Different types of segregated account companies (“SACs”) (p. 5)
The late 1990s saw the emergence of a new form of corporate vehicle, consisting of a single legal entity with multiple legally separate accounts (also referred to as "series", "cells", or "compartments"). Underlying assets are pooled in one entity, but investors invest in specific accounts within the corporate entity, may retain control over the related assets and liabilities, and are exposed to the opportunity for gain and risk of loss only in respect of those assets and liabilities. The accounts themselves are not considered separate legal entities.
An example of such vehicles is the "umbrella fund" available in a number of European jurisdictions. Similar vehicles are available in the form of the "series limited liability companies" (or "series LLCs") of various US states, including Delaware and Illinois, and of the "segregated account companies" of Bermuda and certain other jurisdictions (umbrella funds, series LLCs, segregated account companies and related vehicles will generically be referred to as "SACs”)….
Examples of uses of segregated account companies (p. 5)
[U]ses of…SACs includ[e]:
- the offering of multiple investment sub-funds, whose assets and liabilities are segregated from one another, within a single umbrella fund;
- the provision of employee retirement benefits, death benefits, and other benefits to multiple participating employers, who subscribe for separate sub-funds of an umbrella fund;
- serving as a securitization vehicle for multiple issuers; and
- serving as a captive insurance vehicle to reinsure risks pf multiple unrelated insured parties, who reinsure risks with and pay premiums to separate cells of a SAC.
Application where there is a Cdn-denominated series for Canadian investors (pp. 9-10)
[A]n umbrella fund may offer several sub-funds and different classes or series of shares of each sub-fund denominated in different currencies, with the expectation, for example, that Canadian investors would invest in a Canadian dollar-denominated series. In such cases, because an investor in the. Canadian-dollar denominated series of a particular sub-fund would not have an interest in the property of the other sub-funds, the investor's interest would be a tracking interest….
[I]f the sub-fund hedges its non-Canadian dollar exposure with respect to the Canadian dollar series back to the Canadian dollar, then the property attributable to that series may be deemed to be tracked property. In the words of the Joint Committee, the interests in the Canadian dollar series may be seen as a separate tracked interest from the other interests in the particular sub-fund. As noted above, in general there would not be many holders of. the Canadian-denominated series, and therefore holders of that, series could readily be deemed to hold more than 10% of the shares of the related separate corporation. In addition, since most holders of the Canadian-denominated series can be expected to be resident in Canada, it would be easy for the separate corporation to be deemed a CFA pursuant to the "relevant Canadian shareholders" rule….
No change under 25 October 2018 draft legislation (p. 10)
[T]he new proposals could still result in a deemed CFA in the second hypothetical considered by the joint Committee…
S. 95(11)(e) rule (p. 9)
[I]f the taxpayer holds: (1) property that is a tracking interest in an affiliate; and (2) shares of a class of the affiliate’s capital stock that have a fair market value that may reasonably be considered to be determined by reference to the tracked property in respect of the tracking interest, then subsection 95(11) will deem the tracked property to be property of a separate corporation, much as under the old elective procedure.
In particular, the separate corporation is deemed to have 100 issued and outstanding shares of a single class, but now each shareholder is deemed to hold their "aggregate participating percentage” of the shares of the separate corporation.
Effect of de minimis $5,000 rule in s. 95(1) participating percentage definition (pp. 9-10)
There is effectively a de minimis rule whereby the taxpayer will not have any shares of the separate corporation attributed to it if FAPI in the relevant cell or compartment does not exceed $5,000. In such cases the taxpayer's "aggregate participating percentage" in the compartment (per the existing definition) would be nil, and no shares of the separate corporation would be attributed to the taxpayer. As a result, it appears the separate corporation should not be a CFA in that, year, regardless of whether the separate corporation would otherwise be treated as being controlled by the taxpayer.
Where applicable, this appears to have the effect of not requiring the taxpayer to report de minimis amounts of FAPI pursuant to the tracking rules. However, it may also imply that the taxpayer may not get the benefit of any FAPL that might otherwise arise in a particular year, unless the cell or compartment is net FAPI-positive in that year (more accurately, FAPLs would not arise as the cell or compartment would not be a CFA). It seems inappropriate to impute FAPI of a deemed CFA to the taxpayer but deny the taxpayer the benefit of any FAPLs of the CFA.
In addition, new subsection 95(12) is a residual rule that applies where the rules in new subsections 95(10) and (11) do not apply (e.g., because the taxpayer does not hold shares of a corporate affiliate). In such cases, if the taxpayer holds a tracking interest in respect of the affiliate, subsection 95(12) will deem the entire affiliate to be a CFA (similar to the old default rule).
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