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:
Will the establishment of a pension corporation (PC1) as described in subparagraph 149(1)(o.2)(iii) and the subsequent transfer of property from a pension corporation (PC2) as described in paragraph 149(1)(o.1) with PC2 holding all of the outstanding shares of PC1, for the purpose of increasing the percentage of underlying foreign property, be abusive for purposes of subsection 245(2) of the Act?
Position: No
Reasons:
Provisions of sections 206 and 259 of the Act are not offended. We have previously ruled that GAAR will not apply to similar arrangements involving trusts that are structured to maximize the percentage of foreign property being held under a trust structure.
XXXXXXXXXX 2003-004182
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") XXXXXXXXXX
This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Corporation. We acknowledge receipt of your letters dated XXXXXXXXXX and the information provided in our various telephone conversations (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the Corporation, none of the issues involved in the ruling request is:
(i) in an earlier return of the Corporation or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation or a related person;
(iii) under objection by the Corporation or a related person;
(iv) before the courts; or,
(v) the subject of a ruling previously issued by the Directorate.
In this ruling, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act") and the regulations thereunder (the "Regulations") and the terms "Cost Amount" and "Foreign Property" have the meanings assigned for the purposes of Part XI of the Act.
Facts
1. The Corporation is a corporation without share capital, XXXXXXXXXX. The Corporation is required to administer the XXXXXXXXXX (the "Pension Plan") and manage the assets that provide the benefits under the Plan (the "Pension Fund"). The Corporation carries on no activities other than administering the Pension Plan and investing and managing the Pension Fund and carries on such activities solely at its offices in XXXXXXXXXX. The Pension Fund is not a separate trust fund. The Corporation owns the assets constituting the Pension Fund.
2. XXXXXXXXXX. Pursuant to such agreement, the Board consists of XXXXXXXXXX members, none of whom are members of management. The Board functions as a board of directors would function. The members of the Board have the power and authority to manage the affairs of the Corporation.
3. The Corporation qualifies as a corporation described in paragraph 149(1)(o.1) of the Act.
4. While overall investment policy for the Pension Fund is set by the Corporation and is implemented by an investment committee of the Board, day-to-day decisions regarding investment of the Pension Fund are made by the Corporation's Investment Division, which is staffed with investment professionals authorized by the Board to invest the Pension Fund, and by certain external investment managers with whom the Corporation has contracted to manage certain portions of the Pension Fund.
5. The Pension Plan is required to be administered in accordance with XXXXXXXXXX the Pension Benefits Act (XXXXXXXXXX) (the "PBA") and the Regulations thereunder (the "PBA Regulations"). With respect to the selection of investments, the PBA Regulations state that the assets of every pension plan are to be invested in accordance with the federal investment regulations which are defined in the PBA Regulations to include certain sections of, and Schedule III to, the Pension Benefits Standards Regulations, 1985 made under the Pension Benefits Standards Act, 1985 (Canada) as it read on December 31, 1999 (the "Federal Investment Regulations").
6. The PBA imposes a general standard of care and prudence upon the administrator of a pension plan (in this case, the Corporation) which extends to all of the administrator's responsibilities, including those relating to pension fund administration and investment. Furthermore, every person who is engaged in selecting a pension fund investment must ensure that the investment is selected in accordance with the PBA and the PBA Regulations.
7. The Corporation's investment activities include investing in, or obtaining exposure to, a wide variety of securities and other investment instruments, managing cash and currency exposures, making use of derivatives and participating in securities lending arrangements. The Corporation invests in Canada and globally in investments that are both internally and externally managed.
8. The Federal Investment Regulations provide, among other things, that no pension plan may invest in more than 30% of the securities of a corporation that have attached to them the right to vote to elect the directors of the corporation, with the exception of "real estate corporations", "resource corporations" and "investment corporations", each of which terms are defined in the Federal Investment Regulations.
9. Under the Federal Investment Regulations, an "investment corporation", in respect of a plan, is a corporation that:
a) is limited in its investments to those that are authorized for the plan under Schedule III of the Federal Investment Regulations,
b) holds at least 98% of its assets in cash, investments and loans,
c) does not issue debt obligations,
d) obtains at least 98% of its income from investments and loans, and
e) does not lend any of its assets to, or invest any of its moneys in, a related party of the plan.
10. Pursuant to the Federal Investment Regulations and the PBA, the administrator of a pension plan must obtain from an investment corporation and deposit with the XXXXXXXXXX an undertaking of the investment corporation that the investment corporation will:
a) file audited financial statements containing the prescribed details with XXXXXXXXXX at the times requested;
b) permit XXXXXXXXXX to examine its books and records;
c) meet the requirements of the definition of an investment corporation as set forth above; and
d) not invest in more than 30% of the securities of another investment corporation to which are attached votes to elect the directors of that other investment corporation unless it first obtains a similar undertaking from the other investment corporation for deposit with XXXXXXXXXX of the same nature as the undertaking filed by the first mentioned investment corporation.
Proposed Transactions
11. The Corporation will incorporate as a wholly-owned subsidiary a corporation (the "Pension Corporation") under the Business Corporations Act XXXXXXXXXX. The Corporation will obtain, and deposit with XXXXXXXXXX, the undertaking of the Pension Corporation required by the Federal Investment Regulations.
12. It is also intended that the Pension Corporation will be at all relevant times a corporation described in subparagraph 149(1)(o.2)(iii) of the Act. The Corporation is a prescribed person XXXXXXXXXX for the purposes of subclause 149(1)(o.2)(iv)(D) of the Act.
13. Pursuant to the requirements of the XXXXXXXXXX, the Corporation as the shareholder of the Pension Corporation will elect a board of directors to supervise the management of the business and affairs of the Pension Corporation and the board of directors will appoint officers. It is expected that the directors and officers of the Pension Corporation will be drawn from a small number of members of management of the Corporation. Pursuant to the XXXXXXXXXX, the board of directors of the Pension Corporation has the obligation to supervise the management of the business and affairs of the Pension Corporation.
14. The authorized capital of the Pension Corporation will consist of a class of common shares and a class of preferred shares, issuable in series. Initially, it is expected that common shares will be issued, although in the future preferred shares may be issued as well. In connection with the initial organization of the Pension Corporation, the Corporation will subscribe for common shares of the Pension Corporation in consideration for cash and/or the transfer of certain (but not all) assets currently owned directly by the Corporation. Hence, both the Corporation and the Pension Corporation will each own investments.
15. The Pension Corporation will adopt a statement of investment policies and procedures that complies with the requirements of the Federal Investment Regulations, and will also establish its statement of investment restrictions and guidelines, which will comply with all of the applicable regulatory requirements in order for the Pension Corporation to continue to qualify as both an "investment corporation" and as a corporation described in subparagraph 149(1)(o.2)(iii) of the Act. In addition, the Pension Corporation will restrict its holding of property such that at each month-end (i) the Cost Amount of its Foreign Property will not exceed 30% of the Cost Amount of all of its property and (ii) the value of its shares will not be derived, directly or indirectly, primarily from Foreign Property.
16. The Pension Corporation will enter into an agreement with the Corporation to provide certain administrative and investment services in respect of the portfolio assets held by the Pension Corporation (the "Services Agreement"). The Services Agreement will be entered into for an initial term of one year and will be renewed on an annual basis upon approval of the parties. No fees will be charged by the Corporation to the Pension Corporation for such services except that advisory fees, monitoring fees, placement fees and directors' fees earned from entities in which the Pension Corporation has invested will be paid to the Corporation. In addition, all expenses, such as brokerage, interest and regulatory fees, and taxes related to the investment and administrative services will be for the account of the Pension Corporation and the Corporation will be entitled to be reimbursed for any expenses paid by it on behalf of the Pension Corporation. Pursuant to the Services Agreement, the Corporation will recommend investments to the Pension Corporation. If the Pension Corporation approves the investment, then the Corporation will arrange for the execution of the investment instructions. All contracts of the Pension Corporation will be approved and executed by the Pension Corporation.
17. The Pension Corporation will not be a "public corporation" under the Act and common shares will not, under the terms and conditions thereof or any agreement relating thereto, be convertible into, exchangeable for or confer a right to acquire property that is Foreign Property.
18. The Pension Corporation will not elect pursuant to subsections 259(1) and 259(3) of the Act with respect to its shares held by the Corporation. Depending on the Cost Amount of the properties of the Corporation and the Pension Corporation from time to time, the liability for taxes under Part XI of the Act for the Corporation and the Pension Corporation collectively may be greater if section 259 of the Act applied than if it does not.
Purpose of Proposed Transactions
19. The Corporation desires to incorporate the Pension Corporation to recognize some of the same benefits enjoyed by other groups generally. For example, these benefits include limiting the amount of assets at risk in respect of particular types of liabilities and providing those that contract with the separate entity, a separate credit profile. Governments appear to have recognized that pension plans can benefit from the use of subsidiaries for similar purposes by permitting pension plans to own more than 30% of the voting securities of corporations such as investment corporations, provided such corporations themselves comply with the investment requirements of pension law and regulations. Also, the Pension Corporation will be able to invest up to 30% of the Cost Amount of its property in Foreign Property without increasing the proportion of the Corporation's properties that are considered to be Foreign Property for the purposes of Part XI of the Act.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are as described above, we rule as follows:
A. Common shares of the Pension Corporation held by the Corporation will not be Foreign Property for purposes of Part XI of the Act.
B. Section 259 of the Act will not apply to the Corporation in respect of its shares of the Pension Corporation, such that for purposes of Part XI of the Act the Corporation will not be deemed to hold its specified portion of each asset held by the Pension Corporation.
C. Subsection 245(2) of the Act will not apply as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences arising from the above rulings.
The above rulings, which are based on the Act in its 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 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch
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