Principal Issues: [TaxInterpretations translation] Is it a disposition if units of a particular segregated fund with a redemption fee are exchanged for units of a segregated fund without a redemption fee?
Position: Yes.
Reasons: This transaction would be a disposition under paragraph (a) of the definition of "disposition" in subsection 248(1).
2006-017409 XXXXXXXXXX Guy Goulet, CA, M.Fisc. (819) 986-8098 October 24, 2006
Dear Madam,
Subject: Disposition of shares in a segregated fund
This is in response to your email of February 28, 2006, and our telephone discussions in which you asked whether the transfer described below would result in a disposition for purposes of the Income Tax Act (the "Act"). Unless otherwise indicated, all statutory references herein are to provisions of the Act.
Pursuant to a segregated fund policy as defined in subsection 138.1(1), the policyholder may invest money in segregated funds. In such a case, the money invested may be used to acquire units of a particular fund that carry a redemption charge. However, redemption fees are not charged if certain criteria are satisfied when redeeming. In such a case, you give the holder the option to obtain units of another fund without a redemption charge in exchange for the units of the particular fund redeemed without a redemption charge.
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable in a particular situation.
Section 138.1 sets out the rules for segregated fund policies. Paragraph 138.1(1)(a) deems an inter vivos trust, referred to as a "related segregated fund trust," to be created, and paragraph 138.1(1)(e) deems a segregated fund policyholder to have an interest in the related segregated fund trust. By virtue of subparagraph 39(1)(a)(iii), the gain on the disposition of that interest may be treated as a capital gain. In our view, the exchange of units of a particular segregated fund that have a redemption fee for other units of a segregated fund that do not have a redemption fee is a transaction that constitutes a disposition under paragraph (a) of the definition of "disposition" in subsection 248(1).
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch