2018 Ruling 2017-0681471R3 - Variation of 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.

Principal Issues: 1. Whether the amendment of the trust indenture will result in a resettlement of the trust or a disposition by the beneficiaries of their interest in the trust. 2. Whether the conversion of XXXXXXXXXX Class XX Units into XXXXXXXXXX Class U Units will result in a disposition.

Position: 1. There will be no resettlement of the trust or disposition by the beneficiaries of their interest in the trust. 2. There will be no disposition on the conversion of the Class XX Units into Class U Units.

Reasons: 1. Changes did not result in a fundamental change to the beneficiaries' rights or the terms of the trust. 2. The attributes of each class are substantially the same, the unitholder is not entitled to proceeds of disposition for the units and that the Class XX Units are not cancelled or redeemed.

XXXXXXXXXX							2017-068147

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (Trust account number 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-named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

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

(i) is in a previously filed tax return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by this Directorate.

Further, the above-referenced taxpayer represents that the Proposed Transactions will not result in it or any related person being unable to pay its outstanding tax liabilities.

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter (the “Act”).

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

DEFINITIONS

In this letter, unless otherwise specified, all references to monetary amounts are in Canadian dollars and the following terms have the meanings specified:

“Administrative Amendments” are the transactions described in Paragraphs 21 and 22;

“Applicable Number of Class U Units” means the number of Class U Units issuable per Class X Unit or Class XX Unit pursuant to Section XXXXXXXXXX of the Declaration of Trust;

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

XXXXXXXXXX;

“Class X Units” means the units of beneficial interest in the Trust, designated as XXXXXXXXXX, the terms of which are described in Paragraph 8;

“Class XX Units” means the units of beneficial interest in the Trust, designated as XXXXXXXXXX, the terms of which are described in Paragraph 8;

“Class U Units” means the units of beneficial interest in the Trust, designated as “Class U Units”, the terms of which are described in Paragraph 8;

“Conversion” means the conversion of Class XX Units into Class U Units, as described in Paragraph 25;

“Converting Unitholder” means XXXXXXXXXX, a taxable Canadian corporation, more fully described in Paragraph 18;

“CRA” means the Canada Revenue Agency;

“Currency Amendments” means, collectively, the proposed amendments to the Declaration of Trust that are described in Paragraph 20;

“Declaration of Trust” means the declaration of trust pursuant to which the Trust was formed under the laws of the Province of XXXXXXXXXX, as may be amended, supplemented and/or restated from time to time, most recently amended and restated as of XXXXXXXXXX;

“disposition” has the meaning described in subsection 248(1);

“Effective Date” means a date determined by the Trustees within sixty (60) days following the date of the Special Resolution contemplated by Paragraph 20;

“Exchangeable Securities” means Class X Units, Class XX Units, Class B limited partnership units of XXXXXXXXXX, Class B limited partnership units of XXXXXXXXXX, exchangeable limited partnership units of XXXXXXXXXX and any other securities of a subsidiary of the Trust that are convertible, exchangeable or redeemable for Units;

“IFRS” means the International Financial Reporting Standards;

“Manager” means XXXXXXXXXX and includes any successors or assigns;

“mutual fund trust” is defined in subsection 132(6);

“non-portfolio property” has the meaning assigned by subsection 122.1(1);

“Non-residents” means non-residents of Canada within the meaning of the Act and includes partnerships that are not Canadian partnerships;

“open-ended investment trust” means a trust that qualifies as a unit trust under paragraph 108(2)(a);

“Paragraph” means a numbered paragraph in this advance income tax ruling;

“Proportionate Class X Interest” means XXXXXXXXXX times the distribution on a Class U Unit, as adjusted from time to time in accordance with the Declaration of Trust;

“Proportionate Class XX Interest” means XXXXXXXXXX times the distribution on a Class U Unit, as adjusted from time to time in accordance with the Declaration of Trust;

“Proposed Transactions” means the transactions described in Paragraphs 19 to 25;

“Reorganization” has the meaning described in Paragraph 15;

“SIFT trust” has the meaning assigned in subsection 122.1(1);

“Special Resolution” means a resolution proposed to be passed as a special resolution at a meeting of Unitholders held in accordance with the Declaration of Trust and passed by the affirmative votes of the holders of more than XXXXXXXXXX% of the Units (and Special Voting Units) represented at the meeting and voted on a poll upon such resolution;

“Special Voting Units” means the interests in the Trust described in Paragraph 12;

“Special Voting Unitholder” means a holder of one or more Special Voting Units;

“Stock Exchange” means the XXXXXXXXXX Stock Exchange;

“Subdivision Actions” means, collectively, the proposed actions described in Paragraph 19;

“XXX Declaration of Trust” has the meaning described in Paragraph 23;

“Trust” means XXXXXXXXXX, a trust established under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;

“Trust Amendments” refers collectively to the Currency Amendments and the Administrative Amendments;

“Trustees” means the trustees of the Trust;

“unit trust” is defined in subsection 108(2);

“Units” means the Class X Units, the Class XX Units, and the Class U Units, collectively;

“Unitholder” means a holder of one or more Units or a fraction thereof; and

XXXXXXXXXX.

FACTS

1. The Trust is an unincorporated, open-ended investment trust. The Trust has qualified at all relevant times as a unit trust and as a mutual fund trust. The Trust was established for the principal purpose of providing Unitholders with stable distributions of cash from commercial real estate properties located in XXXXXXXXXX. A majority of the Trustees of the Trust must be resident in Canada for purposes of the Act.

2. The Trust’s address is XXXXXXXXXX. The Trust is served by the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Tax Centre. The fiscal year end of the Trust is XXXXXXXXXX. The trust account number of the Trust is XXXXXXXXXX and the business number of the Trust is XXXXXXXXXX.

3. The Trust is governed by its Trustees in accordance with, and subject to, the terms of the Declaration of Trust. The Manager has been approved pursuant to the terms of a management agreement to undertake certain activities for and on behalf of the Trust.

4. The Declaration of Trust generally provides, inter alia, that at no time may Non-residents be the beneficial owners of more than XXXXXXXXXX% of the Units then outstanding.

5. The Trust is not a SIFT trust and has not at any relevant time held any non-portfolio property. Section XXXXXXXXXX of the Declaration of Trust includes investment restrictions providing, inter alia, that the Trust may only invest primarily, directly or indirectly, in interests (including fee ownership and leasehold interests) in commercial real estate properties located in XXXXXXXXXX and assets ancillary thereto for the operation of such real estate.

6. The beneficial interests in the Trust are represented by units, which have the rights and are subject to the limitations, restrictions and conditions set out in the Declaration of Trust.

7. The Declaration of Trust provides for four classes of units: Class X Units, Class XX Units, Class U Units, and Special Voting Units.

8. The Declaration of Trust sets out the following terms in respect of the Units:

a) Class X Units shall be denominated in Canadian dollars, while Class U Units and Class XX Units shall be denominated in XXXXXXXXXX;

b) Distributions on the Units, including any returns of capital and the distribution of proceeds on the termination of the Trust, will be determined and declared in XXXXXXXXXX;

c) Distributions on the Class X Units, including any return of capital and the distribution of proceeds on the termination of the Trust, will be converted into Canadian dollars at the spot exchange rate available to the Trust in respect of such distribution and holders of Class X Units will receive distributions in Canadian dollars;

d) Distributions on Class XXXXXXXXXX Units will be paid in XXXXXXXXXX;

e) Distributions on Class U Units will be paid in XXXXXXXXXX unless a holder of Class U Units elects to receive distributions in Canadian dollars;

f) Each Unitholder shall be entitled to one vote per Unit held (and each Special Voting Unitholder shall be entitled to such number of votes as determined based on the related Exchangeable Securities, per the Declaration of Trust) and votes of Unitholders and Special Voting Unitholders will be conducted with holders of Class X Units, Class XX Units, Class U Units and Special Voting Units voting together as a single class; and

g) Each Unit entitles the holder to the same rights and obligations as a Unitholder and no Unitholder is entitled to any privilege, priority or preference in relation to any other Unitholder, subject to the proportionate entitlement of the holders of Class X Units, Class XX Units and Class U Units to participate in distributions made by the Trust and to receive proceeds on a redemption of Units and/or upon termination of the Trust.

9. The Declaration of Trust provides that, for the purposes of making a distribution by the Trust, the Trustees shall establish a distribution per Class U Unit and each Class X Unit and Class XX Unit shall be entitled to a distribution calculated based on the Proportionate Class X Interest and the Proportionate Class XX Interest, respectively.

10. The Proportionate Class X Interest and the Proportionate Class XX Interest are also used to calculate the amounts payable to each holder of such Units on a redemption of such Units or on the termination of the Trust.

11. The Declaration of Trust grants each holder of Class X Units and Class XX Units the right at any time to require the Trust to convert such Units for a number of Class U Units that is computed on the basis of the Proportionate Class X Interest and the Proportionate Class XX Interest, respectively (i.e., each holder may convert XXXXXXXXXX Class X Unit for XXXXXXXXXX Class U Units or XXXXXXXXXX Class XX Unit for XXXXXXXXXX Class U Units). Where this conversion would result in a fraction of a Class U Unit, such fractional Class U Unit shall not be issued by the Trust and the number of Class U Units that shall be issued shall be rounded down to the nearest whole number of Class U Units.

12. The Declaration of Trust provides that Special Voting Units have no economic entitlement nor beneficial interest in the Trust or in the distribution of assets in the Trust but are entitled to voting rights as described in Paragraph 8(f). Special Voting Units may only be issued in connection with or in relation to Exchangeable Securities. Special Voting Units have never been issued and there is no intention of ever issuing Special Voting Units in connection with, or in relation to, Class X Units or Class XX Units.

13. The Class U Units are listed for trading on the Stock Exchange under the symbols XXXXXXXXXX. The Class X Units and Class XX Units are not listed for trading on any stock exchange. As of XXXXXXXXXX, there were approximately XXXXXXXXXX Class X Units, XXXXXXXXXX Class XX Units, and XXXXXXXXXX Class U Units issued and outstanding.

14. Pursuant to Section XXXXXXXXXX of the Declaration of Trust, the Trustees may subdivide or consolidate the issued and outstanding Units and Special Voting Units from time to time without notice to or approval of the Unitholders or Special Voting Unitholders.

15. Section XXXXXXXXXX of the Declaration of Trust provides that in the event that there is a change in the number of Class X Units, Class XX Units or the Class U Units outstanding from time to time as a result of a subdivision, distribution of Units, consolidation (other than a pro rata distribution of Units immediately followed by a consolidation pursuant to Section XXXXXXXXXX) or similar change (a “Reorganization”), the Applicable Number of Class U Units in respect of one Class X Unit or Class XX Unit immediately following the Reorganization and the Proportionate Class X Interest and the Proportionate Class XX Interest will be adjusted to reflect such Reorganization.

16. The Declaration of Trust provides that the addition, change or removal of the rights, privileges, restrictions or conditions attached to the Units must be duly approved by a Special Resolution.

17. The Declaration of Trust permits the issuance of fractional Units. Fractional Units have the rights, restrictions, conditions and limitations attaching to whole Units in the proportion that they bear to a whole Unit, provided however that fractional Units do not entitle the holders thereof to notice of or to attend or to vote at meetings of Unitholders except to the extent that they may represent, in the aggregate, one or more whole Units. Notwithstanding the foregoing, the Trust or the transfer agent of the Units may choose not to issue fractional Units.

18. Converting Unitholder is resident in Canada for purposes of the Act and holds approximately XXXXXXXXXX Class XX Units as capital property. The business number of the Converting Unitholder is XXXXXXXXXX. The Converting Unitholder’s address is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Centre.

PROPOSED TRANSACTIONS

19. On the Effective Date, the Trustees of the Trust will subdivide each Class X Unit and each Class XX Unit into a greater number of Class X Units or Class XX Units, as applicable, based upon the relevant Proportionate Class X Interest and Proportionate Class XX Interest, as follows:

			Number of Units		Number of Units
			before subdivision	after subdivision
Class X Unit	XXXXXXXXXX			XXXXXXXXXX
Class XX Unit 	XXXXXXXXXX			XXXXXXXXXX

Pursuant to the authority granted by Sections XXXXXXXXXX of the Declaration of Trust, the foregoing will be implemented pursuant to a resolution of the Trustees that will provide:

a) the Trust is authorized to subdivide the Class X Units effective on the Effective Date on the basis of a subdivision ratio of XXXXXXXXXX pre-subdivision Class X Unit for XXXXXXXXXX post-subdivision Class X Units, subject to any required rounding as per Paragraph 19(c);

b) the Trust is authorized to subdivide the Class XX Units effective on the Effective Date on the basis of a subdivision ratio of XXXXXXXXXX pre-subdivision Class XX Unit for XXXXXXXXXX post-subdivision Class XX Units, subject to any required rounding as per Paragraph 19(c);

c) to the extent the number of post-subdivision Class X or Class XX Units otherwise determined would include a fractional Class X or Class XX Unit, the number of post-subdivision Class X or Class XX Units issued to any particular Unitholder will be rounded down to the nearest whole number of Class X or Class XX Units, as applicable;

d) the Proportionate Class X Interest and the Proportionate Class XX Interest will be adjusted on the Effective Date to XXXXXXXXXX and all Units will have equal rights, including on distributions from the Trust, on redemptions of Units and on the termination of the Trust; and

e) each Class X Unit and each Class XX Unit will remain convertible and may be converted into a Class U Unit on a one-for-one basis.

20. Following receipt of the approval of Unitholders pursuant to a Special Resolution as contemplated by Sections XXXXXXXXXX of the Declaration of Trust, and upon the Effective Date, the Declaration of Trust will be amended as follows (the “Currency Amendments”):

a) The Units shall be denominated in XXXXXXXXXX and specifically, Section XXXXXXXXXX of the Declaration of Trust will be amended to provide that the Units shall be denominated in XXXXXXXXXX.

b) Distributions on the Units, including any returns of capital and the distribution of proceeds on the termination of the Trust, will be determined and declared in XXXXXXXXXX and specifically, Section XXXXXXXXXX of the Declaration of Trust will be amended to provide that:

i) distributions on the Units will be made in XXXXXXXXXX (unless a Unitholder elects to receive distributions in Canadian dollars);

ii) Unitholders may from time to time elect to change the currency of the distributions he or she receives;

iii) each holder of Class X Units is deemed to have elected to receive distributions in Canadian dollars (unless such election is changed); and

iv) if a Unitholder elects to receive distributions in Canadian dollars, the Trust will convert the XXXXXXXXXX distribution payable into Canadian dollars at the spot exchange rate available to the Trust and the Unitholder will receive the distribution in Canadian dollars.

Further, Section XXXXXXXXXX of the Declaration of Trust will be amended to delete the provisions that were equivalent to Paragraph 20(b)(iv) that previously applied only to the Class X Units.

c) The Declaration of Trust will be further amended to clarify that redemption proceeds payable by the Trust in respect of the Units will be determined in XXXXXXXXXX and specifically, Section XXXXXXXXXX of the Declaration of Trust will be amended to provide that:

i) redemption proceeds in respect of the Units will be made in XXXXXXXXXX (unless a Unitholder elects to receive redemption proceeds in Canadian dollars);

ii) each holder of Class X Units is deemed to have elected to receive redemption proceeds in Canadian dollars (unless such election is changed); and

iii) if a Unitholder elects to receive redemption proceeds in Canadian dollars the Trust will convert the XXXXXXXXXX redemption proceeds into Canadian dollars at the spot exchange rate available to the Trust and the electing Unitholder will receive the redemption proceeds in Canadian dollars.

21. The Declaration of Trust will be amended consequentially for the Subdivision Actions:

a) Section XXXXXXXXXX of the Declaration of Trust will be amended to add a definition of the “2018 Subdivision”.

b) The definitions of “Applicable Number of Class U Units”, “Proportionate Class X Interest”, and “Proportionate Class XX Interest” in Section XXXXXXXXXX of the Declaration of Trust will be amended to set the numerical value at XXXXXXXXXX for all Units.

c) Section XXXXXXXXXX of the Declaration of Trust will be amended to provide for the rounding down of Units as contemplated by the Subdivision Actions.

22. The following sections of the Declaration of Trust will be amended to make various administrative changes:

XXXXXXXXXX

23. The Currency Amendments and the Administrative Amendments will be reflected in the proposed XXXXXXXXXX amended and restated declaration of trust (the “XXX Declaration of Trust”) as approved by a resolution of the Trustees that will provide that the amendments to the Declaration of Trust shall not constitute or be considered a termination of the Trust or a resettlement of the Trust or the settlement or the establishment of a new trust, which statements are consistent with the existing recitals of the Declaration of Trust and Section XXXXXXXXXX thereof.

24. The Subdivision Actions will be implemented at the same time as the XXX Declaration of Trust becomes effective on the Effective Date.

25. At a time within ninety (90) days following the Effective Date, the Converting Unitholder will convert XXXXXXXXXX Class XX Units into XXXXXXXXXX Class U Units (the “Conversion”) in accordance with the XXX Declaration of Trust. No Units will be redeemed or cancelled as a result of the Conversion. The Class U Units issued upon the Conversion will have a net asset value equal to the net asset value of the converted Class XX Units.

ADDITIONAL INFORMATION

26. No cash or amount will be paid to any Unitholder by the Trust for any rounding that occurs pursuant to Paragraph 19(c).

27. No Unitholder will be entitled to consideration or proceeds of disposition in respect of his, her or its beneficial interest in the Trust as a result of the Proposed Transactions.

28. None of the Proposed Transactions will result in a change to the total capital of the Trust.

29. The Trust Amendments will not result in a resettlement of the Trust or the creation of a new trust under the laws of XXXXXXXXXX.

30. Management of the Trust has confirmed that, following the Proposed Transactions, the Units shall be required to be reported as equity and not as a liability under the IFRS in the financial statements of the Trust. The financial auditors of the Trust have reviewed and confirmed this conclusion.

PURPOSES OF THE PROPOSED TRANSACTIONS

31. The purpose of the Subdivision Actions and the Currency Amendments is to simplify the structure of Unitholders’ holdings by enhancing the level of consistency between the terms of the Class X Units, the Class XX Units and the Class U Units, thereby clarifying Unitholders’ entitlements and reducing the administrative burden on the Trust.

32. Currently, the Units are recorded as liabilities in the financial statements of the Trust under the IFRS. XXXXXXXXXX.

33. The purpose of the Administrative Amendments is to update and correct minor aspects of the Declaration of Trust to improve the readability of the Declaration of Trust.

34. The purpose of the Conversion is to acquire Class U Units that are liquid given that such units are listed and traded on the Stock Exchange.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our rulings are as follows:

A. Except for a disposition of a fractional interest in the Class X Units or the Class XX Units arising from the rounding contemplated in Paragraph 19(c), the Proposed Transactions will not, in and by themselves, result in a disposition by any Unitholder of all or part of his, her or its beneficial interest in the Trust.

B. The Proposed Transactions will not, in and by themselves, result in a disposition by the Trust of its property or in a resettlement of the Trust for purposes of the Act.

C. The Conversion, described in Paragraph 25, will not, in and by itself, be considered to be a disposition by the Converting Unitholder of the Class XX Units for purposes of the Act.

CAVEATS

Nothing in this letter 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. In particular we express no opinion with respect to:

(a) whether the Proposed Transactions will result in a legal resettlement of the Trust under the laws of the Province of XXXXXXXXXX;

(b) whether any specific changes or amendments to the Declaration of Trust before the present time would impact on the specific rulings given;

(c) whether the Trust is, at any particular time, a mutual fund trust within the meaning of subsection 132(6) or a unit trust within the meaning of subsection 108(2); and

(d) whether any changes made to the Declaration of Trust, not described herein, as a result of recommendations from XXXXXXXXXX would result in a resettlement of the Trust and/or a disposition by any Unitholder of all or part of his, her or its beneficial interest in the Trust.

The above advance income tax rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

Yours truly,

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