Section 132

The capital gains refund to mutual fund trusts under s. 132(1) does not reduce the Quebec refundable abatement provided under s. 120(2).

The purchase and redemption of units of a mutual fund trust by an investment dealer for the sole purpose of increasing the capital gains refund to the trust would be subject to the application of GAAR.

Would a mutual fund trust that was a "day trader" using margin have an investment undertaking? CRA stated (TaxInterpretations translation):

[W]e generally are of the view that day trading, i.e, the acquisition and sale of securities in a single session, constitutes the investment of funds in property within the terms of subparagraph 132(6)(b)(i).

The elimination of the sub trust of an open-end listed mutual fund trust (the "Fund") was to be accomplished by the subtrust transferring its assets (being units of subsidiary real estate partnerships and the shares of the GPs thereof) under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of the REIT, with a small percentage of MFT's units then being distributed to the REIT unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into the REIT under s. 132.2.

The proposed transactions specify that the MFT's Canadian-resident trustee will not be a director of any of the GPs.

See detailed summary under s. 107.4(1).

The taxpayer is a listed mutual fund trust which holds all of the non-exchangeable LP units in a subsidiary LP which, in turn, holds interests in subsidiary limited partnerships, including Sub-Partnership as well as the shares of the GP thereof. Sub-Partnership will borrow in order to finance the acquisition of additional rental properties or refinance existing borrowings, with the lenders obtaining insurance one of whose conditions is that the taxpayer guarantee such borrowings, and with such borrowings being secured by properties of Sub-Partnership.

The provision of such guarantees by the taxpayer for no consideration would not, in and by themselves, disqualify the taxpayer from satisfying the requirements of s. 132(6)(b).

A mutual fund trust holds all the units of a subsidary trust which in turn holds the share of the general partner and the Class A units of a limited partnership (the "LP"). There also are subordinated exchangeable units of the LP which are exchangeable into units of the mutual fund trust. In order to finance the expansion of its business, the LP sells a property to a third party, and leases the property back from the third party.

The agreement of the fund as guarantor (and for no fee) to bind and oblige itself solidarily with LP for the full performance by LP of all its obligations under the lease agreement does not cause the fund to lose its mutual fund status.

A non-resident third party which does not have any office in Canada (the "Arranger") agrees to fund the payment of dealer commissions for sales of units of a mutual fund trust on the basis that the Arranger will receive deferred sales charges on the redemption of the fund units (which the fund agrees to withhold from the redemption proceeds and pay as directed by the Arranger) and also a monthly "Earned Basic Fee" for a specified number of years and calculated on the fund NAV from time to time. Although the fund and its manager are jointly and severally liable to pay the Earned Basic Fee, as between them they agree that the manager will be responsible for their payment, so that the contingent liability of the fund for the Earned Basic Fees is similar to that of a guarantor.

Ruling that this effective guarantee by the fund will not preclude it from qualifying under s. 132(6)(b) as a mutual fund trust.

A guarantee, for no fee, by a mutual fund trust of notes of a limited partnership held by a subsidiary trust of the mutual fund trust would not cause it to lose its mutual fund trust status.

A REIT through an subsidiary trust is the limited partner of a partnership that directly and indirectly owns and leases real property, and whose general partner is controlled by the REIT. Previous owners of various of those properties hold LP units of the partnership that participate in its profits based on distributions made by the REIT on its units, and are exchangeable into REIT units. As a condition to obtaining financing for a property to be developed jointly by the partnership and a third party ("X Corporation"), the REIT, its subsidiary trust, X Corporation and one or more members of the X Corporation group are required to guarantee the mortgage obligations issued to Lender in the name of the nominee corporation for the development property. Furthermore, Lender will receive insurance in respect of the mortgages from a third party insurer (therefore facilitating a lower interest rate on those mortgages) provided that the REIT provides such guarantee. No guarantee fee will be charged by the REIT.

In the summary of Reasons, the Directorate states that "it is reasonable to conclude...that the degree of integration between the investment of the funds and the guarantee is sufficiently high that the guarantee will not be considered to be a separate undertaking." It rules that the provision by the REIT of the guarantee will not by itself cause the REIT to not qualify under s. 132(6)(b).

Ruling that a guarantee given by an income fund of a loan made to an indirect "Finco" subsidiary of the Fund and of a loan made on similar terms by Finco to an indirect subsidiary general partnership of the Fund would not cause the Fund to fail to meet the requirements of s. 132(6)(b).

In indicating that a trust which guaranteed (a) the obligations of a subtrust under the subtrust's guarantee of a borrowing of a partnership of which the subtrust was a majority limited partner, and (b) such borrowing, did not thereby become disqualified under s. 132(6)(b), the Directorate stated:

"In determining whether some activities of an entity are part of its core undertaking, the practical and functional relationship of each activity to such core undertaking must be assessed ... Just like a cotton strand loses its identity and becomes part of a cable when twisted round other strands, a guarantee becomes part of such undertaking where all the operations of the trust, including the provision of the guarantee, mesh together for that result. Absent exceptional circumstances, such degree of integration would be expected to exist where for no consideration a mutual fund trust guarantees a debt incurred by a wholly-owned subsidiary to finance its commercial operation. ... However, a guarantee provided by a mutual fund trust in respect of the debt of an entity not wholly-owned by the trust or of the debt of an entity in which a wholly-owned subsidiary has an interest, would have to be closely scrutinized in light of all the relevant circumstances."

Ruling that the giving of a guarantee by an open-ended unit trust that is a REIT on mortgages held on properties beneficially owned by an operating partnership below the REIT would not, by itself, disqualify the REIT from meeting the requirements of s. 132(6)(b).

A mutual fund trust that is not engaged in the business of lending money or guaranteeing loans will not violate the requirements of s. 108(2)(b) and subsection 132(6) of the Act merely by guaranteeing a loan that is contracted by a subsidiary. However, the payment of a fee by the subsidiary with respect to the guarantee might taint the trust.

Ruling that the lending of securities by a unit trust under a securities lending arrangement would not by itself cause its undertaking to cease to be investing of its funds.

The only assets of an inter vivos trust (the "MFT") are (as to a cost of 85%) interest-bearing promissory notes ("First Notes") with a term of 25 years owing by another inter vivos trust ("CT") carrying on a business that was purchased from a public corporation and units of CT which may be redeemed on demand for interest-bearing notes (the "Second Notes") of CT payable after one year. The MFT units are redeemable on demand for cash up to a specified aggregate amount applicable in each calendar month, with redemptions for amounts in excess of that maximum being by way of an in-specie redemption through the distribution of CT units and First Notes, provided that where MFT unitholders are RRSPs or the like, Second Notes rather than CT units are distributed in the event of an in-specie redemption.

The MFT will be considered to be an open-ended trust for purposes of s. 108(2)(a), its only undertaking will be considered to be the investing of its funds in CT units and the First Notes, the MFT units will not be considered to be foreign property (provided that the MFT continues to hold less than 20% of its property in the CT units), and GAAR will not apply.

The requirement that its undertaking be the investing of its funds would not be violated as a result of short selling, writing naked call option, acquiring derivatives (including swaps), or making secured loans of its securities. This will include situations where such speculative activities are engaged in for non-hedging purposes.

The requirement that its undertaking be the investing of funds will be satisfied where a trust's only activity is purchasing and holding all the issued shares of a corporation engaged in an active business.

Although the acquisition of commodity futures contract by a mutual fund trust will be considered to be investing for purposes of s. 132(6)(b), it is the opinion of the Department that a mutual fund trust or (a corporation) which invests primarily in futures would be engaged in transactions considered to be adventures in the nature of trade.

An activity of entering into exchange-traded futures contracts and forward purchase contracts would constitute "the investing of its funds in property".

The acquisition of a stock index futures contract would constitute the investing of funds.

Entering into a commodity futures contract constitutes the investing of funds.

Transactions with respect to commodity futures contracts by a mutual fund trust are considered to be investing notwithstanding that the resulting gains or losses would be on income account if the mutual fund trust invests primarily in futures.

The disposition by a mutual fund corporation of all its investments, the distribution of all its assets and its winding-up will not disqualify the corporation as a mutual fund corporation for the year.

A mutual fund trust is not precluded from investing in mortgages, or from acquiring real property on the security of a mortgage, provided that its activities with respect to the real estate do not include participation in decisions concerning real estate development.

A trust which was formed in September 2000, had its first year end on December 15, 2000 and did not satisfy the unit distribution requirements in Regulation 4801 until June 2001 would not be eligible for the election under s. 132(6.1) because on the 91st day after its first taxation year, the distribution requirements were not satisfied.

Ruling that a net profits interest granted by a partnership to a mutual fund trust would not be taxable Canadian property, so that s. 132(7) would be satisfied even if the trust became majority-owned by non-residents.

Given that taxable Canadian property can include shares, units and partnership interests in some circumstances, oil and gas income trusts may derive their value substantially from taxable Canadian property.

In response to a submission that a trust should have a reasonable period of time to take steps to correct a situation giving rise to more than 50% non-resident ownership, e.g., the purchase of a large block of units by a non-resident, the Directorate indicated that:

"It is impossible to indicate at what moment the trust is maintained for the benefit for non-residents but, certainly, if the trust does not take appropriate action, it is likely that the trust would be maintained primarily for the benefit of non-residents at that moment."

General discussion of consequences of an income or royalty trust not satisfying the 50% test in s. 132(7).

Non-residents who had sold a business to a Canadian corporation owned by a unit trust in consideration for notes and shares of the corporation had the right to exchange such notes and shares for units of the unit trust provided that this did not result in non-residents owning more than 49% of the units of the trust. "As the Canadian Customs and Revenue Agency would not normally consider the benefit of providing liquidity to the investors in a corporation to have the same weight as the benefit of being a unitholder of the trust, the fact that the number of exchange rights issued may exceed the number of units of the trust currently held by residents of Canada would not necessarily result in the application of subsection 132(7). However, it would be a factor in the determination."