2017-0738021R3 Addition of a series of preferred units

Principal Issues: Whether the creation and issuance of XXXXXXXXXX Preferred Units of a mutual fund trust would result in (1) a disposition by the trust of its assets or in a resettlement of the trust, (2) a disposition by the existing unitholders of their units, (3) the application of 104(7.1).

Position: (1) no (2) no (3) no

Reasons: (1) The changes are not considered material or significant to result in a resettlement of the trust and it is submitted that there will be no resettlement as a matter of provincial law. (2) No cash consideration or other proceeds of disposition will be received by the unitholders in respect of the diminishment of their rights as a consequence of the amendments. (3) Consistent with previous rulings.

Author: XXXXXXXXXX
Section: 104(6)(b); 104(7.1); 122.1(1) and 132(6) SECTION

XXXXXXXXXX                        2017-073802

XXXXXXXXXX, 2018

Dear Sir/Madame:

Re:    Advance Income Tax Ruling Request
       XXXXXXXXXX

I.    INTRODUCTION

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

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

(ii)    being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;

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

(iv)    before the courts or the subject of a judgement the limit for appeals from which has not expired; or

(v)    the subject of a ruling previously issued by the Directorate to the taxpayer or a related person XXXXXXXXXX.

This document is based solely on the facts and Proposed Transactions 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 stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, and all terms and conditions used herein that are defined therein have the meaning given in such definitions unless otherwise indicated.

II.    DEFINITIONS

The following terms and taxpayers referred to throughout this document will have the following meaning:

“XXXXXXXXXX Trust Amendments” means the amendments to the Declaration of Trust XXXXXXXXXX made to reflect the creation of the Preferred Units;

“Certificate of Amendment”  means a certificate of amendment setting out the terms of each particular series of Preferred Units, which shall be approved by the Manager prior to the issue of any series of Preferred Units and, upon such approval, shall become a part of the Declaration of Trust;

“closed-end investment trust” means a trust that qualifies as a unit trust under paragraph 108(2)(b) of the Tax Act;

“CRA” means the Canada Revenue Agency;

“Declaration of Trust” means the declaration of trust pursuant to which the Fund was formed under the laws of the Province of XXXXXXXXXX;

“Equity Interests” means the Units and/or the Preferred Units of any series;

“Equity Interest Holder” means a holder of an Equity Interest;

“Fund” means XXXXXXXXXX, a trust established under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;

“Manager” means XXXXXXXXXX;

“Non-Resident” means a non-resident of Canada for purposes of the Tax Act;

“Preferred Unit” means a preferred equity interest of any series in the Fund, which are issued from time to time in accordance with the provisions of the Declaration of Trust, with such designation, rights, privileges, restrictions and conditions attached thereto as determined by the Manager and set forth in the Certificate of Amendment for the particular series;

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

“Proposed Transactions” means the proposed transactions described in paragraphs 16 to 22 in section IV below;

“XXXXXXXXXX Preferred Units” means the Preferred Units designated as XXXXXXXXXX Preferred Units with, in addition to the rights, privileges, restrictions and conditions attaching to the Preferred Units as a class pursuant to the Declaration of Trust, XXXXXXXXXX;
 
“XXXXXXXXXX Holder” means a holder of an outstanding XXXXXXXXXX Preferred Unit;

“XXXXXXXXXX Preferred Unit” means the Preferred Units to be designated as XXXXXXXXXX Preferred Units to be issued as contemplated in the Proposed Transactions;

“XXXXXXXXXX Holder” means a holder of an outstanding XXXXXXXXXX Preferred Unit;
 
“Stock Exchange” means the XXXXXXXXXX;

“Tax Act” means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date of this letter;

“Trustee” means the person(s) that act as trustee(s) of the Fund in accordance with and subject to the provisions of the Declaration of Trust, and which as of the date hereof is XXXXXXXXXX;

“Unit” means one transferable unit representing an equal and undivided interest in the property and assets of the Fund, in accordance with and subject to the provisions of the Declaration of Trust, that is not a Preferred Unit as more particularly described herein; and

“Unitholder” means a holder of a Unit.

Our understanding of the facts, the Proposed Transactions, and the purpose of the Proposed Transactions is as follows:

III.    FACTS

1.    The Fund is an unincorporated, closed-end investment trust constituted in accordance with the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust.

2.    The head office of the Fund is located at XXXXXXXXXX. The Fund is located within the area served by the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Tax Centre.

3.    The fiscal year end of the Fund is XXXXXXXXXX. The Fund’s business number is XXXXXXXXXX.

4.    The Fund is managed by the Manager and governed in accordance with, and subject to, the terms of the Declaration of Trust.

5.    The Fund has qualified at all relevant times as a “unit trust” as defined in subsection 108(2) of the Tax Act and as a “mutual fund trust” as defined in subsection 132(6) of the Tax Act.

6.    The Fund is not a “SIFT trust” as defined in subsection 122.1(1) of the Tax Act.  The Fund has not at any relevant time held any “nonportfolio property” as defined in subsection 122.1(1) of the Tax Act. XXXXXXXXXX of the Declaration of Trust includes investment restrictions precluding the Fund from owning more than XXXXXXXXXX% of any class of securities issued by an issuer.

7.    The Fund was established for the principal purpose of XXXXXXXXXX.

8.    The beneficial interests in the Fund are represented by two classes of units, designated as Units and Preferred Units, which have the rights and are subject to the limitations, restrictions and conditions set out in the Declaration of Trust and the applicable Certificate of Amendment creating a particular series of Preferred Units.

9.    The Fund was not established and has not been maintained primarily for the benefit of NonResidents. XXXXXXXXXX.
    
10.    The Declaration of Trust provides that each Unit has the following rights:

(a)    each Unit shall entitle the holder of that Unit to one vote at any meeting of the Unitholders;

(b)    the right, subject to the rights of the Preferred Unitholders and the restrictions set out in XXXXXXXXXX of the Declaration of Trust, to participate in the XXXXXXXXXX distributions made by the Fund to Unitholders including distributions of XXXXXXXXXX;

(c)    in the event of the termination of the Fund, the right to participate on a pro rata basis in the distribution of the net assets of the Fund after satisfaction of the rights of the Preferred Unitholders; and

(d)    XXXXXXXXXX.

11.    The Declaration of Trust provides that the Preferred Units have the following attributes:

(a)    the consideration for the issue of each series of Preferred Units shall be $XXXXXXXXXX per Preferred Unit;

(b)    XXXXXXXXXX;

(c)    XXXXXXXXXX;

(d)    XXXXXXXXXX; and

(e)    XXXXXXXXXX.

12.    The Certificate of Amendment creating the XXXXXXXXXX Preferred Units provides that the XXXXXXXXXX Preferred Units have the following rights, privileges, restrictions and conditions (in addition to the rights, privileges, restrictions and conditions attaching to Preferred Units as a class pursuant to the Declaration of Trust):

(a)    a subscription price of $XXXXXXXXXX Preferred Unit;

(b)    a right to a cumulative, preferential cash distribution payable XXXXXXXXXX on the XXXXXXXXXX day of XXXXXXXXXX at a fixed XXXXXXXXXX distribution rate of $XXXXXXXXXX Preferred Unit (being $XXXXXXXXXX Preferred Unit per annum) (each, a “XXXXXXXXXX”), such distributions to be paid in priority to any amounts being paid to the Unitholders (other than distributions paid solely through the issuance of additional Units) as set out in XXXXXXXXXX of the Declaration of Trust;

(c)    in the event of termination, liquidation, dissolution or winding-up of the Fund, the XXXXXXXXXX Holders shall have the right to receive $XXXXXXXXXX Preferred Unit, together with all distributions accrued and unpaid up to but excluding the date of payment or distribution (less any tax required to be deducted or withheld by the Fund) before any amounts shall be paid or any assets of the Fund distributed to the Unitholders or any holder of Equity Interests ranking junior as to capital to the XXXXXXXXXX Preferred Units. Upon payment of such amounts, the XXXXXXXXXX Holders shall not be entitled to share in any further distribution of the assets of the Fund;

(d)    the right to require the retraction of the XXXXXXXXXX Preferred Units by the Fund, XXXXXXXXXX, at $XXXXXXXXXX Preferred Unit, together with all accrued and unpaid distributions in respect of such XXXXXXXXXX Preferred Units less any amount required to be withheld therefrom by applicable law;

(e)    the XXXXXXXXXX Preferred Units shall be redeemable, in whole or in part, at the option of the Fund on and after a specified date upon payment in cash of a specified amount plus all accrued and unpaid distributions up to but excluding the date fixed for redemption less any amount required to be withheld therefrom by applicable law; and

(f)    XXXXXXXXXX.

13.    The Units are listed for trading on the Stock Exchange under the symbol XXXXXXXXXX and the XXXXXXXXXX Preferred Units are listed under the symbol XXXXXXXXXX. As of XXXXXXXXXX, there were approximately XXXXXXXXXX Units and XXXXXXXXXX Preferred Units issued and outstanding, respectively. 

14.    The Units and the XXXXXXXXXX Preferred Units are widely held by the public and, to the knowledge of the directors and officers of the Manager, no person or company beneficially owns, directly or indirectly, more than XXXXXXXXXX% of the outstanding Units or more than XXXXXXXXXX% of the outstanding XXXXXXXXXX Preferred Units.

15.    In accordance with XXXXXXXXXX of the Declaration of Trust, the Manager may fix the terms of a particular series of Preferred Units which shall be set out in a Certificate of Amendment that is approved by the Manager prior to the issue of any such Preferred Units pursuant to XXXXXXXXXX of the Declaration of Trust. 

IV.    PROPOSED TRANSACTIONS

16.    The Fund proposes to issue a new series of Preferred Units. 

17.    Pursuant to the authority provided in XXXXXXXXXX of the Declaration of Trust, the Manager will approve and execute a Certificate of Amendment to create the XXXXXXXXXX Preferred Units, which will be designated as “XXXXXXXXXX Preferred Units”. The rights, privileges, restrictions and conditions attaching to the XXXXXXXXXX Preferred Units (in addition to those attaching to Preferred Units as a class pursuant to the Declaration of Trust) will be determined by the Manager based on current market conditions at the time of the offering and set out in the Certificate of Amendment. 

18.    The XXXXXXXXXX Preferred Units will have the following rights, privileges, restrictions and conditions (in addition to the rights, privileges, restrictions and conditions attaching to Preferred Units as a class pursuant to the Declaration of Trust): 

(a)    a subscription price of $XXXXXXXXXX Preferred Unit;

(b)    a right to a cumulative, preferential cash distribution payable XXXXXXXXXX on the XXXXXXXXXX day of XXXXXXXXXX at a fixed XXXXXXXXXX distribution rate of $XXXXXXXXXX Preferred Unit (being $XXXXXXXXXX Preferred Unit per annum) (each, a “XXXXXXXXXX”), such distributions to be paid XXXXXXXXXX in priority to any amounts being paid to the Unitholders (other than distributions paid solely through the issuance of additional Units) as set out in XXXXXXXXXX of the Declaration of Trust;

(c)    in the event of termination, liquidation, dissolution or winding-up of the Fund, the XXXXXXXXXX Holders shall have the right to receive $XXXXXXXXXX Preferred Unit, together with all distributions accrued and unpaid up to but excluding the date of payment or distribution (less any tax required to be deducted or withheld by the Fund) before any amounts shall be paid or any assets of the Fund distributed to the Unitholders or any holder of Equity Interests ranking junior as to capital to the XXXXXXXXXX Preferred Units. Upon payment of such amounts, the XXXXXXXXXX Holders shall not be entitled to share in any further distribution of the assets of the Fund;

(d)    the right to require the retraction of the XXXXXXXXXX Preferred Units by the Fund, on or after a specified date, at $XXXXXXXXXX Preferred Unit, together with all accrued and unpaid distributions in respect of such XXXXXXXXXX Preferred Units less any amount required to be withheld therefrom by applicable law;

(e)    the XXXXXXXXXX Preferred Units shall be redeemable, in whole or in part, at the option of the Fund on and after a specified date upon payment in cash of a specified amount plus all accrued and unpaid distributions up to but excluding the date fixed for redemption less any amount required to be withheld therefrom by applicable law; and

(f)    XXXXXXXXXX.

19.    The XXXXXXXXXX Preferred Units will be qualified for listing on the Stock Exchange, and will be sold to the public by way of prospectus. There is no anticipated minimum dollar investment required on the initial or subsequent offerings of the Preferred Units, except as may be required by securities laws. XXXXXXXXXX.

20.    It is anticipated that the proceeds from the offering of the XXXXXXXXXX Preferred Units will be added to the net assets of the Fund and used to make additional investments, subject to the investment restrictions and criteria contained in the Declaration of Trust. 

21.    Existing Unitholders and XXXXXXXXXX Holders will not receive any financial compensation or proceeds of any kind whatever, as consideration for the issuance of the XXXXXXXXXX Preferred Units; nor will the Units or XXXXXXXXXX Preferred Units be redeemed or cancelled as a result of the issuance of the XXXXXXXXXX Preferred Units. 

22.    The creation and designation of the XXXXXXXXXX Preferred Units will not result in a resettlement of the Fund or the creation of a new trust under the laws of the Province of XXXXXXXXXX.

V.    PURPOSE OF THE PROPOSED TRANSACTIONS 

23.    The purpose of the Proposed Transactions is to increase the ability of the Fund to raise capital by appealing to a broader range of investors through offering an alternative equity interest in the Fund that has a different return and risk profile than the Units. In particular, the management of the Fund believes that the terms of the XXXXXXXXXX Preferred Units will enable the Fund to more effectively raise capital from investors that are looking for security and stability of returns while still maintaining the Fund’s appeal to investors looking for a combination of yield and capital appreciation through the Units. The addition of the XXXXXXXXXX Preferred Units allows investors to better match their investment in the Fund with their particular investment goals and risk profile thereby increasing the overall attractiveness of an investment in the Fund and the Fund’s ability to raise additional capital for future growth and expansion.

VI.    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 that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A.    The Proposed Transactions will not, in and by themselves, result in a disposition by the Fund of its property or in a resettlement of the Fund for purposes of the Tax Act.

B.    The Proposed Transactions will not result, in and by themselves, in a disposition by any Unitholder or any XXXXXXXXXX Holder of all or part of his, her or its beneficial interest in the Fund, provided that the rights, privileges, restrictions and conditions attaching to the XXXXXXXXXX Preferred Units are based on current market conditions at the time of the offering, as described in paragraph 17 above.

C.    The implementation of the Proposed Transactions will not, in and by themselves, cause subsection 104(7.1) to apply so as to deny the deduction by the Fund of any amount it is otherwise entitled to deduct under paragraph 104(6)(b) in respect of amounts paid or payable to its Unitholders or to Preferred Unitholders.

Comments

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 considered, confirmed or made any determination in respect of:

a.    whether the Proposed Transactions will result in the creation of a new trust under the laws of the Province of XXXXXXXXXX;

b.    whether the Fund is at any particular time, a mutual fund trust within the meaning of subsection 132(6) or a SIFT trust, as defined in subsection 122.1(1);

c.    whether the attributes relating to the XXXXXXXXXX Preferred Units, as described in 18 above, represent current market conditions; and

d.    the tax consequences of any amendments made to the Declaration of Trust before the date of this letter.

The above advance income tax rulings, which are based on the Tax Act and Income Tax Regulations to the Tax Act 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 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

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