2017-0723421R3 Creation of a new Mutual Fund Trust

Principal Issues: 1) Will the redemption features of the proposed Trust satisfy subparagraph 108(2)(a)(i)? 2) Will section 253.1 apply in regard to the proposed acquisition of an LP interest by Trust? 3) Will the proposed transactions cause Trust to fail to meet 132(6)(b)?

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

Reasons: 1) Requirements will be met. 2) Requirements to apply 253.1 will be met. 3) Requirements will be met.

Author: XXXXXXXXXX
Section: 108(2)(a)(i); 132(6)(b) and 253.1

XXXXXXXXXX                                                                                       2017-072342

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

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

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. 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 taxpayer, none of the issues contained herein:

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

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

(d)   is, in relation to the taxpayer or a a related person, before the courts or the subject of a judgement the limit for appeals from which has not expired; 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 taxpayer, the Proposed Transactions will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

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

DEFINITIONS

The following definitions apply in this advance income tax ruling. Throughout this ruling, the singular should be read as plural and vice versa where the circumstances so require.

"Class" means a class of Units.

"Class A" means a Class A Unit of the Trust and includes a fraction of a Class A Unit of the Trust.

"Class B" means a Class B Unit of the Trust and includes a fraction of a Class B Unit of the Trust.

"Class O" means a Class O Unit of the Trust and includes a fraction of a Class O Unit of the Trust.

"CRA" means the Canada Revenue Agency.

"Declaration of Trust" means the draft XXXXXXXXXX Declaration of Trust dated XXXXXXXXXX by the Trustees to hold in trust all property of the Trust, real, personal or otherwise, tangible or intangible, and all income, profits, and gains therefrom for the benefit of the Unitholders.

"GP" means XXXXXXXXXX, a taxable Canadian corporation incorporated pursuant to the laws of the Province of XXXXXXXXXX, whose share capital will be wholly owned by the Manager. GP will function as the general partner of the LP.

"LP" means the limited partnership to be named and established pursuant to the laws of the Province of XXXXXXXXXX.

"LP Unit" means the interest of a limited partner in the LP’s capital, designated as a Class “A” unit and issued as such pursuant to the terms of the agreement governing the affairs of the LP.

"Manager" means XXXXXXXXXX, a corporation formed under the laws of the province of XXXXXXXXXX and resident in Canada. The Manager is a taxable Canadian corporation at all times under the Act.

"Monthly Limit" means a cash limit of $XXXXXXXXXX in relation to payments of cash made by the Trust in respect of redemptions of Trust Units tendered for redemption.

"Notes" means the XXXXXXXXXX promissory notes of Trust 2 described more fully in Paragraphs 11 to 14.

"Paragraph" refers to a numbered paragraph in this letter.

"Proposed Transactions" means the transactions described in Paragraphs 2 to 22.

"qualified investment" has the meaning assigned in subsection 146(1) and/or for greater certainty, in subsections 146.1(1), 146.3(1), 205(1), and 207.01(1), and section 204.

"Redemption Price" means an amount equal to the applicable Trust Unit Class’s Net Asset Value per Unit, multiplied by the number of Trust Units of that Class to be redeemed, together with the proportionate share attributable to such Trust Units of any distribution of net income and net realized capital gains less any applicable redemption or other fees payable.

XXXXXXXXXX

“Regulations” means the Income Tax Regulations (Canada), as amended to the date of this letter.

"Rights of Redemption" means the rights of a Unitholder to redeem units pursuant to and subject to the provisions of the Declaration of Trust, as described in Paragraph 8.

"Securities" means shares of public corporations, bonds of public corporations, units of mutual fund trusts, units of real estate investment trusts, securities listed on a designated stock exchange, and other securities that are qualified investments held by the Trust.

"Securities Legislation" means the laws and regulations in each province and territory of Canada which are applicable to the Trust and the requirements, rules and policies of the XXXXXXXXXX and equivalent regulatory authorities which are applicable to the Trust.

"Trust" means a trust to be settled and named XXXXXXXXXX.

"Trust 2" means a secondary trust to be settled and named.

"Trust OM" means the draft Trust Offering Memorandum dated XXXXXXXXXX.

"Trust Units" means a unit of the Trust, each unit representing an equal undivided beneficial interest in the Trust.

"Trustee" means the Manager.

"Unitholder" means a holder of Trust Units of beneficial interest in the Trust.

"unit trust" has the meaning set out in subsection 108(2) of the Act.

"Valuation Date" means the last business day of each month, and in any event, December 31, of each year or any such other day as agreed from time to time by the Manager and the Trustee.

"Valuation Time" means the particular time on a Valuation Date at which the Trustee determines the Net Asset Value per Unit, or Class Net Asset Value per Unit, as the case may be, as prescribed from time to time by the Trustee.

FACTS

1.    The head office of the Manager is located at, XXXXXXXXXX. The Manager’s Taxation Centre is the XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.  Its business number is XXXXXXXXXX.

PROPOSED TRANSACTIONS

2.    The Trust will be an open-ended inter vivos trust established by way of a declaration of trust governed by the laws of the Province of XXXXXXXXXX and the laws of Canada applicable therein. An officer of the Manager will be the settlor of the trust with the payment of $XXXXXXXXXX in exchange for one unit of the Trust. Immediately after units of the Trust are issued to investors, the settlor of the Trust will redeem their unit in the Trust. The Manager will also act as the sole Trustee of the Trust and will be a resident of Canada at all times.

3.    The Trust’s primary investment objective will be to provide a prudent balance between long-term capital appreciation and present income. It seeks to invest its funds in XXXXXXXXXX. The Trust may also invest in various government issued and corporate bonds from time to time to maintain or increase liquidity, or as a temporary investment. The Trust may make investments directly or indirectly through its interest in LP described in Paragraphs 6 and 7.

4.    The Declaration of Trust will provide that:

a)    The interests of each beneficiary will be described by reference to units of the Trust, of which there will be multiple classes as described in b) below.

b)    An unlimited number of three classes (each a “Class”; Class A, Class B and Class O) of Trust Units will be offered on a continuous basis to subscribers in each of the Provinces of XXXXXXXXXX. Each Unit within a particular Class will be of equal value; however, the value of a Unit in one Class may differ from the value of a Unit in another Class due to the unique attributes and characteristics of each Class. Fractional units of a Class may be issued in certain circumstances.

5.    Trust 2 will be an open-ended inter vivos trust established by way of a declaration of trust governed by the laws of the Province of XXXXXXXXXX and the laws of Canada applicable therein. An officer of the Manager will be the settlor of the trust with the payment of $XXXXXXXXXX. The Manager will also act as the sole Trustee of the Trust and will be a resident of Canada at all times. The Trust will subscribe for one unit of Trust 2 for $XXXXXXXXXX consideration. Subsequently, the settlor of the trust will redeem their unit in Trust 2, such that the Trust will be the sole beneficiary of Trust 2 and will be entitled to any and all distributions by Trust 2. The sole purpose of Trust 2 is to XXXXXXXXXX. Trust 2 shall not undertake any activity, take any action or make any investment that would result in the Trust not being considered a mutual fund trust for purposes of the Act.

6.    A majority of the board of directors of GP will be resident in Canada and will not be acting as trustees of the Trust. The board of directors of GP has the power and authority to manage the business and affairs of GP. The Trust and GP will establish LP, in respect of which the Trust will be the limited partner and GP will be the general partner. Pursuant to the partnership agreement, GP will administer, manage, control and operate the business for and on behalf of the LP. The Trustee of the Trust will not have such powers or authority, and will not limit such powers or authority. The partnership agreement governing the affairs of the LP will provide that all of the partners of LP must be resident in Canada.

7.    The LP will be structured with one class of limited partnership units, Class A, in addition to the interest of GP as the general partner of LP. The Class A units will be issued to the Trust in exchange for cash capital contributions. The LP will invest in property as described in Paragraph 3.

8.    The units of the Trust will feature a Right of Redemption, allowing the units to be redeemed at the demand of the Unitholder under the following conditions:

a)    Requests for redemption of Trust Units by a Unitholder must be made at least 30 days prior to the close of business on the Valuation Date on which the Trust Units are intended to be redeemed. Redemptions will be effective on the relevant Valuation Date. Redemption requests received after this time will be implemented on the next Valuation Date. The Trustee is entitled in their sole discretion to accelerate this request.

b)    The Redemption Price payable by the Trust in respect of any Trust Units surrendered shall be satisfied by way of a cash redemption equal to XXXXXXXXXX% of their fair market value reduced by the pro rata share of any costs associated with the redemption, including commissions and such other costs, if any, related to the sale of any investments, if any, to fund such redemptions. However, the entitlement of a Unitholder to receive a full cash payment upon redemption of their Trust Units is not applicable if the total amount payable by the Trust in respect of such Trust Units and all other Trust Units tendered for redemption in the same calendar month exceeds the Monthly Limit. The Trustee may, in their sole discretion, waive such limitation in respect of all Trust Units tendered for redemption in any particular calendar month.

9.    If a Unitholder is not entitled to receive a XXXXXXXXXX cash payment upon redemption of their Trust Units as a result of the foregoing, the Redemption Price per Trust Unit shall be the fair market value thereof as determined by the Trustee. Subject to any applicable regulatory approvals, the Redemption Price shall be paid out and satisfied through a combination of cash and an in specie distribution of the assets of the Trust which may include Notes of Trust 2. XXXXXXXXXX.

10.   The in specie distribution of the assets of the Trust will first be accomplished by the Trust transferring Securities having an aggregate fair market value equal to the Redemption Price less any cash that will be distributed. This portion of the Redemption Price payable in respect of Trust Units tendered for redemption during any calendar month shall be paid by delivery of the Securities to or to the order of the Unitholder who exercised the right of redemption, on the last day of the calendar month following the calendar month in which the Trust Units were tendered for redemption. XXXXXXXXXX.

11.   If a Unitholder is not entitled to receive a XXXXXXXXXX cash payment upon redemption of their Trust Units as a result of the limitations described in Paragraph 8 and either XXXXXXXXXX, or XXXXXXXXXX, the Trust will distribute Notes having an aggregate principal amount equal to (i) the total amount payable by the Trust in respect of Trust Units tendered for redemption in that calendar month less (ii) the sum of the cash to be distributed and the fair market value of the Securities that the Trust wishes to transfer. The Trustees will waive the Monthly Limit on cash redemptions to the extent required to avoid the issuance of a Note to a Unitholder with a principal amount less than $XXXXXXXXXX.

12.   The Trust will acquire the Notes of Trust 2 to be distributed as described in Paragraph 11 by selling, pursuant to an exchange agreement with Trust 2, a certain number of LP units to Trust 2 in exchange for Notes (each in the principal amount of $XXXXXXXXXX) having an aggregate amount equal to the amount calculated in Paragraph 11. The Notes received by the Trust will be distributed in specie by the Trust to the redeeming Unitholders. No fractional Notes in an amount less than the principal amount of $XXXXXXXXXX will be distributed to Unitholders. Where the number of Notes to be received by a former Unitholder includes a fraction or principal amount less than a multiple of $XXXXXXXXXX, such number shall be rounded to the next lowest number or multiple of $XXXXXXXXXX, and the fractional amount receivable by the redeeming Unitholder will be distributed in cash, notwithstanding the Monthly Limit.

13.   The Notes distributed in specie to Unitholders on redemption of Trust Units will not be listed on any stock exchange and no market is expected to develop in such securities. As the Notes will not be qualified investments XXXXXXXXXX.

14.   The Notes will bear interest at XXXXXXXXXX, with interest payable XXXXXXXXXX. Trust 2 will use distributions received from the LP to satisfy interest and principal payments on the Notes. Trust 2 will be entitled to repay the principal amount and any accrued and unpaid interest on the Notes XXXXXXXXXX. The holder of the Notes will be entitled to payment of the principal amount and any accrued and unpaid interest on XXXXXXXXXX.

15.   The amount of any capital gains or income realized in a year by the Trust as a result of any disposition of property by the Trust (i.e. Securities and LP Units), to permit the payment of in specie redemption proceeds to Unitholders, may, for purposes of computing the net income of the Trust under the Act, be treated as having been paid in the year by the Trust to the Unitholders redeeming Trust Units in such year in proportion to the number of Trust Units of each such Unitholder redeemed by the Trust. Such portion of any capital gain will be designated by the Trust to be a capital gain for the year of each particular Unitholder.

16.   Payments by the Trust of the Redemption Price will conclusively be deemed to have been made upon the delivery of the Securities and/or mailing of the relevant Notes by registered mail in a postage prepaid envelope addressed to the Unitholder and/or any party having a security interest in the Trust Units being redeemed. Upon such payment, the Trust shall be discharged from all liability to the Unitholder and any party having a security interest in respect of the Trust Units so redeemed.

17.   The Trustee may suspend or postpone, or continue a suspension or postponement of, the right to redeem Trust Units and may postpone the date of payment upon redemption for any period, provided that such suspension or postponement complies with Securities Legislation.

18.   The taxation year-end of the Trust will be XXXXXXXXXX, or if it is eligible and so elects, XXXXXXXXXX.

19.   The units of the Trust will not be listed on any stock exchange.

20.   There will be a lawful distribution of Trust Units within the meaning of paragraph 4801(a) of the Regulations. In addition, the number of Trust Units distributed to Trust Unitholders will be such that the Trust 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 either immediately after the distribution or before the XXXXXXXXXX day after the end of its first taxation year. In particular, there will be at least XXXXXXXXXX Trust Unitholders, each holding at minimum a number of units with an aggregate FMV of at least $XXXXXXXXXX. For purposes of satisfying the requirements of section 4801 of the Regulations, the Trust Unitholders would include groups of unitholders that collectively meet such requirements, as determined in accordance with subsections 4803(3) and 4803(4) of the Regulations.

21.   It is intended that the Trust qualify as a mutual fund trust as a result of meeting all of the relevant conditions pursuant to subsection 132(6) of the Act. For greater certainty, the Trust 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).

22.   Unitholders will be required to confirm their tax residency to the Trust. Non-resident ownership of Trust Units will be restricted XXXXXXXXXX so as to ensure that the percentage of Trust Units held by non-residents does not, at any time, exceed XXXXXXXXXX% of the total number of issued and outstanding Trust Units.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to maximize Unitholder value and to increase the value of XXXXXXXXXX by providing a more flexible legal and operating structure while providing Unitholders with an opportunity to dispose of some or all of their Trust Units and thereby reduce the volatility of the value of their investment in the Trust. XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A.    The terms of the redemption feature as described in Paragraphs 8 through 17 will satisfy the requirements of subparagraph 108(2)(a)(i) for purposes of determining whether the Trust qualifies as a unit trust.

B.    Section 253.1 will apply such that the acquisition of the limited partnership interest in the LP by the Trust as described in Paragraph 7 above will not, in and of itself, cause the Trust to be considered to be carrying on the business of the limited partnership for the purposes of paragraph 132(6)(b).

C.    The proposed transactions described above will not, in and of themselves, adversely impact the qualification of the Trust as a mutual fund trust within the meaning of subparagraph 132(6)(b).

CAVEATS AND OPINION

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or Proposed Transactions described herein. For greater certainty, the CRA has not confirmed or made any determination in respect of:

(a)   the fair market value of any property;

(b)   whether Trust will qualify as a unit trust or as a mutual fund trust under the Act; or

the deductibility of interest payable on the Notes. It is our opinion that should a postponement or suspension of the right to redeem Trust Units occur (as described in Paragraph 17 above) and that postponement or suspension exceeded a period of more than one year, the Trust would cease to meet the requirement of subparagraph 108(2)(a)(i) of the Act.

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, dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

Yours truly,

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

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, 2018

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, 2018