CRA rules on the use of s. 107.4(1) to effect the spin-off by a REIT of a portion of its operations to a new REIT

CRA ruled on a transactions for the spin-off by an existing REIT of a portion of its operations (the “Segment”) to a newly formed REIT.

In addition to numerous transactions to properly package the Segment, the Plan-of-Arrangement transactions included the REIT settling the New REIT, subscribing a modest amount (in the form of a REIT note issued by it to New REIT) in consideration for New REIT units equal in number to the number of outstanding REIT units, distributing a modest amount of cash to a depositary for its unitholders, and selling its units of the New REIT to the unitholders for such cash. At that point, New REIT might just marginally exceed the numerical thresholds in Regs. 4801 and 4803.

The REIT was then to transfer the Segment to New REIT in a gratuitous transfer that apparently was intended to qualify as a “sideways” transfer in accordance with s. 107.4(2), with CRA ruling that the transfer would be a “qualifying disposition” under the definition in s. 107.4(1), so that the rollover rules in s. 107.4(3) could apply.

The proposed transactions also contemplated that the “Investor” (a tax-exempt resident, perhaps a pension corporation) would transfer a significant portfolio of properties to New REIT in consideration for New REIT units, including non-voting Series B units that were convertible into the “regular” Series A listed units.

CRA also ruled that the transactions would not by themselves adversely affect the qualification of the REIT as a mutual fund trust. This, inter alia, was adverting to the proposed giving by the REIT of an indemnity to the subsidiaries of New REIT to make them whole if any residual guarantees of Segment entities in respect of properties retained in the REIT entities were called upon.

Neal Armstrong. Summary of 2021 Ruling 2021-0894161R3 under s. 107.4(1).