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:
Is a "mortgage bond" secured by a leasehold interest in land a qualified investment for (a) RRSPs (b) RRIFs (c) RESPs (d) DPSPs?
Position:
"Yes" for (a) and (b) under current law. Will be "yes" for (c) and (d) also if proposed change to paragraph 4900(1)(j) becomes law.
Reasons:
A mortgage bond is an interest in a mortgage within the meaning of subsection 4900(4) of the current regulations and proposed new paragraph 4900(1)(j) of the regulations. An interest in a mortgage secured by real property includes an interest in a mortgage secured by a leasehold interest in real property pursuant to subsection 248(4).
XXXXXXXXXX 2001-008388
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 XXXXXXXXXX (the "School").
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. The School is a corporation without share capital incorporated under the XXXXXXXXXX.
2. The School is a registered charity within the meaning of paragraph 149(1)(f) of the Income Tax Act (the "Act"). The School's registration number is XXXXXXXXXX . The School files its annual Registered Charity Information Return with the Charities Directorate, Ottawa, Ontario.
3. The School operates a private co-educational secondary school in facilities located at XXXXXXXXXX.
4. The School's facilities are located on land (the "Property") leased from the XXXXXXXXXX (the "Landlord") under the terms of a lease dated XXXXXXXXXX, as amended (the "Lease"). The School will be entering into a Lease Amending Agreement, pursuant to which the term of the Lease will be XXXXXXXXXX years.
5. The School intends to construct new buildings and facilities on the Property. Construction is expected to commence in XXXXXXXXXX.
6. The School plans to finance the construction through the issuance of mortgage bonds (the "Mortgage Bonds") to parents of children attending or planning to attend the School and to other individuals.
7. XXXXXXXXXX is a trust company incorporated under the laws of Canada having its principal business office at XXXXXXXXXX provides corporate trust services, including acting as trustee or administrator under mortgage and bond indentures.
Proposed Transactions
8. The School intends to enter into a trust indenture (the "Trust Indenture") with XXXXXXXXXX pursuant to which the School will issue the Mortgage Bonds up to a maximum aggregate amount of $XXXXXXXXXX. The Mortgage Bonds will be issued in series on an annual basis. The Mortgage Bonds proposed to be issued in XXXXXXXXXX will be Series XXXXXXXXXX.
9. The Mortgage Bonds will evidence debt obligations of the School secured by a first mortgage on the School's leasehold interest in the Property, as evidenced by the Lease.
10. The Mortgage Bonds will be administered by XXXXXXXXXX which will be responsible for processing pre-payments and redemptions of the Mortgage Bonds, and upon maturity, their repayment. XXXXXXXXXX will also act as registrar and transfer agent of the Mortgage Bonds.
11. In the event of default under the Trust Indenture, XXXXXXXXXX will be authorized to act on behalf of the holders of the Mortgage Bonds and to exercise their rights as provided in, and in accordance with, the Trust Indenture.
12. The principal terms and conditions of the Mortgage Bonds will include the following:
(a) The Mortgage Bonds will be redeemable by the School and may be repurchased by the School at any time, in whole or in part, without penalty. Holders of Mortgage Bonds may require the School to redeem Mortgage Bonds held by them from time to time on notice ranging from XXXXXXXXXX depending on the principal amount of Mortgage Bonds to be redeemed.
(b) All the Mortgage Bonds will mature on the expiry of the Lease.
(c) The Mortgage Bonds will be issued in denominations of $XXXXXXXXXX.
(d) Except as to interest rate, all Mortgage Bonds of all series will rank pari passu in all respects.
(e) The Series XXXXXXXXXX Mortgage Bonds will bear interest at XXXXXXXXXX% per annum, payable on the earlier of maturity and redemption. Mortgage Bonds of subsequent series will be issued at interest rates to be fixed by the School prior to issuance, payable on the earlier of maturity and redemption.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to provide the School with a source of funding to finance the construction of new buildings and facilities.
To the best of your knowledge and that of the School, none of the issues in respect of which the ruling is being requested are:
i. in an earlier return of the School or a related person;
ii. being considered by a tax services office or taxation centre in connection with a previously filed tax return of the School or a related person;
iii. under objection by the School or a related person;
iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
v. the subject of a ruling previously issued by the Canada Customs and Revenue Agency.
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 annuitants of the Registered Retirement Savings Plan ("RRSP") and/or Registered Retirement Income Funds ("RRIF") that may acquire Mortgage Bonds issued by the School deal at arm's length with the School, the Mortgage Bonds will, by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1) of the Act and paragraph (c) of the definition of "qualified investment" in subsection 146.3(1) of the Act and subsection 4900(4) of the Income Tax Regulations ("Regulations"), be a qualified investment for an RRSP and a RRIF.
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, and is binding on the Canada Customs and Revenue Agency provided that the Series XXXXXXXXXX Mortgage Bonds are issued by XXXXXXXXXX.
Opinion
Provided that proposed paragraph 4900(1)(j) of the Regulations is enacted into law substantively as currently worded in conjunction with the proposed repeal of current subsection 4900(4) of the Regulations, it is our opinion that, provided that an annuitant, a beneficiary, an employer or a subscriber under the governing plan of the plan trust is not the School or any other person who does not deal at arm's length with the School, the Mortgage Bonds will be a qualified investment for an Registered Education Savings Plan and a Deferred Profit Sharing Plan pursuant to paragraph (e) of the definition of "qualified investment" in subsection 146.1(1) of the Act and paragraph (i) of the definition of "qualified investment" in subsection 204 of the Act.
Provided that proposed paragraph 4900(1)(j) of the Regulations is enacted as noted above, it is further our opinion that, provided the annuitant of the RRSP or RRIF deals at arm's length with the School, the Mortgage Bonds will continue to be a qualified investment for an RRSP and a RRIF pursuant to paragraph (d) of the definition of "qualified investment" in subsection 146(1) of the Act and paragraph (c) of the definition of "qualified investment" in subsection 146.3(1) of the Act.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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