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 (along with the REIT) holds notes (the "US Holdco 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. The REIT holds US Holdco through a 2-tier subsidiary LP structure (i.e., holding Holdings LP which in turn holds US Portfolio LP.)
Purposes
As a result of US tax reform, Finance Trust no longer serves a purpose as adverse US tax consequences are no longer suffered by US Holdco on interest paid to the REIT. The proposed transactions allow for the US Holdco Notes to be transferred out of Finance Trust prior to its termination, and (in transactions not described below) also permit the US Holdco Notes to be refinanced to reflect current commercial arm’s length interest rates.
Proposed Transactions
A portion of the existing loans will be contributed by the REIT to Holdings LP, and by Holdings LP to US portfolio LP. An equity conversion option will be added to their terms and US portfolio LP will then convert them into equity on exercise of that option.
Finance Trust will transfer all of the US Holdco Notes held by it (being most of its property) to the REIT for no consideration (the “Disposition”). At the time of transfer, the beneficiaries of the REIT will be identical to, and will hold their units in the same proportions as, the beneficiaries of Finance Trust. The REIT will purchase all of the outstanding Finance Trust Units from the Finance Trust Unitholders for their nominal value, and Finance Trust will redeem all of the Finance Trust Units and will be terminated.
Ruling
The Disposition will constitute a “qualifying disposition” within the meaning of s. 107.4(1), such that the rules in s. 107.4(3) will apply to the REIT, Finance Trust and their respective unitholders in respect of the Disposition.