30 November 1996 Ruling 9700733 - PENSION FUND - POOLING VEHICLES

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:

This ruling request concerns proposed transactions whereby two Registered Pension Plan's (the property of which is held in separate pension trusts) will establish two new unit trusts. These new trusts will be pooling vehicles created to offer pension fund clients an opportunity to have their assets aggregated with those of other pension trusts to achieve economies of scale. Each new trust will have a number of different classes of units, each corresponding to a particular portfolio of assets, to permit the pooling to occur in a single vehicle for ease of administration but still allow the pension trust to have an investment mix matched to its particular funding status and obligations. Distributions to unitholders will be based on the trust's income for the year, however, if a particular class (portfolio of assets) realized losses rather than income in a particular year, the unitholders of that class would not share in the income distributions for that year.

Will subsection 104(7.1) apply to the proposed transactions?

Position TAKEN:

Subsection 104(7.1) does not apply.

Reasons FOR POSITION TAKEN:

Subsection 104(7.1) is an anti-avoidance measure intended to prevent the streaming by commercial trusts of income and capital to different beneficiaries. Since the facts in this particular case do not indicate that it is reasonable to consider that this is one of the main reasons of the proposed transactions subsection 104(7.1) is not applicable.

XXXXXXXXXX							3-970073
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs/Mesdames:

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 the above-noted taxpayers and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

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

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

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

(d)before the courts; and

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

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

"A Co." means XXXXXXXXXX.

"B Co." means XXXXXXXXXX.

"AB Management" means XXXXXXXXXX.

"Trustco" means XXXXXXXXXX.

"Pension Plan A" means XXXXXXXXXX.

"Pension Plan B" means XXXXXXXXXX.

"Canusa Pension Trust" means XXXXXXXXXX.

"Global Pension Trust" means XXXXXXXXXX.

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

FACTS

1.A Co. is a Canadian corporation that is a XXXXXXXXXX corporation. A Co. has approximately XXXXXXXXXX employees. The employees of A Co. are members of Pension Plan A, which is a registered pension plan, the assets of which are held in a pension trust, as that term is defined for purposes of paragraph 149(1)(o) of the Act.

2.B Co. is a wholly-owned subsidiary of A Co. B Co. also provides a registered pension plan for the benefit of its employees. This plan, Pension Plan B, has approximately XXXXXXXXXX members and is funded through a pension trust, as that term is defined for purposes of paragraph 149(1)(o) of the Act.

3.AB Management is a wholly-owned subsidiary of A Co. which provides investment management and related services to A Co., B Co. and other related companies in respect of assets held in those companies' pension trusts.

4.Trustco is a trust company incorporated under the laws of Canada and is the trustee for the pension trusts referred to in 1 and 2 above.

PROPOSED TRANSACTIONS

5.On or about XXXXXXXXXX, two trusts will be established for purposes of pooling the investment assets held by the A Co., B Co. and other affiliated companies' pension trusts to the extent these are managed by AB Management as investment manager.

6.One trust will be called the Canusa Pension Trust and the other trust will be called the Global Pension Trust.

7.Each trust will be a unitized trust with a number of different classes of units. Initially the Canusa Pension Trust will have XXXXXXXXXX classes of units and the Global Pension Trust will have XXXXXXXXXX classes of units. Each of these classes will track, and be identified by reference to, a particular portfolio of assets held by the trust. The proposed classes of units, and hence portfolios, are set out in the attached Schedules. The first class of units of the Canusa Pension Trust, for example, will track a portfolio of assets which will be comprised of actively managed investments in Canadian equity securities with an emphasis on larger companies. Over time it is anticipated that AB Management will create additional classes of units for each of the trusts based on its market assessments and in response to demand from its clients. Funds or assets received from subscriptions for a new class will be invested or held by the trust as part of a new portfolio of assets invested in accordance with particular investment guidelines.

8.Investors in the Canusa Pension Trust and the Global Pension Trust will be pension trusts in respect of registered pension plans. Initially the investors will be pension trusts of the registered pension plans of A Co., B Co. and other related companies but, in the future, they may include pension trusts in respect of registered pension plans of unrelated parties.

9.The Canusa Pension Trust will qualify as a "pooled fund trust" as defined in subsection 5000(7) of the Regulations. Further, the trust will hold "foreign property", as defined in subsection 206(1) of the Act, consisting primarily of U.S. securities, but the cost amount to the trust of all foreign property held by it will not exceed 20 per cent of the cost amount to it of all property held by it. Accordingly, units of the Canusa Pension Trust will not be foreign property for the pension trusts that are unitholders. The Global Pension Trust will hold foreign property and the units of the trust will be foreign property for the pension trusts that are unitholders.

10.Investors in the Canusa Pension Trust and the Global Pension Trust will be charged a management fee by AB Management in respect of their investment in the trusts. This will be fixed by negotiation between the relevant employer or pension plan administrator in respect of the investing pension trust and AB Management.

11.Each unit of any particular class of the Canusa Pension Trust or the Global Pension Trust ranks equally with all of the other units of that class and will be allocated an identical amount of class net income and net realized capital gains from time to time.

12.The class net asset value per unit for each of the different classes of the trusts is determined on each valuation day by dividing the net asset value of the portfolio of assets corresponding to the particular class by the total number of units of that class outstanding at that time. The class net asset value per unit in respect of any particular class of units of the trusts will reflect only class-specific expenses, such as brokerage commissions or asset related costs and fees paid to third parties, incurred by the trusts. Expenses incurred by AB Management in respect of the trusts (e.g., trustee and accounting fees) will not be charged to the trusts and AB Management will not charge management fees to the trusts.

13.The trust agreements will provide that sufficient net income and net realized capital gains will be distributed to unitholders each year so that the trusts are not liable to income tax under Part I of the Act. Distributions of class net income and net realized capital gains will be determined by first calculating net income and net realized capital gains in respect of the asset portfolio that corresponds to that class, taking into account appropriate class-specific expenses. The amount of distributions to the unitholders of that particular class each year will be equal to the ratio of the net income and net realized capital gains in respect of the asset portfolio that corresponds to that class to the aggregate net income and net realized capital gains of all asset portfolios, multiplied by the trust's net income and net realized capital gains for the year. In determining the amount of distributions of class net income and net realized capital gains to be made by the trust, losses that may have been incurred in respect of any particular asset portfolio will be taken into account in that such losses will reduce or eliminate any distribution that units of that class might otherwise have received. However, to the extent that the trust has a non-capital or net capital loss for any particular year, this loss will not be "earmarked" to be used in subsequent years only for the benefit of the class in respect of which the loss arose. Rather, loss carry forwards will be used to determine trust net income or net realized capital gains to be distributed, and thus the amount to be apportioned between the various classes of that trust, in any particular year. It is intended that the trust will distribute only net income and net realized capital gains to its unitholders each year, and not return capital. The amount of distributions to a unitholder for a year will be reinvested in additional units of the same class of units held by the unitholder or such other class of units as the unitholder may elect and such distributions will be made on the last business day of the year. For greater certainty, the trust agreements will also provide that each unitholder shall have the legal right to enforce payment of any amount that is due and payable.

PURPOSE OF PROPOSED TRANSACTIONS

14.The Canusa Pension Trust and the Global Pension Trust are pooling vehicles which will offer pension fund clients an opportunity to have their assets aggregated with those of other pension trusts to achieve economies of scale. The use of separate classes of units, each corresponding to a particular portfolio of assets, is intended to permit the pooling to occur in a single vehicle for ease of administration but still allow the pension trust to have an investment mix matched to its particular funding status and obligations.

15.The two pooling vehicles are being created to segregate North American assets currently managed directly by AB Management from those foreign assets, chosen by AB Management, that are managed by other investment advisors.

RULING GIVEN

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

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 Canusa Pension Trust or the Global Pension Trust a deduction in computing its income under paragraph 104(6)(b) of the Act.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and is binding on Revenue Canada provided that the trust agreements for the Canusa and Global Pension Trusts are signed and effective within six months of the date of this letter.

Yours truly,

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