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:
Does money borrowed to replace capital contributions meet the condition of clause 149(1)(o.2)(ii)(C) of the Act?
Position:
Likely no.
Reasons:
Clause 149(1)(o.2)(ii)(C) of the Act requires that borrowed money be used solely for the purpose of earning income from real property. Borrowed money used to replace capital would not meet this requirement.
2002-013488
XXXXXXXXXX Karen Power, CA
(613) 957-8953
June 26, 2002
Dear XXXXXXXXXX:
Re: Clause 149(1)(o.2)(ii)(C) of the Income Tax Act (the "Act")
We are writing in reply to your letter dated April 16, 2002 requesting our interpretation of the meaning of "borrowed money solely for the purpose of" as described in clause 149(1)(o.2)(ii)(C) of the Act.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. Although an advance income tax ruling will not be issued on this matter, we have provided you with the following comments.
Paragraph 149(1)(o.2) of the Act exempts from tax certain types of corporations involved with pension fund administration and investments if all the shares and rights to acquire shares of the corporation are owned by one or more registered pension plans. Clause 149(1)(o.2)(ii)(C) of the Act limits the corporations borrowings to amounts used solely for the purpose of earning income from real property or an interest therein.
Whether money is borrowed solely for the purpose of earning income from real property or an interest therein is a question of fact. However, we are of the view that the conditions of clause 149(1)(o.2)(ii)(C) would not be satisfied, where borrowed money is used to replace capital contributed by the shareholders of the corporation. This view also applies where such capital contributions were originally used to invest in real property for the purpose of earning income.
We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.
Yours truly,
Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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