A Canadian REIT (the “Fund”) holds the units and notes of a subsidiary unit trust (“Sub-Trust”), whose principal asset is most of the partnership interests, other than exchangeable LP units, in a subsidiary LP (“Partnership”) which holds real estate and a corporate subsidiary (“Opco”).
The Fund first eliminates Sub-Trust by setting up a unit trust (“MFT”), transferring its assets to MFT under s. 107.4, distributing just enough units of MFT to its unitholders for MFT to qualify as a mutual fund trust, and then instigating a s. 132.2 merger of MFT into the Fund.
The Fund does not wish for Opco to pay corporate income tax. Had the Fund now held Opco directly, this would have been accomplished by incorporating a subsidiary (“MFC”), distributing relatively modest shareholdings in MFC to its unitholders sufficient to qualify MFC as a mutual fund corporation, amalgamating MFC and Opco so that Amalco MFC also qualifies as a mutual fund corporation, and then instigating the merger of Amalco MFC into the Fund under s. 132.2 – so that the former assets of Opco are now held directly by a REIT (the Fund).
A complicating factor is that Opco is held by the Partnership. Accordingly, the Partnership first transfers its Opco shares to MFC under s. 85(2) in consideration for most of the shares of MFC (so that Opco then can be vertically amalgamated with MFC). On the s.132.2 merger of Amalco MFC into the Fund, the Partnership renounces the receipt of the Fund units that otherwise would be receivable by it on the merger. CRA ruled that the Partnership will not realize any gain or loss on the disposition of its Fund units as a result of the renunciation because their proceeds of disposition should be equal to their ACB pursuant to s. 132.2(3)(g)(vi)(C)(I), and that none of the conferral-of-benefit provisions in the Act would apply.