Principal Issues: A segregated fund proposes to acquire units of an investment trust. Will this cause the investment trust to be considered a financial institution under paragraph (b) of the definition of "financial institution" in subsection 142.2(1) of the Act?
Position: Based on the facts provided, the acquisition by the segregated fund will not, in itself, cause the investment trust to be considered a financial institution.
Reasons: In order to determine whether the investment trust falls within the scope of paragraph (b) of the financial institution definition, we need to consider whether the segregated fund is itself a financial institution. The facts provided indicate that the segregated fund is not a financial institution.
XXXXXXXXXX 2006-018736
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the Ruling request:
(i) is in an earlier return of the taxpayers or a related person;
(ii) is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers 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 to the taxpayers by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
"ACO" means XXXXXXXXXX.
"Declaration of Trust" means the declaration of trust for the XXXXXXXXXX dated XXXXXXXXXX.
"Financial institution" has the meaning assigned by subsection 142.2(1).
"Fund" means the XXXXXXXXXX.
"Insurer" means XXXXXXXXXX.
"Seg Fund" means the XXXXXXXXXX.
Facts
1. ACO is a corporation existing under the laws of XXXXXXXXXX, and is a "taxable Canadian corporation" as defined in subsection 89(1).
2. ACO is the sole trustee and manager of the XXXXXXXXXX, which are open-end trusts created under the law of the Province of XXXXXXXXXX pursuant to the Declaration of Trust. The XXXXXXXXXX include the Fund.
3. The Declaration of Trust provides that the interests of all beneficiaries of the Fund are evidenced by units, which may be issued in series. The net asset value in respect of each series of the Fund is computed by ACO as of the close of business on every business day. Unitholders are entitled under the Declaration to redeem their units at the applicable series net asset value per unit on the business day next following the day on which the notice of redemption is received by ACO.
4. To date, the Fund has issued and outstanding units of a single series.
5. To date, units of the Fund have been marketed to, and are generally held by, registered pension plans.
6. The Fund is a trust resident in Canada and qualifies as a "unit trust" as defined in subsection 108(2). It does not currently qualify as a "mutual fund trust" as defined in subsection 132(6) by virtue of the fact that it does not comply with the prescribed conditions referred to in paragraph 132(6)(c).
7. You advise that the Fund is not currently a financial institution.
8. The Insurer is a life insurance stock company governed by the laws of XXXXXXXXXX and is a "taxable Canadian corporation", a "public corporation" and an "insurance corporation" as defined under subsections 89(1) and 248(1). The Insurer is also a financial institution.
9. The Insurer established the Seg Fund in XXXXXXXXXX. The Seg Fund is a "related segregated fund trust" within the meaning of subsection 138.1(1).
10. All or substantially all of the property held in the Seg Fund was funded with premiums paid by policyholders under a segregated fund policy, and no material amount of such premiums have been paid by policyholders who are financial institutions.
11. You advise that the Seg Fund is not a financial institution.
Proposed Transaction
12. The Seg Fund will subscribe for units of the Fund. The total fair market value of units of the Fund held by the Seg Fund may exceed XXXXXXXXXX% of the fair market value of all outstanding units of the Fund.
Purpose of the Proposed Transaction
13. ACO wishes to offer units in the Fund to the Seg Fund in order to broaden the investor base of the Fund.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transaction, and purpose of the proposed transaction, and provided further that the proposed transaction is carried out as described above, we confirm that:
Provided the Seg Fund is not currently a financial institution as defined in subsection 142.2(1), in determining whether or not the Fund is a financial institution as defined in subsection 142.2(1) for purposes of the mark-to-market rules, the units held by the Seg Fund will not be regarded as units held by a financial institution as defined in 142.2(1) for purposes of the mark-to-market rules in the Act.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the Canada Revenue Agency provided that the proposed transaction is completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch