through trusts” for purposes of the Act).

c)    The Partnership Agreement will be amended to:

i.    provide that the holder of Class B LP Units shall not be entitled to distributions from the Partnership where such distributions are in the form of MFT Units; and,

ii)   XXXXXXXXXX.

d)    XXXXXXXXXX.

29.   Pursuant to the terms and conditions of a transfer agreement entered into between the Fund, MFT and an agent acting on behalf of the holders of the MFT Units:

a)    MFT will transfer all of the cash, near-cash investments, Class A LP Units and the shares of GP I Inc. it acquired in paragraph 22 above to the Fund at the MFT Transfer Time; and

b)    as consideration for the transfer, the Fund will agree to issue Fund Units having an aggregate FMV equal to the aggregate FMV of the assets transferred to the Fund to MFT Unitholders in satisfaction of their entitlement to the redemption price in respect of the redemption of their MFT Units.  Specifically,

i.    at the MFT Transfer Time, the Fund will issue Fund Units to the agent having an aggregate FMV equal to the aggregate FMV of the assets transferred to the Fund;

ii.   upon the redemption of the MFT Units, the agent will transfer the Fund Units it holds to the MFT Unitholders in satisfaction of their entitlement to the redemption price for the MFT Units that are redeemed; and

iii.  immediately after the MFT Transfer Time, MFT will redeem all of the issued and outstanding MFT Units held by the Fund and the MFT Unitholders except for one MFT Unit which the Fund will continue to hold until the winding-up of MFT described in paragraph 36 below. No consideration other than the Fund Units will be received by the Fund and the MFT Unitholders on the redemption of the MFT Units.

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

31.   At the MFT Transfer Time, MFT will have no material outstanding liabilities and the only material assets of MFT will be cash, near-cash investments, all of the issued and outstanding Class A LP Units and all of the issued and outstanding shares of GP I Inc.

32.   The Fund Units that will be received by the Fund upon the redemption of the MFT Units described in paragraph 29 above will be cancelled upon receipt.

33.   Immediately after the transactions described in paragraphs 29 and 30 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 of this consolidation.

34.   Following the transactions described in paragraph 29 through 33 above, but prior to the winding-up of MFT described in paragraph 36 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 29, 31 and 32 above.  Applicable equivalent provincial elections will be filed.

35.   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 subsection 132.2(1) referred to in paragraph 34 above and the election under subsection 132(6.1) described in paragraph 27 above can be filed. Applicable equivalent provincial elections will be filed.

36.   After the elections described in paragraph 35 above have been filed, MFT will be wound-up.  The one MFT Unit held by the Fund will be cancelled for no consideration.

Reorganization of Opco

37.   The Fund will incorporate MFC.  The articles of incorporation of MFC will provide that its only undertaking will be activities described in paragraph 131(8)(b).

38.   The authorized share capital of MFC will consist of an unlimited number of MFC Common Shares, MFC Class A Shares and MFC Class B Shares.

a)    The MFC Common Shares will, subject to the CBCA:

i.    entitle the holder to one vote in respect of each MFC Common Share on all matters to be voted on at all meetings of shareholders;

ii.   entitle the holder thereof to receive dividends if, as and when declared by the board of directors of MFC, to the exclusion of holders of MFC Class A Shares or MFC Class B Shares; and

iii.  on the liquidation, dissolution or winding-up of MFC, subject to the rights of the holders of any other class of shares of MFC entitled to receive assets of MFC upon such a distribution in priority to or rateably with the holders of the MFC Common Shares, entitle the holder thereof to share rateably in any remaining assets of MFC.

b)    The MFC Class A Shares will, subject to the CBCA:

i.    be non-voting;

ii.   entitle the holder thereof to receive dividends if, as and when declared by the board of directors of MFC, to the exclusion of holders of MFC Common Shares or MFC Class B Shares;

iii.  be redeemable at the option of MFC at the Class A Redemption Price.  The Class A Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units;

iv.   be retractable at the option of the holder at the Class A Redemption Price.  The Class A Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units; and

v.    on the liquidation, dissolution or winding-up of MFC, entitle the holder thereof to receive the Class A Redemption Price pari passu with the holders of MFC Class B Shares before any amount will be paid or any assets of MFC will be distributed to the holders of MFC Common Shares, or any shares ranking junior to the MFC Common Shares.

c)    The MFC Class B Shares will, subject to the CBCA:

i.    be non-voting;

ii.   entitle the holder thereof to receive dividends if, as and when declared by the board of directors of MFC, to the exclusion of holders of MFC Common Shares or MFC Class A Shares;

iii.  be redeemable at the option of MFC at the Class B Redemption Price.  The Class B Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units;

iv.   be retractable at the option of the holder at the Class B Redemption Price.  The Class B Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units; and

v.    on the liquidation, dissolution or winding-up of MFC, entitle the holder thereof to receive the Class B Redemption Price pari passu with the holders of MFC Class A Shares before any amount will be paid or any assets of MFC will be distributed to the holders of MFC Common Shares, or any shares ranking junior to the MFC Common Shares.

39.   The Fund will subscribe for XXXXXXXXXX MFC Common Shares and XXXXXXXXXX MFC Class A Shares at a price of $XXXXXXXXXX per share on incorporation for nominal cash consideration of $XXXXXXXXXX.

40.   The MFC Class A Shares will be listed on the XXXXXXXXXX, although such shares will not be posted for trading.

41.   Following the listing of the MFC Class A Shares as noted in paragraph 40 above, the Fund will subscribe for a number of MFC Class A Shares equal to the number of Fund Units owned by Fund Unitholders less the XXXXXXXXXX MFC Class A Shares subscribed for by the Fund in paragraph 39, for nominal cash consideration.

42.   At all times following their issuance, the aggregate FMV of the MFC Class A Shares and MFC Class B Shares will at least be equal to XXXXXXXXXX% of the FMV of all of the issued shares of MFC.

43.   The Fund will distribute to Fund Unitholders, as a return of capital, all of its MFC Class A Shares acquired in paragraphs 39 and 41, above.  Each Fund Unitholder will receive a number of MFC Class A Shares equal to the number of Fund Units owned by such Fund Unitholder immediately before the distribution in this paragraph.  The Fund will remit to the Receiver General, on behalf of each Fund Unitholder that is a non-resident, an amount equal to the amount required by the Act to be withheld on behalf of that Fund Unitholder in respect of the return of capital pursuant to subsection 218.3(2), if applicable.

44.   In its tax return for its first taxation year, MFC will elect to be deemed to have been a public corporation from the beginning of that year.  Since the filing due date for this return is after the amalgamation described in paragraph 47 below, it will be filed by Amalco MFC.

45.   Pursuant to a transfer agreement to be entered into between the Partnership and MFC, prior to the amalgamation described in paragraph 47 below and immediately prior to the distribution of the MFC Class A Shares described in paragraph 43 and prior to the MFC Transfer Time (i.e., the moment at which the transfer of assets described in paragraph 49 will occur and for greater certainty, that will be the transfer time for the purposes of the definition of “qualifying exchange” in subsection 132.2(1)), the Partnership will transfer all of its Opco Shares and the Opco Note, all of which it holds as capital property, to MFC for a purchase price equal to the aggregate FMV of each property so transferred.  MFC will satisfy the purchase price by issuing XXXXXXXXXX MFC Class B Shares to the Partnership with a FMV equal to the aggregate FMV of the Opco Shares and the Opco Note.

46.   All of the members of the Partnership and MFC will jointly elect under subsection 85(2), in prescribed form and within the prescribed time in subsection 85(6) or 85(7), to have the provisions of subsection 85(1) apply, as modified by subsection 85(2), to the transfer of the Opco Shares and the Opco Note as described in paragraph 45 above.  The elected amount in respect of the Opco Shares and the Opco Note will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).  In each case, the elected amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).  The transfer value of the Opco Note will not be less than its principal amount.  Since the filing due date for this election is after the amalgamation described in paragraph 47 below, it will be filed by the members of the Partnership and Amalco MFC.

47.   Following the distribution described in paragraph 43 above and the transfer described in paragraph 45 above, MFC and Opco will amalgamate (hereinafter referred to as “predecessor corporations”) to form Amalco MFC in such a manner that:

a)    all of the property (except for the Opco Shares and the Opco Note) of the predecessor corporations immediately before the amalgamation will become property of Amalco MFC by virtue of the amalgamation;

b)    all of the liabilities of the predecessor corporations (except any amount payable by Opco to MFC under the Opco Note) immediately before the amalgamation will become liabilities of Amalco MFC by virtue of the amalgamation;

c)    each MFC Common Share will be converted into an Amalco MFC Common Share with the same terms and conditions;

d)    each MFC Class A Share will be converted into an Amalco MFC Class A Share with the same terms and conditions;

e)    each MFC Class B Share will be converted into an Amalco MFC Class B Share with the same terms and conditions; and

f)    the Opco Shares and the Opco Note will be cancelled without any repayment of capital or principal, as applicable, in respect thereof.

48.   In accordance with the provisions of the CBCA, the articles of amalgamation of Amalco MFC will be the same as the articles of incorporation of MFC, and Amalco MFC will not issue any securities in connection with the amalgamation described in paragraph 47 above, other than the securities issued on the amalgamation share exchange.

49.   Pursuant to the terms and conditions of a transfer agreement entered into between the Fund, Amalco MFC and an agent acting on behalf of the holders of the Amalco MFC Class A Shares and Amalco MFC Class B Shares:

a)    Amalco MFC will transfer all of the assets it acquired as a result of, collectively, the transfer in paragraph 45 and the amalgamation in paragraph 47, to the Fund at the MFC Transfer Time; and

b)    as consideration for the transfer, the Fund will assume any outstanding liabilities of Amalco MFC and will agree to issue Fund Units, having an aggregate FMV equal to the aggregate FMV of the assets transferred to the Fund less any assumed liabilities, to the holders of the Amalco MFC Class A Shares and the Amalco MFC Class B Shares in satisfaction of their entitlement to the Class A Redemption Price and the Class B Redemption Price, respectively.  Specifically,

i.    at the MFC Transfer Time, the Fund will issue Fund Units to the agent having an aggregate FMV equal to the aggregate FMV of the assets transferred to the Fund, less assumed liabilities;

ii.   upon the redemption of the Amalco MFC Class A Shares (all of which are held by the Fund Unitholders), the agent will transfer a portion of the Fund Units it acquired in subparagraph 49(b)(i) to the holders of the Amalco MFC Class A Shares in satisfaction of their entitlement to the Class A Redemption Price; 

iii.  upon the redemption of the Amalco MFC Class B Shares (all of which are held by the Partnership), the agent will transfer the balance of the Fund Units it acquired in subparagraph 49(b)(i) to the Fund for cancellation pursuant to the Right of Renunciation as described in paragraphs 51 and 52; and

iv.   immediately after the MFC Transfer Time, Amalco MFC will redeem all of the issued and outstanding Amalco MFC Class A Shares and all of the issued and outstanding Amalco MFC Class B Shares at the Class A Redemption Price and the Class B Redemption Price, respectively.  No other consideration will be received by the Fund or the holders of the Amalco MFC Class A Shares on the redemption of the Amalco MFC Class B Shares and Amalco MFC Class A Shares other than the Fund Units.

50.   At the MFC Transfer Time, Amalco MFC will qualify as a mutual fund corporation and the Fund will qualify as a mutual fund trust for purposes of the Act.

51.   At the same time as receipt of the Fund Units by the Fund, as described in subparagraph 49(b)(iii) above, the Partnership will, pursuant to the Right of Renunciation, deliver a written notice of renunciation in which it will immediately renounce, release and surrender all of its interest in the Fund (income, capital or otherwise).  The Partnership will not renounce, release or surrender its interest in favour of any particular person, and will not receive any consideration from the Fund or any other person in respect of this renunciation and surrender.

52.   As a result of the exercise by the Partnership of the Right of Renunciation described in paragraph 51 above, its Fund Units will be cancelled.

53.   Immediately after the transactions described in paragraph 52 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 of this consolidation.

54.   Following the transactions described in paragraph 53 above, Amalco MFC will jointly elect with the Fund, in prescribed form and within the prescribed time in paragraph (c) of the definition of “qualifying exchange” in subsections 132.2(1) and 132.2(6), to have the rules in section 132.2 apply to the transactions described in paragraph 49.  Applicable provincial equivalent elections will be filed.

55.   Amalco MFC will file the following:

a)    the tax return of MFC referred to in paragraph 44 within the time prescribed by paragraph 150(1)(a);

b)    the election under subsection 85(1) referred to in paragraph 46 within the time prescribed by subsection 85(7);

c)    the election under section 132.2 referred to in paragraph 54 within the time prescribed by paragraph 132.2(6); and

d)    applicable equivalent provincial elections.

56.   The Fund and the Partnership will enter into a transfer agreement pursuant to which the Fund will transfer all of Opco Partnership Units and the shares of GP II Inc. it acquired from Amalco MFC on the qualifying exchange in paragraph 49 and the Amalco MFC Common Shares to the Partnership.  At the transfer time, the transferred properties will be capital property of the Fund.  The Partnership will increase the capital account maintained for the Fund in respect of Class A LP Units it already owns by an amount equal to $XXXXXXXXXX.  Immediately after the transfer, Partnership will be a Canadian Partnership as defined in subsection 102(1) of the Act, of which the Fund will be a member.

57.   The Fund, in its capacity as transferor, and GP I Inc., the Investor and the Fund, as partners of the transferee, will jointly elect under subsection 97(2), in prescribed form and within the prescribed time under subsection 96(4) or 96(5), with respect to the transfer described in paragraph 56 above.  The elected amount for purposes of the election will be Fund’s cost amount for each of the transferred properties and will be within the limits prescribed by paragraph 97(2)(a), which provides that the provisions of paragraphs 85(1)(a) to (f) are applicable as modified by paragraph 97(2)(a).  All applicable provincial equivalent elections will be filed.

58.   Opco Partnership will be terminated and all of its properties will be distributed to its partners, the Partnership and GP II Inc., in accordance with the Opco Partnership Agreement and in such a manner that each of the Partnership and GP II Inc. will own immediately after the distribution an undivided interest in each property so distributed.  Each of the partners of Opco Partnership, namely, GP II Inc. and GP I Inc., acting on behalf of the Partnership, will jointly elect in respect of each property in prescribed form and within the time referred to in subsection 96(4) of the Act, to have the termination of Opco Partnership to be on a tax-deferred basis pursuant to subsection 98(3) of the Act.

59.   GP II Inc. will sell its undivided interest in each of the properties that were distributed to it by Opco Partnership to the Partnership for FMV consideration and then GP II Inc. will be wound-up.

60.   A meeting of Fund Unitholders will be held prior to the implementation of the transactions described herein to approve the proposed reorganization of the Fund by way of special resolution. 

IV. Purpose of the Proposed Transactions

61.   The purpose of the proposed transactions is to eliminate Sub Trust so that the Fund will hold its investment in the Partnership directly.

62.   The Fund, indirectly through the Partnership, holds a portion of its real properties through Opco.  One of the consequences of this is that the Fund is exposed to corporate taxation in respect of the income that is earned on such real properties and would be subject to corporate tax on the potential gains that may be realized in the event that these real properties are sold by Opco, which reduces cash flow for distribution to the Fund.  The proposed structure will eliminate such corporate taxation.

63.   Additionally, the proposed structure will eliminate the increased complexity of accounting and legal reporting and income tax compliance inherent in the existing structure.

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 proposed transactions described in paragraphs 16 to 59 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).

B.    The proposed transactions described in paragraphs 16 to 59 above will not, in and by themselves, adversely affect the qualification of Amalco MFC as a mutual fund corporation within the meaning of subsection 131(8).

C.    The transfer in paragraph 22 above by Sub-Trust of all of the assets it owns, including for greater certainty, cash, near-cash investments, the Class A LP Units and the shares of GP I Inc., to MFT for no consideration will be a “qualifying disposition” within the meaning of subsection 107.4(1), such that the rules in subsection 107.4(3) will apply to Sub-Trust and MFT in respect of such transfers.

D.    Provided that:

a)    at the MFT Transfer Time, as defined in paragraph 22 above, each of MFT and the Fund is a mutual fund trust within the meaning of subsection 132(6);

b)    at the MFT Transfer Time, as defined in paragraph 22 above, the property transferred by MFT to the Fund has an aggregate FMV equal to at least XXXXXXXXXX% 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 29, 31 and 32 above will constitute a “qualifying exchange” as defined in subsection 132.2(1) such that the rules in subsections 132.2(2) through (4) and subsections 132.2(6) and (7) will apply to such transactions.

E.    Provided that a joint election under subsection 85(2) is filed in prescribed form within the prescribed time in subsection 85(6) or 85(7) in respect of the transfer of the Opco Common Shares and the Opco Note by Partnership to MFC described in paragraph 45 above, in the manner and as described in paragraph 46 above, the rules in subsection 85(1), as modified by subsection 85(2), will apply to these transfers.

F.    Provided that the shares of GP II Inc. are held as capital property by Opco, paragraph 87(2)(e) will apply as a result of the amalgamation described in paragraph 47 above, such that the cost of  the shares of GP II Inc. to Amalco MFC shall be deemed to be the amount that was the adjusted cost base of the GP II Inc. shares to Opco immediately before the amalgamation.

G.    Provided that the Opco Partnership Units are held as capital property by Opco, paragraph 87(2)(e.1) will apply as a result of the amalgamation described in paragraph 47 above, such that the cost of the Opco Partnership Units to Amalco MFC shall be deemed to be the amount that was the cost of the Opco Partnership Units to Opco and Amalco MFC shall be deemed to be the same corporation as and a continuation of Opco in respect of the Opco Partnership Units.

H.    The Fund will not be considered to have disposed of its property and resettled a new trust by virtue of the amendments to the Declaration of Trust of the Fund described in subparagraph 28(a) above.

I.    Fund Unitholders will not be considered to have disposed of any portion of their Fund Units by virtue of the amendments to the Declaration of Trust of the Fund described in subparagraph 28 (a) above.

J.    Provided that:

a)    at the MFC Transfer Time, as defined in paragraph 45 above, Amalco MFC is a mutual fund corporation within the meaning of subsection 131(8) and the Fund is a mutual fund trust within the meaning of subsection 132(6);

b)    at the MFC Transfer Time, as defined in paragraph 45 above, subsection 131(8.1) is not applicable to Amalco MFC and subsection 132(7) is not applicable to the Fund;

c)    at the MFC Transfer Time, as defined in paragraph 45 above, the property transferred by Amalco MFC to the Fund has an aggregate FMV equal to at least XXXXXXXXXX% of the FMV of all property owned by Amalco MFC; and

d)    Amalco MFC 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 paragraph 49 will constitute a “qualifying exchange” as defined in subsection 132.2(1), such that the rules in subsections 132.2(2) through (4) and subsections 132.2(6) and (7), will apply to such transactions.

K.    Partnership will not realize any gains (or losses) on the disposition of its Fund Units renounced in paragraph 51 above because the proceeds of disposition of such units should be equal to their ACB pursuant to subclause 132.2(3)(g)(vi)(C)(I), and consequently, will not result in an adjustment under subparagraph 53(2)(c)(i) to the ACB of the Class A LP Units owned by the Fund.

L.    The consolidation of the Fund Units held by Unitholders, as described in paragraphs 33 and 53, will not in itself result in a disposition of Fund Units by the Unitholders.

M.    Provided that the Partnership is a Canadian partnership as defined in subsection 102(1), immediately after the transfer by the Fund to the Partnership of the Opco Partnership Units, the shares of GP II Inc. and the Amalco MFC Common Shares, and provided that joint elections under 97(2) are filed in prescribed form within the prescribed time in subsection 96(4) or 96(5) in respect of the transfers described in paragraphs 56 to 57, above, in the manner described in paragraph 57 above, the rules in subsection 97(2) will apply to this transfer.

N.    The provisions of subsections 15(1), 56(2), 56(4), 69(1), 69(4), 105(1) or 246(1) will not apply in respect of the renunciation described in paragraph 51 above.  For greater certainty, the Partnership will not be considered to have received, or deemed to have received, proceeds of disposition, and the Fund and Amalco MFC will not be considered to have received, or deemed to have received an amount or benefit as a result of the renunciation described in paragraph 51 above.

O.    Provided that Opco Partnership is a Canadian partnership at the time it is terminated, and the partners of Opco Partnership, namely, GP II Inc. and GP I Inc., acting on behalf of the Partnership, jointly elect, as described in paragraph 58, subsection 98(3) will apply to the distribution by Opco Partnership of its properties to the Partnership and GP II Inc., as described in paragraph 58, such that:

a)    paragraph 98(3)(f) will deem Opco Partnership to have disposed of each of its properties for proceeds equal to the cost amount to Opco Partnership of such property immediately before its distribution;

b)    paragraph 98(3)(a) will deem the proceeds of disposition for each of the Partnership and GP II Inc. of their respective interests in Opco Partnership to be equal to the greater of: (i) the adjusted cost base to each of the Partnership and GP II Inc. of their respective interests in Opco Partnership immediately before Opco Partnership ceases to exist, and (ii) the sum of the amount of any money received by the Partnership and GP II Inc., respectively, on the cessation of Opco’s existence, and their respective percentage of the total of amounts each of which is the cost amount to Opco Partnership of each of its properties immediately before its distribution; and

c)    the cost to each of the Partnership and GP II Inc. of their respective undivided interests in each of the properties of Opco Partnership so distributed to each of them will be determined pursuant to paragraphs 98(3)(b) and (c).

P.    The proposed transactions described in paragraphs 16 to 59 above will not, in and by themselves, cause the Fund to fail to qualify as a “real estate investment trust” as defined in subsection 122.1(1).

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

R.    Provided there is no dissolution of Opco Partnership pursuant to the XXXXXXXXXX, the conversion of Opco Partnership from a general partnership to a limited partnership, as described in subparagraph 16(e) above will not result in a disposition of the assets of Opco Partnership and the partners of Opco Partnership will not be deemed to have disposed of their interests in Opco Partnership.

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;

• we have made no determination of the fair market value of any property referred to herein;

• no ruling has been provided on whether Partnership is a Canadian partnership as defined under subsection 102(1) of the Act; and

• no ruling has been provided on whether any of the properties described in the ruling are capital properties.

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 70-6R7 Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016, 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 Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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