16 May 2002 External T.I. 2001-0115455 - MORTGAGE INVESTMENT CORP ACTIVITIES

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Whether a mortgage investment corporation can loan funds to a developer without losing its status as a mortgage investment corporation for the purposes of section 130.1 of the Act.130.1

2. Why mortgage investment corporations are treated differently under the Act than are banks and credit unions, with respect to impaired loans.

Position:

1. While not prohibited from investing in a developer, the terms and conditions of the specific investment must be taken into account in determining whether the requirements of subsection 130.1(6) are met.

2. Insufficient information to determine whether a mortgage investment corporation would be treated differently from a bank or credit union with respect to impaired loans. Basis in the legislation for taxpayer's perception is unclear. If the concern is one of tax policy, it should be directed to the Department of Finance.

Reasons:

1. Whether a particular investment is within the scope of permitted activities for a corporation to qualify as a mortgage investment corporation under subsection 130.1(6) is a question of fact.

2. Legislative basis for taxpayer's perception was not clear from the submission. We would need the taxpayer to explain their interpretation of what they consider to be the relevant provisions of the legislation which have created this perception so that we could comment on those particular provisions.

XXXXXXXXXX 						2001-011545

May 16, 2002

Dear XXXXXXXXXX:

Re: Issues Relating to the Taxation of Mortgage Investment Corporations

This is in your reply to your two letters dated November 9, 2001, requesting our views on two separate issues dealing with mortgage investment corporations. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Qualified Activities

One of your letters asks whether a mortgage investment corporation could enter into an arrangement whereby it would lend funds to a developer, who in turn would enter into a development agreement with a municipality to provide services such as constructing, altering or expanding sewage, drainage and water systems for future residential and commercial development, without losing its status as a mortgage investment corporation for the purposes of the Income Tax Act (the "Act").

In order to qualify as a mortgage investment corporation for the purposes of the Act, a corporation must, throughout the year, satisfy certain criteria which are set out in paragraphs 130.1(6)(a) to (i) of the Act. In respect of the types of activities that a mortgage investment corporation is limited to, paragraph (b) of the definition states that the corporation's "only undertaking was the investing of funds of the corporation and it did not manage or develop any real property". Whether a mortgage investment corporation has only undertaken the investing of corporate funds and has not become involved in the management or development of real property is a question of fact that can only be determined by reviewing the agreements between the corporation and the borrower and any other participants in a real estate project.

In addition to determining whether the activity is the investing of funds rather than the management or development of real property, one would also need to consider the nature of the debt to the mortgage investment corporation. Within the definition of "mortgage investment corporation" paragraphs ((f) through (i) have requirements with respect to the cost amount to the corporation of certain properties relative to the cost of all its properties or relative to its liabilities. For example, subparagraph (f) requires that the cost amount of debts secured on "houses" or on property included within a "housing project", as those terms are defined in section 2 of the National Housing Act, together with certain deposits to the corporation's credit (as set out in subparagraph (f)(ii), and the amount of money of the corporation, must equal at least 50% of the cost of all property of the corporation. Accordingly, while a mortgage investment corporation is not prohibited from investing funds in a developer the terms and conditions of the investment must be taken into account in determining whether the requirements of subsection 130.1(6) of the Act will be met.

If a particular corporation is proposing to enter into a particular arrangement and would like to obtain comfort as to whether, under the arrangement, the corporation would be considered to be doing more than the "investing of funds", for the purposes of paragraph 130.1(6)(b) of the Act, we would recommend that the corporation request an advance income tax ruling in accordance with Information Circular IC 70-6R4.

Provisions for Impaired Loans

The other letter we received from you dealt with a perception the loan impairment provisions are determined differently for mortgage investment corporations than they are for banks and credit unions. It is unclear to us what are the specific provisions of the Act you are seeking an interpretation of, and that have given rise to this perception. As it is beyond the scope of our mandate to provide general explanations of various provisions and how they may or may not apply to one or more categories of taxpayers, we are unable to provide any comments at this time. If you would like to provide us with the specific provisions for which you wish to receive interpretive assistance, and the basis for the perception that the tax treatment for impaired loans is different for mortgage investment corporations than for banks and credit unions, we would be pleased to provide our general comments regarding the interpretive issues.

You may find some useful background information regarding the existing legislation for provisions in respect of impaired loans by referring to the Department of Finance website at www.fin.gc.ca and doing a key word search for "impaired loans". Among other documents you will find the explanatory notes relating to various amendments made in respect of impaired loans in 1997. With regard to your comment concerning a general loan loss provision we would draw your attention to the definition of "sectoral reserve" in subsection 20(2.3) of the Act.

If your concern is more a question of tax policy, we would recommend that you send your views to the Department of Finance as the setting of tax policy and making legislative amendments is within their mandate.

While we hope that the above comments and information will be of assistance to you, we caution that they neither address all of the potential income tax implications nor do they constitute an advance income tax ruling and therefore are not binding on the CCRA in respect of a specific situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Brach