2002 Ruling 2002-0123473 - Redesignation of Units of a Trust

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 CCRA.

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

Principal Issues:

1. Whether the consolidation of various Declarations of Trust into one Master Declaration of Trust will result in there being a resettlement of the trusts.

2. Whether the redesignation of units of one series of a fund as units of another series of the same fund will result in a disposition of the units.

Position: 1. No. 2. No.

Reasons: Consistent with rulings we have provided to other funds.

XXXXXXXXXX 2002-012347

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling______________________

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX and the mutual funds identified herein. We also acknowledge your subsequent letters of XXXXXXXXXX.

You provided us with copies of:

(1) the current Declaration of Trust for each of the Funds;

(2) the draft Preliminary and Pro Forma Simplified Prospectus for each of the Funds;

(3) the draft Preliminary and Pro Forma Annual Information Form for each of the Funds; and

(4) the draft Master Declaration of Trust for the Funds.

To the best of your knowledge, and that of the taxpayers named above, none of the issues involved in this advance income tax ruling request:

(a) is in an earlier return of the taxpayers or a related person;

(b) is being considered by a tax services office or a taxation centre in connection with a previously filed income tax return of the taxpayers or a related person;

(c) is under objection by the taxpayers or a related person;

(d) is or has been before the courts; or

(e) is the subject of a ruling previously considered by the Income Tax Rulings Directorate in respect of the taxpayers or a related person.

The following terms have the meanings specified:

"Act" means the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c. 1, as amended);

"Business Day" means each day that the XXXXXXXXXX Stock Exchange is open for trading;

"Declarations of Trust" means the various declarations of trust by which the Funds were formed;

"Funds" means the XXXXXXXXXX mutual funds, namely:

Tax account number

XXXXXXXXXX

(individually referred to as a "Fund");

"Group B Funds" means XXXXXXXXXX;

"NAV" means the net asset value of each Fund, and is the value of all of the assets of the Fund less its liabilities;

"Series A Units" means the series of units of a Fund into which the currently issued and outstanding units will be redesignated as described in 10 below;

"Series B Units" means Series XXXXXXXXXX Units of a Fund;

"Series NAV" means the NAV calculated for the relevant series of units, as more specifically described in 14 below; and

"Trustee" means XXXXXXXXXX.

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

Facts

1. The Trustee is the trustee and administrative manager for the Funds.

2. The Trustee is a taxable Canadian corporation as defined in subsection 89(1) of the Act. It was incorporated under the laws of the province of XXXXXXXXXX. The principal address of the Trustee is XXXXXXXXXX, its taxation year-end is XXXXXXXXXX, its business number is XXXXXXXXXX and its tax services office is the XXXXXXXXXX Tax Services Office.

3. The Funds are trusts which were formed under various Declarations of Trust (as amended from time to time), each governed by the laws of the province of XXXXXXXXXX.

4. Each of the Funds currently qualifies as a unit trust as defined in paragraph 108(2)(a) of the Act and a mutual fund trust as defined in subsection 132(6) of the Act. XXXXXXXXXX each has a taxation year-end of XXXXXXXXXX, while each of the other Funds has a taxation year-end of XXXXXXXXXX.

5. Each of the Funds is presently divided into an unlimited number of identical units of one class, representing an equal undivided interest in the assets of the Fund.

6. The NAV of each Fund is calculated on each Business Day. The NAV per unit of each Fund is calculated by dividing the NAV of the Fund at the close of business on a Business Day by the total number of units of the Fund outstanding at that time. The NAV per unit is the basis for all purchases and redemptions of units of the Funds and the reinvestment of distributions from the Funds.

7. XXXXXXXXXX ceased distribution of units as of XXXXXXXXXX.

Proposed Transactions

8. XXXXXXXXXX will be merged into XXXXXXXXXX, subject to approval by the unitholders of XXXXXXXXXX and the securities regulatory authorities.

9. The Declarations of Trust of each of the Funds will be amended, restated and consolidated into the Master Declaration of Trust. Unitholders of the Funds have received by way of a Notice to Unitholders XXXXXXXXXX days prior written notice of the Trustee's intention to implement these amendments as is required by the Declarations of Trust of some of the Funds, which notice period expired on XXXXXXXXXX. According to the Notice to Unitholders, the consolidation of the various Declarations of Trust into the Master Declaration of Trust will enable the updating of the language in the Declarations of Trust to conform with current practices for leading Canadian mutual fund management companies. One change is that the Trustee will be provided with discretion to create new classes or series of units of the Funds. The other changes are of a house-keeping nature, involving procedural matters.

10. The Master Declaration of Trust will:

(a) allow each of the Funds to issue an unlimited number of series of units, as may be designated by the Trustee from time to time;

(b) create a series of units designated as Series A Units for each of the Funds with terms identical to the presently issued and outstanding units of each Fund and redesignate such outstanding units on the effective date of such instrument as Series A Units of the same Fund; and

(c) create an additional series of units designated as Series B Units for each of the Group B Funds.

11. Series A Units will be available to investors under the initial sales commission option, the deferred sales charge option or the volume sales option. Series B Units will only be available to investors who are enrolled in an eligible fee-based account with a broker or dealer and who are subject to an annual advisory asset-based fee rather than commissions for each transaction.

12. The attributes of each series of units of a Fund will be the same in all respects, except that Series B Units will have lower management fees and no direct sales charges will apply nor will dealer commissions be paid in respect of Series B Units.

The other administrative and operating expenses of the Group B Funds, including commissions, brokerage fees, taxes, registrar and transfer agency fees, safekeeping fees, unitholder servicing costs, costs of prospectuses and reports, interest and audit and legal fees will be allocated by the Trustee among the two series of units in a manner that reflects the actual administrative and operating costs of each series.

13. The units of each series of a Fund will be redeemable at the option of the holder at the Series NAV per unit less, in the case of Series A Units, any applicable deferred sales charge payable by an investor who has purchased the units on a deferred sales charge basis. All unitholders of a Fund will rank on a parity with each other with respect to property received on the termination or winding up of the Fund, based on the relative Series NAV of each series of units.

14. Each series of units of a Fund will have a separate Series NAV calculated for that series. The Series NAV of each series of units of a Fund will be the value of all assets of such Fund multiplied by the percentage of the Fund's assets attributable to the particular series less management fees and other administrative and operating expenses of the Fund which are specific to that particular series and less a portion of the administrative and operating expenses of the Fund which are not specific to a particular series, all as determined at the sole discretion of the Trustee, based on such criteria as the relative Series NAV of each series of units, the relative number of unitholders in each series of units, or the relative amount of sales or redemptions of units of each series during any given period. Income taxes, refundable capital gains taxes and other taxes such as goods and services tax payable by each Fund will be borne by one or more series of that Fund as the Trustee, in its sole discretion, will determine.

15. Series A Units and Series B Units of the Group B Funds will have a redesignation feature which will, in certain circumstances, permit outstanding units of one series to be redesignated as units of the other series of the same Fund. Holders of Series A Units will have the right, but not the obligation, to redesignate their holdings into Series B Units. At the time of such redesignation, the aggregate NAV of the Series A Units of the Fund to be redesignated and the aggregate NAV of the Series B Units into which they will be redesignated will be equal. Such redesignation from Series A Units to Series B Units of the same Fund, referred to in the Prospectus as a conversion (as opposed to a switch between Funds), is subject to the proviso that the minimum initial investment and minimum account balance requirements for Series B Units are met. Holders of Series B Units may have their units redesignated by the Trustee as Series A Units if they fail to meet the criteria for holding Series B Units. At the time of such redesignation, the aggregate NAV of the Series B Units of the Fund to be redesignated and the aggregate NAV of the Series A Units into which they will be redesignated will be equal. Units originally acquired under the deferred sales charge option or the volume sales charge option and subject to a redemption fee may not be converted to another series. On any redesignation of units, the unitholder will not be entitled to proceeds of disposition for the units and the redesignated units will not be cancelled or redeemed.

16. Where the general nature of the business to be transacted at a unitholder meeting concerns an issue relevant to all unitholders of a Fund, units of all series of units of that Fund will be voted together. Where an issue is relevant only to the unitholders of a particular series, only unitholders of those series to which such business is relevant will be entitled to vote and such units will be voted separately as a series.

17. The Master Declaration of Trust will be entered into as soon as possible after the date of this letter, and in any event within six months of the date of this letter.

Purpose of Proposed Transactions

Currently each Fund effectively charges the same management fee with respect to all units (except with respect to management fee distributions which may be paid to a small number of unitholders), and effectively divides other administration and operating expenses equally among all units. The proposed transactions are designed to allow the Trustee the flexibility to charge differing management fees and to allocate other administrative and operating expenses depending on the nature of the investor. Having multiple series of units will allow the administrative and operating expenses of the Funds to be allocated between different types of investors. These changes are expected to attract new investors which will increase the Funds' asset base which, in turn, should result in lower per unit costs and a lower management expense ratio for all of the series of the Funds and enable the Trustee to provide enhanced services to all Fund investors on a more cost effective basis.

Rulings

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 provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

(A) The execution by the Trustee of the Master Declaration of Trust as described in 9 above will not, in and of itself, result in the resettlement of any of the Funds, a disposition of the property of any of the Funds or a disposition of the issued and outstanding units of any of the Funds, for purposes of the Act;

(B) The redesignation of the presently issued and outstanding units of each of the Funds into Series A Units of the same Fund as described in 10(b) above will not result in a disposition of those units for purposes of the Act;

(C) A redesignation of Series A Units into Series B Units of the same Fund, or vice versa, as described in 15 above, will not result in a disposition of those units for purposes of the Act;

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

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

Comments

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

The above rulings should not be construed as providing the Canada Customs and Revenue Agency's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.

Yours truly,

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch