2018-0787051R3 QET Investing in ETF

Principal Issues: Will securities held by the QET in a U.S. trust that is organized as an ETF and whose securities meet the definition of "qualified investment" under paragraph (d) of section 204 be a “prohibited investment” of the QET as that term is defined in subsection 211.6(1).

Position: No, provided that the facts and representations are respected.

Reasons: Application of the law.

Author: XXXXXXXXXX
Section: ss. 204(d) definition of "qualified investment," 204.01(4), 211.6, 248(25), 108(1) definition of "beneficiary"

XXXXXXXXXX
                                                                                                                           2018-078705

XXXXXXXXXX, 2019

Re:   Supplemental Advance Income Tax Ruling to Ruling No. 2015-057319
         XXXXXXXXXX

This is in reply to the request made by XXXXXXXXXX (the “Taxpayer”) for a supplemental advance income tax ruling (a “Supplemental Ruling”) under the Income Tax Act with respect to the tax consequences of the Proposed Transactions described herein. The request seeks amendments to the advance income tax ruling letter dated XXXXXXXXXX (No.: 2015-057319R3) (the “QET Ruling”). We have also received a letter dated XXXXXXXXXX, in its capacity as a trustee as described above, be a party to this Supplemental Ruling.

To the best of your knowledge and that of the Taxpayer involved, none of the proposed transactions or issues contained in this Supplemental Ruling are the same as or substantially similar to transactions or issues that are:

i.    in a previously filed income tax return of the Taxpayer or a related person and:

A.    being considered by the Canada Revenue Agency (the “CRA”) in connection with such return;

B.    under objection by the Taxpayer or a related person; or the subject of a current or completed court process involving the Taxpayer or a related person; or

ii.   the subject of a ruling request previously considered by the Income Tax Rulings Directorate involving the Taxpayer or a related person, other than the QET Ruling and advance income tax rulings XXXXXXXXXX.

Unless otherwise stated, all statutory references are to the provisions of Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended to the date of this letter (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition.

DEFINITIONS

In this Supplemental Ruling, unless otherwise expressly stated, all capitalized terms have the meanings specified in the QET Ruling. In addition, the following terms have the meanings specified below:

“Collection Order” means the XXXXXXXXXX;

“designated stock exchange” has the meaning assigned in subsection 248(1);

“ETF Securities” means beneficial interests in an Issuer Trust (including for greater certainty, securities described as a class or a series of “shares,” provided that they represent a beneficial interest in the Issuer Trust) that are listed on a designated stock exchange and that are intended to track the performance of an index or provide exposure to a certain class of assets;

“Fund” has the meaning assigned in XXXXXXXXXX of the Agreement;

“Issuer Trust” means a trust that issues ETF Securities;

“related” has the meaning assigned to that phrase in subsection 251(2);

“SIPP” has the meaning assigned to the defined term “Statement of Investment Policies and Procedures” in XXXXXXXXXX of the Agreement;

“significant interest” has the meaning assigned in subparagraph (b)(iii) of the definition of “prohibited investment” in subsection 211.6(1) and the meaning assigned by subsection 207.01(4) with such modifications as the circumstances require; and

“Trustee” has the meaning assigned in XXXXXXXXXX of the Agreement.

FACTS

1.    The Taxpayer holds the regulatory authorization to operate the Pipeline.

2.    The QET Ruling states that, provided the Trust is operated in accordance with the terms of the Agreement, the Trust will constitute a “qualifying environmental trust” as defined in subsection 211.6(1).

3.    Section XXXXXXXXXX of the Agreement provides that the Trustee shall invest the Fund in, and maintain the Fund invested in, Qualified Investments in accordance with the SIPP.

4.    XXXXXXXXXX of the SIPP, filed with the NEB in XXXXXXXXXX, restricts permissible investments to property described in paragraphs (a) and (b) of the definition of “qualified investments” in section 204 (i.e. cash and government debt).

5.    The QET Ruling confirms (at Ruling C) that a debt obligation that meets the definition of a “qualified investment” in paragraph (b) of the definition of that term in section 204 will not be a “prohibited investment” of the Trust for the purpose of the definition of that term in subsection 211.6(1).

6.    The facts (including facts set out in the definitions), proposed transactions and the purpose of the proposed transactions as described in the QET Ruling continue to be relied upon in their entirety for this Supplemental Ruling.

7.    There have been no changes to the Agreement since the date of the QET Ruling.

PROPOSED TRANSACTIONS

8.    The Trust will continue to be operated in accordance with the terms as set out in the Agreement.

9.    At all times, the Fund will be invested in Qualified Investments in accordance with the SIPP.

10.   The Taxpayer intends to amend the SIPP for the Trust (and will file such amendment with the NEB prior to implementation of the change in the investment policy) as follows:

(a)   to permit investment in property described in paragraph (d) of the definition of “qualified investment” in section 204;

(b)   to provide that, when determining whether a particular investment in an ETF Security would be a “prohibited investment” and therefore not a Qualified Investment for the Trust, the particular class or series of securities of the Issuer Trust to which the ETF Security belongs, will be considered to be a separate trust such that no beneficiary under or contributor to the Trust, together with persons and partnerships not dealing at arm’s length therewith (including for certainty, the Trust), will at any time, own  ETF Securities of that class or series that have an aggregate fair market value that is equal to or greater than 10% of the fair market value of all the ETF Securities of that class or series; and

(c)   to provide that where an Issuer Trust is subject to the Internal Revenue Code of the United States, the Trust will invest only in ETF Securities of a series or class of such Issuer Trust that qualifies as:

i.    a “regulated investment company” for the purposes of Internal Revenue Code as amended from time to time; and

ii.   a “diversified company” within the meaning of section 5(b) the Investment Company Act of 1940 of the United States, as amended from time to time.

11.   The Taxpayer anticipates that following the amendment to the SIPP for the Trust, the Trustee will begin to invest in ETF Securities issued by one or more Issuer Trusts.

12.   The Trust will not borrow money at any time and will only invest in property that is Qualified Investments as defined in the Agreement, which may include ETF Securities issued by an Issuer Trust in accordance with the restrictions set out in the SIPP.

PURPOSE OF THE PROPOSED TRANSACTIONS

13.   The purpose of the Proposed Transactions is as described in the QET Ruling, namely to comply with the Collection Order, and the directions of the NEB from time to time, to set aside funds on a current basis to secure the funding of the future Reclamation Obligations in respect of the Pipeline.

14.   The Taxpayer anticipates that if the Fund established by the Agreement is invested in ETF Securities issued by an Issuer Trust, the requisite funding for Reclamation Obligations in respect of the Pipeline can be set aside on a basis that is more cost effective for the shippers on the Pipeline.

ADDITIONAL INFORMATION

15.   At all times, no person or partnership that is a beneficiary under, or a contributor to, the Trust will be related to an Issuer Trust that issues ETF Securities in which the Fund of the Trust may be invested from time to time.

16.   At all times, no person or partnership which is a beneficiary under, or a contributor to, the Trust will have a significant interest in an Issuer Trust that issues ETF Securities in which the Fund of the Trust may be invested from time to time.

17.   The assets belonging to a series of ETF Securities issued by an Issuer Trust may include securities issued by a person or partnership that is related to, or holds a significant interest in, a contributor to, or a beneficiary under, the Trust.

18.   An Issuer Trust that issues ETF Securities in which the Trust invests will not be a partnership or a corporation for purposes of the Act.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, purpose of the proposed transactions and additional information, and provided that the Proposed Transactions are carried out as described above, the following ruling E is added to the “Rulings” section in the QET Ruling:

E.    Provided that the ETF Securities issued by an Issuer Trust are described in paragraph (d) of the definition of “qualified investment” in section 204, and provided that at any time:

(i)   no contributor to, or beneficiary under, the Trust is related to the Issuer Trust that issues the ETF Securities;

(ii)  no contributor to, or beneficiary under, the Trust has a significant interest in the Issuer Trust that issues the ETF Securities; and

(iii) the investment in the ETF Securities is made in accordance with the restrictions set out in the SIPP as described in paragraph 10 above;

the ETF Securities will not be a “prohibited investment” as defined in subsection 211.6(1) of the Act.

COMMENTS

Except as expressly stated, the supplemental ruling provided does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly whether an Issuer Trust would be a trust for the purposes of the Act.

CONFIRMATION

We hereby confirm that the rulings provided in the QET Ruling, as amended by this letter, will continue to be binding on the CRA, subject to the conditions, limitations, qualifications and comments set out in the QET Ruling and this Supplemental Ruling.

Yours truly,

XXXXXXXXXX
Manager
XXXXXXXXXX
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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