2007 Ruling 2007-0237011R3 - XXXXXXXXXX - foreign buy-out of Canadian MFT -- summary under Subparagraph 53(2)(h)(i.1)

Beginning structure

The Fund, a listed mutual fund trust held units and debt of Trust, which held all the units (being B units) of a Canadian limited partnership (LP1) and the shares of its general partner (GPco 1). LP1 holds all the units of a Canadian limited partnership (LP2) and the shares of its general partner (GPco 2).

Fund takeover transactions

Newco (owned and funded by Holdco) acquired all the Fund units for cash and subscribed for Class B LP1 units and GPco 1 shares to fund debt repayments. Newco acquired the shares of “Target Subsidiaries.” Newco amalgamated with GPco 1, GPco 2, and the Target Subsidiaries to form Newco-Amalco.

Proposed transactions

1. The Trust will transfer all of its Class B LP1 Units to Newco-Amalco for a promissory note, payable on demand (the "Newco-Amalco Note").
2. The Trust will distribute the Newco-Amalco Note to the Fund as payment of the taxable capital gain realized in 1, repayment of Trust notes and a capital distribution (including non-taxable portion of capital gain realized).
3. The Trust will make a s. 104(21) designation in its current year’s return.
4. The Trust will redeem all of the Trust Units for nominal proceeds, thereby recognizing a capital loss.
5. The Fund will declare a distribution payable to Newco-Amalco with such distribution to be paid by delivery of a promissory note, payable on demand (the "Fund Note"). The Fund Note will constitute a payment of the taxable capital gain deemed to be realized under 2 and 3 and of a capital distribution.
6. The Fund Note and the Newco-Amalco Note will be set off against each other.
7. The Fund will make a s. 104(21) designation in its current year’s return.
8. Newco-Amalco and Holdco will amalgamate.

Rulings

Include: on the distribution in 2, the Fund will be deemed by s. 107(2.1) to have acquired the Newco-Amalco Note at a fair market value cost and the Fund will not be deemed to have any proceeds of disposition of the Trust Units.

Ss. 53(2)(h)(i.1)(A) and 53(2)(h)(i.1)(B)(I) will apply such that the ACB of the Trust Units to the Fund, and of the Fund Units to Newco-Amalco, will not be reduced for the amount included in the Fund's or Newco-Amalco’s income under 2 or 5, and for the s. 104(21) amounts in 3 or 7.