Current Structure
The units of the REIT (a real estate investment trust) are stapled to those of Finance Trust (a portfolio investment entity and a mutual fund trust), so that they trade on a stock exchange together. Finance Trust holds notes of the indirect U.S. commercial real estate subsidiary of the REIT (“U.S. Holdco”). Finance Trust qualifies as a fixed investment trust for Code purposes, so that its unitholders are treated as if they held such notes directly. This avoids the U.S. earnings stripping limitations on the level of permitted interest deductions by U.S. Holdco. However, subsequently to this structure being implemented, U.S. acquisitions by U.S. Holdco were funded with loans from REIT, which are subject to the earnings stripping rules. Each unit of the REIT and of Finance Trust (and of F17 Trust described below) represents an equal undivided beneficial interest in the property of the trust.
Proposed Transactions
In order that much of this additional debt can access the benefits of the stapled structure, the REIT and Finance Trust are proposing that Finance Trust first make a s. 107.4 transfer of its notes of U.S. Holdco to the REIT. Following the replacement of those notes and some of the newer debt with amended notes, and the transfer to the unitholders of units of a new fixed investment trust with nominal assets (the “F17 Trust”) in consideration for the nominal cash received by them for the transfer of their units of Finance Trust to the REIT (whose ACB will have been reduced under s. 107.4(3)(l)), the amended notes will be transferred by the REIT under s. 107.4 to the F17 Trust. Finance Trust then will redeem all its units. Thus, there will be a replacement stapled structure similar to what was there before, except that the new Finance Trust (F17 Trust) will hold more U.S. Holdco debt.
Ruling
The disposition of the Finance Trust loans to the REIT and of the amended loans to F17 Trust will constitute “qualifying dispositions” under s. 107.4(1), such that the rules in s. 107.4(3) will apply to the REIT, Finance Trust, F17 Trust, and their respective unitholders in respect such dispositions.
See also H&R REIT summary.