Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
PRINCIPAL ISSUE:
If a type of participating bond is an investment that is permitted to a pension fund or plan under the Pension Benefits Standards Act, 1985 or a similar law of a province will it be considered an investment allowed within the meaning of clause 149(1)(o.2)(iii)(A)?
Position: Yes.
Reasons: Wording of the paragraph.
XXXXXXXXXX 2001-010848
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation")
This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the Corporation.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows.
Relevant Facts
1. The Corporation, which has its principal office at XXXXXXXXXX, was incorporated under the laws of XXXXXXXXXX, for the sole purpose of investing its funds in a manner that will permit the Corporation to qualify as a tax-exempt pension fund corporation as defined in subparagraph 149(1)(o.2)(iii) of the Income Tax Act (Canada) (the "Act"). The Corporation will file its annual income tax return at the XXXXXXXXXX Tax Services Office.
2. The Corporation will limit its activities by not making investments other than investments that a pension fund or plan are permitted to make under the Pension Benefits Standards Act, 1985 or a similar law of a province.
3. The Corporation has not and does not intend to issue debt obligations or accept deposits.
4. The Corporation will derive at least XXXXXXXXXX% of its income from, or from the disposition of, its investments.
5. The authorized share capital of the Corporation consists of an unlimited number of common shares. No shares are currently issued. It is intended that all of the issued common shares will be held by registered pension plans. Holders of the common shares shall be entitled to attend meetings of shareholders and shall be entitled to one vote in respect of each common share held at such meetings. Holders of common shares will be entitled to receive dividends in such amounts and at such times as the directors of the Corporation decide. Holders of common shares may require that the Corporation redeem their shares for an amount equal to the current fair value of such common shares as determined by a valuator chosen by the directors of the Corporation subject to certain liquidity restrictions. The directors of the Corporation may suspend redemptions at any time when (i) market conditions do not permit the orderly sale of the Corporation's investments; (ii) when more than XXXXXXXXXX% of the issued and outstanding common shares have been tendered for redemption; or (iii) under such other circumstances as they may, in their sole discretion, determine.
6. XXXXXXXXXX ("Fundco") was incorporated under the laws of XXXXXXXXXX and is a tax-exempt pension realty corporation within the meaning of subparagraph 149(1)(o.2)(ii) of the Act. Fundco is managed by XXXXXXXXXX (the "Manager").
7. The authorized share capital of Fundco consists of an unlimited number of common shares, all of which are held by registered pension plans.
8. Registered pension plans wishing to invest in managed real estate assets may purchase common shares and secured debt obligations of Fundco. Each real estate asset purchased by Fundco is financed through the issue of participating bonds (the "Participating Bonds") issued to the shareholders of Fundco. A holder of a Participating Bond ("Bondholder") must also be a shareholder of Fundco and, pursuant to shareholder agreements, may be required to loan to Fundco amounts in addition to the amount paid for a Participating Bond. These additional loans earn interest but are unsecured, whereas the Participating Bonds are secured by a charge on the real estate held by Fundco. The additional unsecured loans constitute investments that a pension fund or plan is permitted to make under the Pension Benefits Standards Act, 1985 or a similar law of a province.
9. Under the terms of a typical Participating Bond, a Bondholder will earn interest at a fixed annual rate plus will receive an additional participating interest (computed annually) to the extent that the earnings from the real estate asset underlying the Participating Bond exceeds the aggregate of (i) the costs, expenses, charges and depreciation in respect of the property, (ii) payments of interest and principal on any unsecured loans required to be made by the Bondholders pursuant to a shareholder agreement, (iii) the fixed interest paid to the Bondholders in respect of the secured portion of its investment, (iv) taxes and provision for taxes, and (v) appropriate reserves.
Proposed Transactions
10. The Corporation proposes to invest in common shares of Fundco and Participating Bonds issued by Fundco. As stated in 8 above, the Corporation may also be required make additional unsecured loans to Fundco.
11. The Corporation will make indirect investments in real estate assets by participating in Fundco in much the same way as registered pension plans. The Corporation will subscribe for common shares of Fundco and will purchase Participating Bonds as and when assets of interest to its shareholders are to be acquired by Fundco. Fundco will use the proceeds from these Participating Bonds to finance the purchase of a specific real estate asset.
12. The real estate asset purchased by Fundco will be subject to a fixed charge (claim on the real estate) in favour of the Corporation (as a Bondholder), as discussed in 8 above, as security for the repayment of amounts so advanced pursuant to the terms of trust deeds between Fundco and the trustee, XXXXXXXXXX (the "Trustee"). (Note that the Trustee is a corporation separate and distinct from the Manager referred to in 6. above).
13. The common shares and Participating Bonds of Fundco, together with cash reserves, will constitute at least XXXXXXXXXX% of the assets of the Corporation.
Purpose of Proposed Transactions
14. Due to the significant amount of capital required to purchase quality commercial real estate, many smaller pension plans are at a distinct disadvantage to larger funds investing through Fundco. The Corporation has been established to provide a vehicle through which smaller registered pension plans may make tax efficient investments in real estate through a tax-exempt pension fund corporation.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, we rule as follows:
Provided that the Participating Bonds are investments permitted under the Pension Benefits Standards Act, 1985 or a similar law of a province, the acquisition of the Participating Bonds by the Corporation will not, in and by itself, cause the Corporation to fail to satisfy the requirements of subparagraph 149(1)(o.2)(iii) of the Act.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, is binding on the Canada Customs and Revenue Agency in respect of Participating Bonds acquired by the Corporation before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate