2000 Ruling 2000-0031613 - mutual fund trust redesignation

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

The addition of a redesignation feature to the existing units of a group of mutual fund trusts and the amendment of the declaration of trust to allow multiple Classes of Units for different investor segments so that the manager of the Fund has the flexibility to charge differing management fees to the various investors depending on the size of the investment. The issues are whether the proposed transactions can result in investors (unitholders) being considered to have disposed of their units or being considered to have a greater percentage interest in the income of the Fund than such investor's percentage interest in the capital of the Fund.

Rulings requested are: 1) whether the proposed transactions result in a resettlement of the trust or a disposition of units; 2) whether subsections 104(7.1) and 245(2) apply to the proposed transactions.

Position:

1) Unitholders are not considered to have disposed of their units as a result of the redesignation of the units from one class to another class. Also, the addition of a redesignation feature to the existing units will not result in a disposition of those units; changes to trust indenture are not so significant to precipitate a resettlement. Given that there are no redemption fees on Class Y Units, the fact that on a redesignation of Class X Units to Class Y units, a unitholder will be required to pay an amount equal to any redemption fees that would otherwise have been payable if there had been a redemption merely recognizes that those Class X unitholders who purchased their units on a sales charge basis paid up-front fees, while those who purchased their units on a deferred sales charge basis paid no up-front fees. It thus equalizes the position of all Class X unitholders.

2) Subsections 104(7.1) and 245(2) will not apply to the proposed transactions.

Reasons:

1) Similar positions taken in 990500, 9820753, 9726113 and 9525413.

2) Similar positions taken in 9820753 and 9603753.

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XXXXXXXXXX 2000-003161
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Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Rulings
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising from the proposed transactions described below. We also acknowledge the additional information received by our office on XXXXXXXXXX. We understand that, to the best of your knowledge, and that of the taxpayers on whose behalf this ruling is requested, none of the issues contained in this advance income tax ruling are:

i) contained in earlier returns of the taxpayers or a related person;

ii) being considered by a tax service office and/or a tax centre in connection with a tax return previously filed by the taxpayers or a related person;

iii) under objection by the taxpayers or related person;

iv) before the courts; or

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

DEFINITIONS

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) ("Act"), and the following terms have the meaning specified:

a) "ACo" means XXXXXXXXXX

b) "BCo" means XXXXXXXXXX

c) "CC Fund" means XXXXXXXXXX

d) "DD Fund" means XXXXXXXXXX

e) "Fund" means any mutual fund trust listed in Schedule "A" to this ruling individually and "Funds" mean all the mutual fund trusts listed in Schedule "A" collectively

f) "Class X" means Class XXXXXXXXXX

g) "Class Y" means Class XXXXXXXXXX

ACo deals with theXXXXXXXXXX Tax Services Office and files its returns at the XXXXXXXXXX Tax Centre. The Funds deal with the XXXXXXXXXX Tax Services Office and file their returns at the XXXXXXXXXX Tax Centre.

Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:

FACTS

1. The Funds were formed under Declarations of Trust governed by the laws of the Province of XXXXXXXXXX. ACo is a party to management agreements with each Fund to provide portfolio management, administrative and distribution services.

2. The Funds are open-end "mutual fund trusts", as defined in subsection 132(6), that offer a variety of investment objectives.

3. Each of the Funds is divided into an unlimited number of identical units representing an undivided interest in the assets of the Fund (except with respect to management fee distributions).

4. Each Fund is valued at XXXXXXXXXX (eastern time) on each day on which ACo is open for business (a "Fund Valuation Date"). The net asset value of a Fund is equal to the value of the assets of the Fund less an amount sufficient to provide for all liabilities of the Fund (excluding all liability for issued capital). The net asset value per unit of each Fund is calculated by dividing the net asset value of the Fund by the total number of units and fractions thereof of that Fund then outstanding. The net asset value per unit is the basis for all purchases and redemptions of units of the Funds and the reinvestment of distributions, if any, from the Funds.

5. ACo is the manager and trustee of the Funds. ACo is a corporation amalgamated under the laws of the Province of XXXXXXXXXX. All of the shares of ACo are owned directly by BCo. BCo is a corporation incorporated under the laws of the Province of XXXXXXXXXX, whose common shares are listed on XXXXXXXXXX Stock Exchange.

6. The policies of each of CC Fund and DD Fund are established by that Fund's board of directors and the policies of each of the other Funds are established by ACo as trustee. ACo as manager carries out the day-to-day business of the Funds, including providing all of the general management and administrative services required by each Fund. These duties are performed pursuant to management agreements to which ACo and the Funds are parties. ACo has engaged portfolio advisers to provide investment advice to ACo with respect to the investments of some of the Funds. ACo pays all fees and expenses of the portfolio advisers.

7. The remuneration paid by each Fund to ACo for providing all general management and administrative services is provided for in the management agreement with each Fund. That remuneration is equal to a percentage of the average daily net assets of the relevant Fund. The fee is computed and paid by the Funds daily. The management fee rate differs depending on the Fund. At present, the management fees range from XXXXXXXXXX per annum. Except in the case of management fee distributions, the same management fee is effectively charged with respect to each unit of a Fund. To encourage large purchases in the Funds, ACo may reduce the management fee that it would otherwise be entitled to receive from a Fund with respect to an investment in the Fund, provided that the amount of the management fee reduction is distributed to the investor for whose benefit the fee was reduced. These are referred to as management fee distributions.

8. ACo, as manager, is responsible for all fees and expenses paid to the portfolio advisers and for promotional expenses. In addition to management fees payable to ACo, each Fund is responsible for its own administrative and operating expenses, including audit and legal fees, directors fees, custodian fees, registry and transfer agency fees, portfolio and investment costs, expenses of communications with security holders, all costs imposed by statute or regulation, taxes and applicable GST.

PROPOSED TRANSACTIONS

Amendments to Declarations of Trust for the Funds

9. It is proposed that the Declaration of Trust for each of the Funds will be amended and restated:

(i) to allow the Fund to issue two classes of units, namely Class X Units and Class Y Units, with the attributes set out below and to permit future amendments to the Declaration of Trust to create additional classes;

(ii) to provide that units of one class of a Fund may be redesignated as an equivalent value of units of another class of the same Fund in certain circumstances (the "redesignation feature") as described below; and

(iii) to designate each of the issued and outstanding units of each Fund on the date of the amendments as a Class X Unit.

10. Class X Units will be available to all investors. Class Y Units will be offered primarily to investors who participate in fee-based programs through their financial adviser and who satisfy certain additional criteria established by ACo from time to time (together the "Class Y criteria"). A fee-based program is a program in which an investor pays a financial adviser an annual fee for ongoing financial planning advice and the adviser does not receive any sales commissions or any service fees from ACo. Class Y Units may also be made available to certain other investors in the sole discretion of ACo. A copy of the preliminary prospectus offering the Class X and Class Y Units was enclosed with your ruling request.

11. The attributes of each class of units of a Fund will be similar in all respects, except for differences such as the management fees charged by ACo in respect of a class, the fees and commissions paid by the unitholder and ACo and separate class voting rights in certain circumstances. The management fees charged by ACo to a Fund with respect to the Class Y Units will be less than the management fees charged to a Fund with respect to the Class X Units. In the case of Class X Units, an investor may pay a sales commission to the investment adviser on the purchase of the units or ACo will pay a commission to the financial adviser in respect of units purchased on a deferred sales charge basis and the investor may pay a redemption charge. ACo pays financial advisers a service fee for ongoing services provided by the financial adviser to a unitholder of Class X Units, such as investment advice, account statements and newsletters. An investor in Class Y Units will not be charged a sales commission on the purchase of the units or a redemption charge on the redemption of the units, other than applicable transfer fees and short-term trading fees. ACo will not pay any commissions or service fees to financial advisers with respect to Class Y Units. Where the nature of the business to be transacted at a unitholder meeting concerns an issue relevant only to the unitholders of a particular class or classes, only unitholders of those classes to which such business is relevant will be entitled to vote and such units will be voted separately as a class.

12. The units of each class of a Fund will be redeemable at the option of the unitholder at the net asset value per unit calculated for the relevant class of units, less any applicable redemption charge charged to an investor who has purchased units on a deferred sales charge basis. Each whole unit of a class of a Fund will entitle the unitholder to one vote at a meeting of unitholders of the Fund, except where an issue is relevant only to the unitholders of a particular class. The units of each class of a Fund will rank on a parity with the units of the other classes of the Fund with respect to property received on a termination or winding up of the Fund, based on the relative net asset value of each class of units.

13. Each class of units of each Fund will have a separate net asset value calculated for that class. The primary sources of differences between the net asset values of each class of a particular Fund will be the different level of management fees charged. The net asset value of each class of units of each Fund will be as set out in the draft amended and restated Declarations of Trust. The net asset value per unit of a class of units of a Fund is calculated by dividing the net asset value of the class of units of the Fund by the total number of units and fractions thereof of that class outstanding at that time.

14. The units of each class will have a redesignation feature which will permit them to be redesignated as units of another class of the same Fund, as described in paragraphs 16, 17 and 18 below.

15. These amendments to the Declarations of Trust of the Funds will be entered into as soon as possible after the granting of the rulings requested herein.

Redesignation of Units of the Funds

16. If a unitholder holds Class X Units of a Fund and satisfies the Class Y criteria, those units may, at the request of the unitholder and the agreement of ACo and the unitholder's financial adviser, be redesignated as Class Y Units of the same Fund having an aggregate net asset value equal to the aggregate net asset value of the units being redesignated. Where a unitholder of Class Y Units of a Fund no longer satisfies the Class Y criteria, those units may, at the sole discretion of ACo, be redesignated as Class X Units of the same Fund having an aggregate net asset value equal to the aggregate net asset value of the units being redesignated.

17. On any redesignation of units, the unitholder will not be entitled to proceeds of disposition and the redesignated units will not be cancelled or redeemed.

18. As Class X Units may be purchased on a deferred sales charge basis, prior to the redesignation of Class X Units into Class Y Units, a unitholder must pay an amount equal to any redemption charges that would have been payable in respect of those Class X Units if there had been a redemption.

PURPOSE OF PROPOSED TRANSACTIONS

19. Currently, each Fund is effectively charged the same management fee with respect to all units (except with respect to management fee distributions).

20. The proposed transactions are designed to allow ACo the flexibility to charge different management fees depending on the nature of the investor. Management fees compensate ACo for the management services provided to each Fund, including distributing the units, portfolio management, financial adviser servicing and marketing. Financial adviser servicing costs are reduced in the case of Class Y Units, so that management fees can be reduced. ACo anticipates that the proposed multi-class structures will attract new investors to the Funds. Attracting new investors will increase the asset base of each Fund which, in turn, should result in lower per unit costs and per share costs and a lower management expense ratio for the Funds and will result in an overall increase in the management fees paid to ACo.

RULINGS GIVEN

Provided the preceding statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions, and purpose thereof and the proposed transcations are carried out as herein described, our advance income tax rulings are as follows:

(a) The amendments to the Declarations of Trust described in paragraph 9 above will not, in and by themselves, result in a resettlement of the Funds, a disposition of the property of the Funds or a disposition of the issued and outstanding units, or any part of the units, of the Funds for the purposes of the Act.

(b) A redesignation of Class X Units into Class Y units of the same Fund or a redesignation of Class Y units into Class X units of the same Fund pursuant to the redesignation feature described in paragraphs 16, 17 and 18 above will not result in a disposition of those units, or any part of those units, for the purposes of the Act.

(c) The implementation of the proposed transactions described herein will not, in and by themselves, cause subsection 104(7.1) to apply so as to deny the Funds a deduction in computing their income under paragraph 104(6)(b).

(d) Subsection 245(2) will not apply to redetermine the tax consequences of the above rulings as a result of the implementation of the proposed transactions described herein.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments thereto.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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