2025 Ruling 2025-1054471R3 - Qualifying exchange

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.

Principal Issues: 1) Whether the proposed transactions involving the transfer of property from MFC to New Sub MFT would constitute a qualifying exchange as defined in subsection 132.2(1); 2) Whether the proposed transactions involving the transfer of property from New Sub MFT to MFT would constitute a qualifying exchange as defined in subsection 132.2(1); 3) Whether GAAR would apply to the proposed transactions.

Position: 1) Yes; 2) Yes; 3) No.

Reasons: 1) Meets the requirements. 2) Meets the requirements. 3) There is no abuse or misuse.

XXXXXXXXXX 2025-105447

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling (“Ruling”) on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in your email correspondence, as well as the information provided during our telephone conversations.

You have advised us that, to the best of your knowledge and that of the taxpayer involved, none of the Proposed Transactions or issues involved in this Ruling request 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.

This document is based solely on the facts and Proposed Transactions described below. The documentation submitted with your request does not form part of the facts and Proposed Transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

I. Definitions

Unless otherwise stated:

i. all references to a statute are to the relevant provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended from time to time and consolidated to the date of this letter (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

ii. all terms and conditions used in this Ruling that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars, unless otherwise stated; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

(a) “Aco” means XXXXXXXXXX, prior to the amalgamation of Aco and Newco on XXXXXXXXXX;

(b) “Bco” means XXXXXXXXXX;

(c) “Canadian partnership” has the meaning assigned by subsection 102(1);

(d) “capital property” has the meaning assigned by section 54;

(e) “Class A LP Units” means the class A limited partnership units of LP;

(f) “Class A Retractable Common Shares” means the class A retractable common shares of MFC;

(g) “Class B Retractable Common Shares” means the class B retractable common shares of MFC;

(h) “CRA” means the Canada Revenue Agency;

(i) “Exchangeable LP Units” means units of LP designated as “Class B LP Units” which are economically equivalent to and exchangeable for MFT Units;

(j) “fair market value” or “FMV” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, expressed in terms of cash;

(k) “LP” means XXXXXXXXXX Limited Partnership;

(l) “MFC” means XXXXXXXXXX, following the amalgamation of Aco and Newco on XXXXXXXXXX, as described in Paragraph 9;

(m) “MFC Preferred Shares” means redeemable and retractable, fixed value, and non-voting shares of MFC;

(n) “MFC Properties GP Inc.” has the meaning set out in Paragraph 11;

(o) “MFC Properties LP” has the meaning set out in Paragraph 11;

(p) “MFC Property” means all of the property of MFC held at the MFC Transfer Time, including all interests in MFC Properties LP, the Property LPs, Trust 1, Trust 2, and Trust 3;

(q) “MFC Qualifying Exchange” has the meaning set out in Paragraph 19;

(r) “MFC Shares” means the Class A Retractable Common Shares, Class B Retractable Common Shares, and the MFC Preferred Shares;

(s) “MFC Transfer Time” has the meaning set out in Paragraph 19;

(t) “MFT” means XXXXXXXXXX, a unit trust established under the laws of the Province of XXXXXXXXXX;

(u) “MFT Declaration of Trust” means the declaration of trust dated XXXXXXXXXX, governed by the laws of the Province of XXXXXXXXXX, pursuant to which MFT was created, as further amended, supplemented or amended and restated from time to time;

(v) “MFT Units” means units of participating interest in MFT;

(w) “mutual fund corporation” has the meaning assigned by subsection 131(8);

(x) “mutual fund trust” has the meaning assigned by subsection 132(6);

(y) “Newco” means XXXXXXXXXX;

(z) “New Sub MFT” has the meaning set out in Paragraph 16;

(aa) “New Sub MFT Qualifying Exchange” has the meaning set out in in Paragraph 20;

(bb) “New Sub MFT Transfer Time” has the meaning set out in Paragraph 20;

(cc) “New Sub MFT Units” means units of participating interest in New Sub MFT;

(dd) “Paragraph” refers to a number paragraph is this letter;

(ee) “Property LPs” means the limited partnerships holding underlying real property of which MFC is a member;

(ff) “Proposed Transactions” means the transactions described in Paragraphs 13 to 23;

(gg) “public corporation” has the meaning assigned by subsection 89(1);

(hh) “real estate investment trust” has the meaning assigned by subsection 122.1(1);

(ii) “real or immoveable property” has the meaning assigned by subsection 122.1(1);

(jj) “Reorganization Date” means the date on which the proposed reorganization is completed;

(kk) “Special Voting Units” means non-participating special voting units of MFT, issued in accordance with the provisions of the MFT Declaration of Trust from time to time;

(ll) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);

(mm) XXXXXXXXXX;

(nn) “Trust 1” means XXXXXXXXXX, a trust established under the laws of the Province of XXXXXXXXXX;

(oo) “Trust 2” means XXXXXXXXXX, a trust established under the laws of the Province of XXXXXXXXXX;

(pp) “Trust 3” means XXXXXXXXXX, a trust established under the laws of the Province of XXXXXXXXXX;

(qq) “Trustees” means the individuals who act as trustees of MFT in accordance with and subject to the provisions of the MFT Declaration of Trust; and

(rr) “Unitholders” means holders of MFT Units.

II. Facts

A complete description of all the relevant facts is as follows:

1. MFT is an open-ended unit trust formed under the laws of the Province of XXXXXXXXXX.

2. The taxation year end of MFT is XXXXXXXXXX.

3. The Trustees manage the affairs of MFT in accordance with and subject to the terms of the MFT Declaration of Trust. All of the Trustees of MFT are resident in Canada, and MFT’s central management and control is exercised in Canada.

4. XXXXXXXXXX.

5. MFT qualifies as a mutual fund trust and a real estate investment trust for purposes of the Act.

6. Pursuant to the MFT Declaration of Trust, the beneficial interests in MFT are divided into two classes designated as MFT Units and Special Voting Units. MFT Units represent an undivided interest in MFT. All MFT Units outstanding from time to time participate pro rata in any distribution made by MFT and, in the event of the termination of MFT, in the income or capital of MFT following the satisfaction of liabilities. Special Voting Units do not entitle the holder thereof to any legal or beneficial interest in the distributions or capital of MFT. Each MFT Unit and Special Voting Unit confers the right to one vote at all meetings of the holders of MFT Units and Special Voting Units. As of XXXXXXXXXX, there were XXXXXXXXXX MFT Units issued and outstanding and no Special Voting Units outstanding.

7. MFT Units are currently listed on the XXXXXXXXXX.

8. LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX. LP is a Canadian partnership. MFT is the sole limited partner of LP and all of the Class A LP Units are owned by MFT. Bco is the general partner of LP. Bco holds only a nominal general partner interest in LP. Bco is wholly-owned by MFT. Bco is a taxable Canadian corporation. The limited partnership agreement of LP also provides for Exchangeable LP Units. As of XXXXXXXXXX, there were no issued Exchangeable LP Units.

9. MFC is a corporation formed under the laws of the Province of XXXXXXXXXX following the amalgamation of Newco and Aco on XXXXXXXXXX. Its taxation year end is XXXXXXXXXX. MFC is a taxable Canadian corporation, a public corporation, and a mutual fund corporation. All of the Class A Retractable Common Shares and MFC Preferred Shares are owned by MFT and all of the Class B Retractable Common Shares are owned by LP. As of XXXXXXXXXX, there were XXXXXXXXXX Class A Retractable Common Shares, XXXXXXXXXX Class B Retractable Common Shares, and XXXXXXXXXX MFC Preferred Shares outstanding.

10. MFC holds all of MFT’s underlying property directly or indirectly either through investments in various subsidiary corporations and partnerships, or through beneficial interests in Trust 1, Trust 2, and Trust 3.

11. MFC Properties LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX. MFC Properties GP Inc. is a taxable Canadian corporation. The sole limited partner of MFC Properties LP is MFC. The general partner of MFC Properties LP is MFC Properties GP Inc., a wholly owned subsidiary of MFC.

12. All relevant shares, trust units, and partnership units are held as capital property by the applicable securityholder.

III. Proposed Transactions

The following transactions (the Proposed Transactions) are proposed to occur on the Reorganization Date in the order presented below (other than the transactions described under the heading Pre-Reorganization Date Steps, or where otherwise indicated).

Pre-Reorganization Date Steps

13. MFC will transfer all directly owned real property to MFC Properties LP in exchange for the assumption of debt and interests in MFC Properties LP on a tax deferred basis under subsection 97(2). The real property is real or immovable property from which MFC Properties LP will earn rental income.

14. LP will be dissolved in a manner such that each partner of LP receives an undivided interest in each property of LP immediately before such dissolution. The parties will elect for the dissolution to occur on a tax deferred basis under subsection 98(3). Bco will transfer any and all undivided interests in the Class B Retractable Common Shares of MFC and the promissory notes owing from MFC obtained on the dissolution to MFT such that, on the Reorganization Date, all of the shares of MFC, and all of the promissory notes owing from MFC, will be owned by MFT.

15. MFT will subscribe for additional Class A Retractable Common Shares. In full payment and satisfaction of such subscription price, MFC’s obligation under certain interest-bearing promissory notes owing to MFT by MFC will be set off against the obligation of MFT to pay the subscription price and such promissory notes will be cancelled. The subscription price for the Class A Retractable Common Shares to be issued to MFT will be equal to the principal amount of the corresponding promissory notes so cancelled.

Reorganization Steps

16. A new unit trust (New Sub MFT) will be settled for the benefit of MFC under the laws of the Province of XXXXXXXXXX. MFC will subscribe for one unit of New Sub MFT for nominal consideration in connection with the formation of New Sub MFT. A majority of the trustees of New Sub MFT will be residents of Canada, and the central management and control of New Sub MFT will be exercised in Canada. The terms of New Sub MFT will be such that it complies with paragraph 108(2)(a), subsection 132(6), and subsection 132(7).

17. MFT will contribute cash to New Sub MFT in exchange for units of New Sub MFT. The cash contribution will be sufficient such that upon completion of the distribution described in Paragraph 18, New Sub MFT qualifies a mutual fund trust as defined in subsection 132(6) as there will be at least XXXXXXXXXX beneficiaries of New Sub MFT, each of whom holds not less than one block of units (being XXXXXXXXXX units) and units having an aggregate FMV of at least $XXXXXXXXXX. The number of New Sub MFT Units acquired by MFT will be equal to the number of outstanding MFT Units at that time.

18. MFT will distribute the New Sub MFT Units to the Unitholders on a pro-rata basis as a return of capital. MFT will remit to the Receiver General of Canada, on behalf of each Unitholder that is a non-resident of Canada, an amount equal to the amount required to be withheld in respect of the return of capital, pursuant to subsection 218.3(2). Immediately following the distribution to the Unitholders, New Sub MFT will have no fewer than 150 Unitholders and will satisfy the conditions in subsection 132(6) and the conditions in section 4801 of the Regulations such that it will qualify as a mutual fund trust.

19. MFC and New Sub MFT will undertake a tax-deferred transaction under section 132.2 (the MFC Qualifying Exchange) and, in particular:

a. MFC will transfer all of the MFC Property to New Sub MFT in exchange for the assumption of debt and units of New Sub MFT with an aggregate FMV equal to the FMV of the MFC Property at such time (the MFC Transfer Time);

b. All of the MFC Shares outstanding immediately before the MFC Transfer Time, other than one Class A Retractable Common Share held by MFT, will immediately, and in any event within 60 days after the MFC Transfer Time, be redeemed by MFC in exchange for consideration consisting only of New Sub MFT Units (being the units received by MFC in the preceding paragraph) having an equivalent FMV; and

c. MFC and New Sub MFT will jointly elect, in prescribed form and within the time provided in paragraph (e) of the definition of qualifying exchange in subsection 132.2(1), to have the rules in section 132.2 apply to the transactions described in this paragraph.

20. New Sub MFT and MFT will undertake a tax-deferred transaction under section 132.2 (the New Sub MFT Qualifying Exchange) and, in particular:

a. New Sub MFT will transfer all of its property (including the MFC Property previously received by it) to MFT in exchange for the assumption of debt and units of MFT with an aggregate FMV equal to the FMV of the transferred property at such time (the New Sub MFT Transfer Time);

b. All of the New Sub MFT Units outstanding immediately before the New Sub MFT Transfer Time, other than one New Sub MFT Unit held by MFT, will immediately, and in any event within 60 days after the New Sub MFT Transfer Time, be redeemed by New Sub MFT in exchange for consideration consisting only of MFT Units (being the units received by New Sub MFT in the preceding paragraph) having an equivalent FMV; and

c. New Sub MFT and MFT will jointly elect, in prescribed form and within the time provided in paragraph (e) of the definition of qualifying exchange in subsection 132.2(1), to have the rules in section 132.2 apply to the transactions described in this paragraph.

21. Following the redemption of New Sub MFT Units, MFT Units received by MFT in connection with the redemption will be canceled by operation of law.

22. The outstanding MFT Units will be consolidated such that the total number of MFT Units outstanding immediately after the consolidation will be equal to the total number of MFT Units outstanding immediately before the Reorganization Date. No MFT Units will be cancelled or redeemed and the Unitholders will not receive, and shall not be entitled to receive, any proceeds of disposition as a consequence of this consolidation.

23. New Sub MFT will elect under subsection 132(6.1) in its return of income for its XXXXXXXXXX taxation year, to have been a mutual fund trust from the beginning of its XXXXXXXXXX taxation year. Applicable equivalent provincial elections will be filed.

IV. Purpose of the Proposed Transactions

24. The overall purpose of the Proposed Transactions is to simplify MFT’s operating structure by eliminating its subsidiary mutual fund corporation, MFC, such that MFT will hold investments in subsidiary partnerships and trusts directly.

25. Additionally, the Proposed Transactions will eliminate the increased significant complexity and cost of accounting and legal reporting and income tax compliance inherent in the existing structure.

V. Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, transactions, additional information, and the purpose of the Proposed Transactions, and that the Proposed Transactions are completed in the manner described above, and that there are no other transactions that may be relevant to the Rulings given, our Rulings are as follows:

A. The Proposed Transactions described in Paragraphs 13 through 18 will not, in and by themselves, adversely affect the qualification of MFC as a mutual fund corporation within the meaning of subsection 131(8).

B. The Proposed Transactions will not, in and by themselves, cause MFT to fail to qualify as a real estate investment trust as defined in subsection 122.1(1).

C. Provided New Sub MFT is a mutual fund trust within the meaning assigned by subsection 132(6) and where it becomes a mutual fund trust at any particular time before the 91st day after the end of its XXXXXXXXXX taxation year, and it so elects in its return of income for that year, New Sub MFT shall be deemed to have been a mutual fund trust from the beginning of its XXXXXXXXXX taxation year as provided for in subsection 132(6.1).

D. Provided that:

a) at the MFC Transfer Time, MFC is a mutual fund corporation within the meaning of subsection 131(8) and New Sub MFT is a mutual fund trust within the meaning of subsection 132(6);

b) at the MFC Transfer Time, subsection 131(8.1) is not applicable to MFC and subsection 132(7) is not applicable to New Sub MFT;

c) at the MFC Transfer Time, the property transferred by MFC to New Sub MFT has an aggregate FMV equal to at least XXXXXXXXXX% of the FMV of all property owned by MFC; and

d) MFC and New Sub MFT jointly elect, in prescribed form within the time set out in paragraph (e) of the definition of qualifying exchange in subsection 132.2(1),

the transactions described in Paragraph 19 will constitute a qualifying exchange as defined in subsection 132.2(1) such that the rules in subsections 132.2(2) through (4) and subsections 132.2(6) and (7) will apply to such transactions.

E. Provided that:

a) at the New Sub MFT Transfer Time, New Sub MFT and MFT are mutual fund trusts within the meaning of subsection 132(6);

b) at the New Sub MFT Transfer Time, subsection 132(7) is not applicable to New Sub MFT or MFT;

c) at the New Sub MFT Transfer Time, the property transferred by New Sub MFT to MFT has an aggregate FMV equal to at least XXXXXXXXXX% of the FMV of all property owned by New Sub MFT; and

d) New Sub MFT and MFT jointly elect, in prescribed form within the time set out in paragraph (e) of the definition of qualifying exchange in subsection 132.2(1),

the transactions described in Paragraph 20 will constitute a qualifying exchange as defined in subsection 132.2(1) such that the rules in subsections 132.2(2) through (4) and subsections 132.2(6) and (7) will apply to such transactions.

F. Subparagraph 132.2(3)(g)(i) will apply, and subclause 132.2(3)(g)(vi)(C)(II) will not apply, in respect of the redemption of New Sub MFT Units in Paragraph 20.b.

G. The consolidation of MFT Units held by Unitholders, as described in Paragraph 22, will not, in and of itself, result in a disposition of MFT Units by the Unitholders.

H. The provisions of subsections 15(1), 56(2), 56(4), 69(1), 69(4), 105(1), and 246(1) will not apply as a result of the Proposed Transactions, in and by themselves.

I. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the Rulings given above.

The above Rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

VI. Comments

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the Rulings given above, or acceptance, approval, or confirmation of any other income tax implications of the facts and Proposed Transactions described herein. In particular, but without affecting the generality of the foregoing, we express no opinion with respect to,

a. any transactions which Unitholders may have approved that are not specifically described herein;

b. whether any entity described herein is a mutual fund corporation at any particular time;

c. whether any entity described herein is a mutual fund trust at any particular time;

d. whether any entity described herein is a unit trust within the meaning of subsection 108(2) at any particular time;

e. whether any entity described herein is a real estate investment trust at any particular time;

f. the determination of the FMV or adjusted cost base of any property referred to herein;

g. whether any of the properties described herein are capital properties;

h. the tax status of any entity described herein;

i. any relevant provincial legislation consequences arising as a result of the Proposed Transactions.

An invoice for our fees in connection with this Ruling will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch