2019-0817961R3 Swiss Collective Investment Scheme

Principal Issues: Canadian tax treatment of dividends paid on Canadian securities that are part of the assets of a particular Swiss Collective Investment Scheme taking the form of a contractual fund.

Position: Such dividends will be exempt from Canadian tax imposed by paragraph 212(2) of the Act by virtue of subparagraph 3(b) of Article 10 of the Treaty.

Reasons: Based on position taken in XXXXXXXXXX.

Author: XXXXXXXXXX
Section: -

XXXXXXXXXX                                                                     2019-081796

XXXXXXXXXX, 2022 

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
      XXXXXXXXXX

This is in response to your letter of XXXXXXXXXX (a revision to your letter of XXXXXXXXXX), in which you requested an advance income tax ruling (“Ruling Request”) on behalf of XXXXXXXXXX (“XXXXXXXXXX” or “Taxpayer”) and XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the Taxpayer, none of the proposed transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

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

A. being considered by the CRA in connection with such return;

B. under objection by the Taxpayer or a related person; or

C. 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 to the Taxpayer or a related person.

Unless otherwise indicated, all statutory references in this letter are to the corresponding provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th supp.), as amended to the date of this advance income tax ruling (“Act”).

For greater certainty, all the documents and information submitted in support of your Ruling Request are part of this letter only to the extent described herein and any reference to these documents is provided solely for the convenience of the reader. The rulings given herein are based solely on the Facts, the Additional Information, the Proposed Transactions, and the Purpose of the Proposed Transactions described below.

DEFINITIONS

In this letter, unless otherwise expressly stated:

“Authority” means the Swiss Financial Market Supervisory Authority (“FINMA”), responsible for the implementation of the Financial Market Supervision Act and financial market legislation;

“Benchmark Index” means XXXXXXXXXX;

“Canadian Agreement” means the agreement dated XXXXXXXXXX entered into by XXXXXXXXXX with the Canadian Sub-Custodian as amended by the Transfer and Assumption Agreement between XXXXXXXXXX and XXXXXXXXXX and the Amending Agreement to the Canadian Agreement between XXXXXXXXXX. And XXXXXXXXXX.

“Canadian Place of Business” means an office or place of business situated in Canada at XXXXXXXXXX;

“Canadian Securities” means shares of the capital issued by a Canadian resident corporation which are listed on a Designated Stock Exchange or traded on another regulated market open to the public;

“Canadian Sub-Custodian” means XXXXXXXXXX, a third party custodian delegated by the Custodian Bank for safekeeping of Canadian assets, a Canadian resident, and sub-custodian of the Fund;

“Class” means a particular class of Fund Units issued by the Fund, where each Fund Unit embodies an entitlement to a share in the undivided assets of the Fund;

“Collective Investment Scheme” means a collective investment scheme, established under the laws of Switzerland, authorized by the Authority pursuant to Title 1: Chapter 2 of the Foreign Legislation 1;

“Collective Investment Scheme with Sub-funds” means a Collective Investment Scheme umbrella fund which has several distinct sub-funds, established under the laws of Switzerland, authorized by the Authority pursuant to Article 92 of the Foreign Legislation 1. The income and assets of the respective sub-fund are segregated and each sub-fund is only liable for its own liabilities;

“CRA” means the Canada Revenue Agency;

“Custodian Bank” means XXXXXXXXXX, acting as custodian with respect to the Fund’s property as set out in the Fund Contract;

“Designated Stock Exchange” has the meaning assigned by subsection 248(1);

“Foreign Legislation 1” means the Swiss Federal Act on Collective Investment Schemes of June 23, 2006;

“Foreign Legislation 2” means the Swiss Ordinance on Collective Investment Schemes of November 22, 2006 in respect of the Foreign Legislation 1;

“Fund” means a XXXXXXXXXX;

“Fund Assets” means the assets governed by the Fund Contract XXXXXXXXXX,

XXXXXXXXXX;

“Fund Contract” means the fund contract dated XXXXXXXXXX between the Unitholders, the Management Company and the Custodian Bank, providing for the establishment of the Umbrella Fund and its Sub-funds;

“Fund Unit” means a unit of the Fund conferring an entitlement to the Fund Assets and to the income of the Fund proportionate to the fraction it represents of total Fund Units existing at a moment in time;

“Management Company” means XXXXXXXXXX, a resident of Switzerland, acting in its capacity as the manager of the Fund as set out in the Fund Contract;

“Net Asset Value” means the market value of the Fund Assets at a particular time as determined pursuant to the Fund Contract;

“Net Asset Value per Unit” means the market value of the Fund at a particular time as determined pursuant to the Fund Contract divided by the number of issued and outstanding Fund Units;

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

“Open-ended Collective Investment Scheme” means a Collective Investment Scheme, established under the laws of Switzerland, authorized by the Authority pursuant to Title 2 of the Foreign Legislation 1, in respect of which unitholders are entitled to redeem their units;

“Redemption” means the redemption of a Fund Unit that each Unitholder is entitled to request from the Fund Management Company or that is initiated by the Fund Management Company;

“Redemption Time” means the time when a Redemption occurs;

“related persons” has the meaning assigned by subsection 251(2);

“Sub-fund” means XXXXXXXXXX, each a Collective Investment Scheme, in its own right, within the Umbrella Fund;

“Tax Treaty” means a tax treaty as defined in subsection 248(1);

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

“Treaty” means the Convention between Canada and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income and Capital;

“Umbrella Fund” means XXXXXXXXXX”, which is an Open-Ended Collective Investment Scheme composed of various Sub-funds including the Fund;

“Unitholder” means any person holding Fund Units, such holder being entitled to a value equal to its share in the undivided assets of the Fund;

“Unitholder Liability for Tax” means the liability for tax, interest and penalty of any Unitholder under the Act that may arise in connection with the holding of Fund Units;

“Withholding Tax Exemption” means the exemption that a resident of Switzerland can claim in respect of part XIII withholding tax payable on dividends paid or credited by a resident of Canada pursuant to Article 10(3)(b) of the Treaty; and

“Withholding Tax Obligation” means any legal obligation of the Canadian Sub-Custodian to withhold any amount in application of the Act, or the Canadian Agreement.

FACTS

Background

1. Collective Investment Schemes established under Swiss law are arrangements by which investors pool their assets to be managed by a fund management company for the account of the investors.

2. A contractual umbrella fund of the type XXXXXXXXXX is one form of a Collective Investment Scheme. It is a collective investment undertaking that is an unincorporated body without legal personality. By contractual arrangement between the fund management company, custodian bank and the investors, the fund management company agrees to involve investors in accordance with the number of units which the investors acquired in the investment fund and to manage the fund’s assets in accordance with the fund contract.

3. The Foreign Legislation 1 provides, among other things, the following:

a) The fund management company is required to manage the fund at its own discretion and in its own name but for the account of the investors. As a result, the Foreign Legislation 1 requires that, in case of bankruptcy, the assets, rights and liabilities belonging to the fund management company are to be segregated from those assets, rights and liabilities in favour of the investors. In conjunction with the custodian bank, the fund management company may delegate the management of assets to an external asset manager. The current asset manager of the Fund is XXXXXXXXXX, an asset manager for Collective Investment Schemes, regulated and supervised by the Authority.

b) In the case of an Open-ended Collective Investment Scheme with Sub-funds, each sub-fund constitutes a Collective Investment Scheme in its own right and has its own net asset value. Investors are only entitled to the assets and income of the respective sub-fund in which they are participating. Each sub-fund is liable only for its own liabilities.

c) In conjunction with the custodian bank, the fund management company prepares the fund contract including any amendments thereto, which is to be approved by the Authority.

d) The fund contract sets out the rights and duties of all parties to the contract, which include the investors, the fund management company and the custodian bank.

e) On conclusion of a contract, or subscribing and paying for their interest, the investors acquire a claim against the fund management company to participate in the assets and income of the investment fund in accordance with the fund units they acquire.

4. The Foreign Legislation 2 provides, among other things, the following:

a) Irrespective of legal status, collective investment schemes are assets provided by at least two mutually independent investors for the purpose of collective investment and which are managed externally.

b) Investors are mutually independent when they provide assets that are mutually independent in legal and de facto terms.

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

PROPOSED TRANSACTIONS

XXXXXXXXXX.

Characteristics of the Fund, the Unitholders, the Management Company and the Custodian Bank under the Foreign Legislation 1, the Foreign Legislation 2 and the Fund Contract

6. The characteristics of the Fund, the Unitholders, the Management Company and the Custodian Bank under the Foreign Legislation 1, the Foreign Legislation 2 and the Fund Contract are as follows:

Fund

a) The Fund is an Open Ended contractually based Collective Investment Scheme of the type XXXXXXXXXX. The Fund is both authorized and supervised by the Authority. XXXXXXXXXX.

b) The Fund does not have separate legal personality (therefore legally represented by its Management Company) and is transparent for Swiss tax purposes and is not an entity that is taxable in its own right. On this basis, the Fund is not subject to Swiss tax on its relevant income or relevant gains.

c) The Fund was created by way of the Fund Contract, entered into by the Unitholders, the Management Company and the Custodian Bank, which sets out the rights and duties of the Unitholders, the Management Company and the Custodian Bank. The Fund Contract is a tripartite contract according to XXXXXXXXXX of the Foreign Legislation 1, which is concluded between the Management Company, the Custodian Bank and the individual Unitholders.

d) With the execution of the Fund Contract or the subscription of Fund Units, respectively, the Unitholder acquires a claim against the Management Company to participate in the Fund Assets and income of the Fund corresponding to the number of Fund Units acquired. Each Unitholder enters into the Fund Contract individually.

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

f) The Fund does not currently own any TCP and does not intend to acquire, hold or dispose of TCP.

Unitholders

a) Fund Units are issued pursuant to the Fund Contract, which provides, among other things, the following:

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

ii. Fund Units may be further divided into different Classes to accommodate different entitlements due to class-specific costs or distributions or class-specific income.

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

iv. No Fund Unit shall confer any interest or share in any particular part of the assets of the Fund. The Unitholder in a contractual fund under Swiss law owns the Fund Unit(s) but none of the underlying assets.

v. The Fund Management Company holds the legal ownership of the Fund Assets and the Fund Units provide an interest in the Fund Assets to the Unitholders.

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

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

viii. Units in any Class within the Fund are issued in registered form only and do not take the form of actual certificates.

ix. The Unitholders are entitled to request, at all times, the Redemption of a Fund Unit for its Net Asset Value per Unit at the Redemption Time. Fund Units may be redeemed in cash or in-kind in accordance with the Fund Contract.

b) Each Unitholder of the Fund will be a person beneficially holding the Fund Units, or a custodian or trustee holding the Fund Units for the benefit of such a person.

c) Unitholders of the Fund are XXXXXXXXXX.

d) The XXXXXXXXXX, is a current Unitholder of the Fund.

Management Company

a) The Management Company of the Fund is a Non-Resident.

b) The Foreign Legislation 1 provides that the Management Company and its agents are subject to duties of loyalty, due diligence and disclosure. It acts independently and exclusively in the interests of the Unitholders. It is entitled to be released from the liabilities assumed in the proper execution of its tasks, and to be reimbursed for expenses incurred in connection with such liabilities.

c) Pursuant to the Fund Contract, the Management Company, among other things, manages the Fund at its own discretion and in its own name, but for the account of the Unitholders. The Management Company decides in particular on the issue of Fund Units, the assets and their valuation. It calculates the Net Asset Value of the Fund and determines the issue and Redemption prices of the Fund Units as well as distributions of income. It exercises all rights associated with the Umbrella Fund and each of the Sub-funds.

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

e) The Management Company in conjunction with the Custodian Bank must make an enforced Redemption of the Fund Units of an Unitholder at the current Redemption price if, among others,

i. the participation of the Unitholder in the Fund is such that it could have a significant detrimental impact on the economic interests of the other Unitholders, in particular if the participation could result in tax disadvantages for the Umbrella Fund or a Sub-fund in Switzerland or abroad, or

ii. The Unitholder has acquired or hold their Fund Units in violation of provisions of a law to which they are subject either in Switzerland or abroad, or in violation of the provision of the present Fund Contract.

f) The Management Company and the Custodian Bank are obliged to instruct Unitholders who no longer meet the prerequisites for holding a Class to ensure within 30 calendar days that their Fund Units are redeemed or switched into Fund Units of another Class whose prerequisites they do meet. If a Unitholder fails to comply with this demand, the Management Company, in cooperation with the Custodian Bank, must make an enforced switch into another Class of the Fund or, where this is not possible, enforce the Redemption of the Fund Units in question.

g) The Foreign Legislation 1 provides that, in consideration of the services to be performed by the Management Company under the Fund Contract, the Management Company is entitled to receive fees stipulated in the Fund Contract.

h) The Management Company is authorized and supervised by Authority and subject to an annual regulatory and financial audit.

Custodian Bank

a) The Custodian Bank of the Fund is a Non-Resident.

b) The Foreign Legislation 1 provides that, the Custodian Bank and its agents are subject to duties of loyalty, due diligence and disclosure. It acts independently and exclusively in the interests of the Unitholders. It is entitled to be released from the liabilities assumed in the proper execution of its tasks, and to be reimbursed for expenses incurred in connection with such liabilities.

c) Pursuant to the Fund Contract, the Custodian Bank is responsible for the safekeeping of the Fund Assets. It handles the issue and Redemption of Units as well as payments on behalf of the Fund.

d) The Custodian Bank may delegate the safekeeping of the assets of the Fund to third-party custodians and collective depositories in XXXXXXXXXX or abroad. The Custodian Bank shall be liable for losses caused by the appointed agent unless it can prove that it observed an appropriate degree of care with regard to selection, instruction and monitoring. The Custodian Bank intends to use the services of the Canadian Sub-Custodian with respect to the Canadian Securities held by the Fund.

e) The Custodian Bank ensures that the Management Company complies with the law and the Fund Contract. It checks whether the calculation of the Net Asset Value and of the issue and Redemption prices of the Fund Units as well as the investment decisions are in compliance with the law and the Fund Contract, and whether the income is appropriated in accordance with the Fund Contract.

f) The Foreign Legislation 1 provides that, in consideration of the services to be performed by the Custodian Bank under the Fund Contract, the Custodian Bank is entitled to receive fees stipulated in the Fund Contract.

g) The Custodian Bank is authorized and supervised by the Authority and subject to an annual regulatory and financial audit.

Canadian Sub-Custodian

a) Pursuant to an agreement, the Custodian Bank appointed XXXXXXXXXX, as Canadian Sub-Custodian of Canadian Securities received by it from or on behalf of the Custodian Bank.

b) The Canadian Agreement provides, among other things that the Canadian Sub-Custodian is responsible for the remittance to the CRA of any Part XIII withholding tax on Canadian dividends paid on Canadian Securities in its custody.

c) Other duties of the Canadian Sub-Custodian includes custody, handling of corporate actions, cashing and transferring dividend and interest payments.

d) The Custodian Bank will deliver all Canadian Securities held by the Fund to the Canadian Sub-Custodian, who acts as custodian in respect of such Canadian Securities.

6.1. The Management Company, on behalf of the Fund, invested in Canadian Securities.

ADDITIONAL INFORMATION

7. In addition to the Taxpayer, the Fund currently has XXXXXXXXXX Unitholders that are XXXXXXXXXX.

8. The Taxpayer and all the other Unitholders in the Fund XXXXXXXXXX. Therefore, the Taxpayer and all the other Unitholders in the Fund will meet the conditions for the Withholding Tax Exemption outlined in Article 10(3)(b)(iii) of the Treaty. Dividends received by the Fund from a company resident in Canada are not derived from carrying on a trade or a business or from a related person.

9. XXXXXXXXXX.

10. At all times, the Unitholders of the Fund will meet the requirements for the Withholding Tax Exemption.

11. The Unitholder Liability for Tax and Withholding Tax Obligation will be dealt with as follows:

a) the Canadian Sub-Custodian will keep at the Canadian Place of Business all the books and records containing the information relating to the Unitholder Liability for Tax.

b) the aforementioned information will be provided by the Canadian Sub-Custodian upon CRA’s request to ensure that such Unitholders are complying with their respective obligations under the Act.

12. Withholding Tax Obligation: Part XIII tax will be dealt with as follows:

a) It is expected that dividends will be paid or credited on the Canadian Securities that will be acquired by the Fund within six months of the date of this letter.

b) Subject to Ruling A, as provided in the Canadian Agreement, the Canadian Sub-Custodian will withhold and remit tax under Part XIII to the CRA in connection with any amount that will be paid or credited on the Canadian Securities in its capacity of agent of the Unitholders in compliance with its Withholding Tax Obligation.

c) In addition, the Canadian Sub-Custodian will keep at the Canadian Place of Business all the books and records that are required to determine the appropriate amount of Part XIII Tax to be deducted and remitted to the CRA. On the basis of the information contained in such books and records, the Canadian Sub-Custodian will determine the appropriate withholding tax rate applicable to each Unitholder under Part XIII based on the provisions of the Act and the Treaty that apply to a particular Unitholder. The Canadian Sub-Custodian will then withhold the appropriate tax from the amount paid or credited to each Unitholder.

At the end of each month the Canadian Sub-Custodian will compute the total amount withheld on behalf of a Unitholder for that month as determined above and remit that amount to the CRA by the 15th day of the following month. Within 90 days after the end of each year, the Canadian Sub-Custodian will provide each Unitholder with NR4 Summary form reporting the total amount of Part XIII tax withheld and remitted to the CRA on behalf of that Unitholder and will forward to the CRA a copy of that NR4 Summary form for the year.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to provide the Taxpayer XXXXXXXXXX with the opportunity to acquire an interest in Canadian Securities that are and will form part of the Fund Assets managed and administered by the Management Company and the Custodian Bank.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, and Purpose of the Proposed Transactions, and the statements in the Additional Information are acknowledged, we rule as follows, in reliance on such statements and subject to the Additional Comments below:

A. To the extent that an amount paid or credited from the Fund Assets to the Taxpayer or reinvested in the Fund Assets under the Fund Contract in the interest of the Taxpayer is paid, credited or reinvested out of a dividend paid or credited on Canadian Securities that are part of the Fund Assets, such dividend will be exempt from Canadian tax imposed by paragraph 212(2) of the Act by virtue of subparagraph 3(b) of Article 10 of the Treaty.

The person who pays, credits or provides such dividend will not be required to deduct and withhold an amount under subsection 215(1) of the Act from such dividend and the Canadian Sub-Custodian will not be required to deduct and withhold under subsection 215(3) in respect of such dividend.

The above-noted ruling is subject to the general limitations and qualifications set out in Information Circular IC70-6R12 issued by the CRA on April 1, 2022, and is binding on the CRA.

This Ruling is based on the Act and the Treaty in their present form and do not take into account amendments to the Act or the Treaty which, if enacted into law, could have an effect on the rulings provided herein.

ADDITIONAL COMMENTS:

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

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

a) Whether any of the Unitholders is a resident of any country with which Canada has entered into a Tax Treaty and the manner in which any Article of a Tax Treaty applies to any of the Unitholders;

b) Whether any income referred to herein is taxable under Part I, Part XIII or any other Part of the Act;

c) Whether any Unitholder would be considered to be carrying on business in Canada because of the services that the Custodian Bank or the Canadian Sub-Custodian may provide.

Without restricting the generality of the preceding statements, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has reviewed or made any determinations in respect of the compliance of any Canadian payer concerning its obligations to withhold and remit an amount of tax under Part XIII in respect of any amount paid or credited to a Unitholder through the Fund.

XXXXXXXXXX
International 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.

© His Majesty the King in Right of Canada, 2024

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 le Roi du Chef du Canada, 2024