Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Will a second mortgage in the form of a Mortgage Investment Certificate be a qualified investment under subsection 4900(4) of the Regulations?
Position: Yes.
Reasons: The investment would be considered an interest in a mortgage for purposes of subsection 4900(4) of the Regulations.
XXXXXXXXXX 2000-006146
Attention: XXXXXXXXXX
XXXXXXXXXX, 2001
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX ("Company A") is a federally incorporated non-share capital corporation. Company A is a registered charity within the meaning assigned by subsection 248(1) of the Income Tax Act (the "Act").
Company A's address is XXXXXXXXXX. Company A is located in the area serviced by the XXXXXXXXXX Tax Services Office.
2. XXXXXXXXXX ("Company B") is a federally incorporated non-share capital corporation. Company B is also a registered charity for purposes of the Act.
3. XXXXXXXXXX.
4. XXXXXXXXXX ("Company C") is a federally incorporated non-share capital corporation XXXXXXXXXX Company C is also a registered charity in Canada and it is a registered charity in the United States.
5. Company A, Company B and Company C have filed the required form with the Canada Customs and Revenue Agency to be associated for purposes of fund transfers between corporations.
6. Company A owns XXXXXXXXXX property in the XXXXXXXXXX, municipally known as XXXXXXXXXX . The property cost $XXXXXXXXXX and its current estimated fair market value is $XXXXXXXXXX. There is an outstanding first mortgage on the property in favour of the XXXXXXXXXX for approximately $XXXXXXXXXX.
Proposed Transactions
7. Company A intends to ultimately use the property to build a XXXXXXXXXX (the "New Facility"). XXXXXXXXXX. The estimated cost of building the New Facility is approximately $XXXXXXXXXX.
8. Company A is negotiating a term loan from a commercial lending institution with a principal amount not to exceed $XXXXXXXXXX. The term loan will be secured by a first mortgage (the "First Mortgage") on the property, the New Facility and any fixtures attached thereto (collectively referred to as the "Land"). This loan will be applied first to retire the existing XXXXXXXXXX first mortgage and the balance will be applied to the costs of the New Facility.
9. Company A will borrow up to an aggregate amount of $XXXXXXXXXX from individual investors using a second mortgage (the "Second Mortgage") on the Land as security for the debt. The individual investors will purchase Mortgage Investment Certificates.
10. Company A will apply any funds from the Second Mortgage in excess of the amount required to cover the costs of the New Facility to pay down the First Mortgage on the Land.
11. It is expected that the New Facility will increase the value of the Land to an amount that is in excess of any outstanding Mortgages on the Land.
12. Company A intends to enter into an Indenture pursuant to which a series of Mortgage Investment Certificates will be issued by the Company. The Mortgage Investment Certificates will only be secured by the Second Mortgage on the Land. The aggregate amount of Mortgage Investment Certificates which may be outstanding under the Indenture will be $XXXXXXXXXX. The Mortgage Investment Certificates will be certified, in the form and manner set out in the Indenture, by XXXXXXXXXX ("Subco"), a corporation incorporated under the laws of the Province of XXXXXXXXXX and wholly owned by Company A. Subco was incorporated by Company A solely to act as agent for the Mortgage Investment Certificate holders and to be the liaison between Company A and the Mortgage Investment Certificate holders. Since the individual investors will be too numerous to register their interests in the Land on title to the Land, Subco will register a mortgage in the Land on behalf of all of the Mortgage Investment Certificate holders. In the event of default, Subco will notify the Mortgage Investment Certificate holders of such default and will act at the direction of the said holders in preserving their security.
13. There will be three types of Mortgage Investment Certificates issued with the following principal terms and conditions:
(a) XXXXXXXXXX Certificates will have a XXXXXXXXXX term falling due on XXXXXXXXXX. It is the intention of Company A to receive subscriptions for XXXXXXXXXX Certificates to a maximum aggregate amount of XXXXXXXXXX Each XXXXXXXXXX Certificate will be interest-bearing, calculated and payable XXXXXXXXXX, not in advance, such interest being payable on XXXXXXXXXX in each year until maturity when the principal sum will become due and payable. The XXXXXXXXXX Certificates will bear interest at the market rate that would normally be charged for a second mortgage which is subject to the terms described above and is secured in the manner described above;
(b) XXXXXXXXXX Certificates will have a XXXXXXXXXX term falling due on XXXXXXXXXX. It is the intention of Company A to receive subscriptions for XXXXXXXXXX Certificates to a maximum aggregate amount of XXXXXXXXXX Each XXXXXXXXXX Certificate will be interest-bearing, calculated and payable XXXXXXXXXX, not in advance, such interest being payable on XXXXXXXXXX in each year until maturity when the principal sum will become due and payable. The XXXXXXXXXX Certificates will bear interest at the market rate that would normally be charged for a second mortgage which is subject to the terms described above and is secured in the manner described above; and
(c) XXXXXXXXXX Certificates will have a XXXXXXXXXX term falling due on XXXXXXXXXX. It is the intention of Company A to receive subscriptions for XXXXXXXXXX Certificates to a maximum aggregate amount of XXXXXXXXXX Each XXXXXXXXXX Certificate will be interest-bearing, calculated and payable XXXXXXXXXX, not in advance, such interest being payable on XXXXXXXXXX in each year until maturity when the principal sum will become due and payable. The XXXXXXXXXX Certificates will bear interest at the market rate that would normally be charged for a second mortgage which is subject to the terms described above and is secured in the manner described above.
(d) Company A will have the sole discretion to repay the principal amount of the Mortgage Investment Certificates at any time during the year upon XXXXXXXXXX days written notice and any such repayment shall first be applied to the payment of all accrued interest to the repayment date and the balance shall be applied to reduce the principal amount outstanding.
14. Subco will act as agent for the Mortgage Investment Certificate holders for purposes of dealing with Company A. The purchasers of the Mortgage Investment Certificates will pay the subscription price for the Mortgage Investment Certificates to Subco for distribution to Company A and Company A will pay the required interest and redemption amounts to Subco for distribution to the Mortgage Investment Certificate holders.
15. Company A will try to find investors, XXXXXXXXXX, that may be interested in purchasing its Mortgage Investment Certificates. Where the investor is an RRSP within the meaning assigned by subsection 146(1) of the Act, the annuitant under the particular RRSP will not be related, within the meaning assigned by subsection 251(2) of the Act, to Company A, Company B or Company C. The directors and officers of Company A will approach XXXXXXXXXX and other arm's length parties to see if they are interested in acquiring Mortgage Investment Certificates personally or through their self-administered RRSP's.
Purpose of the Proposed Transactions
16. The purpose of the proposed transactions is to provide Company A with a source of funding which is only secured by a second mortgage on the Land and only requires the payment of interest until its maturity or redemption.
17. To the best of your knowledge and the knowledge of the Company A, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of Company A or a person related to Company A;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of Company A or of a person related to Company A;
(c) is under objection by Company A or by a person related to Company A;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to Company A or to a person related to the Company A.
Rulings 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, and provided that the proposed transactions are carried out as described above, we rule as follows:
A. The Mortgage Investment Certificates are, by virtue of subsection 146(1) of the Act and subsection 4900(4) of the Income Tax Regulations, qualified investments for an RRSP.
B. Provided that the interest rate with respect to each certificate represents the market rate that would normally be charged for a second mortgage which is subject to the terms described above and secured in the manner described above, the acquisition of the Mortgage Investment Certificates by an RRSP will not, in and by itself, result in a non-arm's length relationship between the annuitant of the RRSP and Company A.
The determination of whether an interest rate represents the market value that would normally be charged for a second mortgage which is subject to terms that are similar to those described above is a question of fact. Your submission did not provide the actual rates that will be paid in respect of the Mortgage Investment Certificates nor did it provide any information regarding the basis that will be used for determining market rates. Consequently, this ruling should not be construed as providing any comfort or acceptance of the rates that will be charged in respect of the Mortgage Investment Certificates.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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