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: whether 212(1)(b)(vii) exemption applies on interest payable by Canadian company that purchases property (subject to more than 5 year mortgage) from joint venturers, one of whom is non-resident
Position: no
Reasons: not evident that Canadian company is not obligated to pay non-resident more than 25% within 5 years
2002-017438
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
January 8, 2003
Dear XXXXXXXXXX:
Re: Subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act")
We are writing in reply to your letter dated November 19, 2002 wherein you requested our views on the application of subparagraph 212(1)(b)(vii) of the Act to a hypothetical situation.
Our understanding of the theoretical fact situation is as follows:
A Canadian rental property that has been co-owned (through a bare trust described in IT-216) for a number of years by several persons ("joint venturers"), one of whom is a non-resident corporation and the others are Canadian residents, was sold to a Canadian corporation for cash and a mortgage back with a term of more than five years.
You have asked us whether payments to the non-resident person that are made from a corporation that is a bare trustee that receives the mortgage payments (blended payments of interest and principal) from the purchaser and that acts as an agent for the joint venturers will be exempt from Part XIII tax on the basis of subparagraph 212(1)(b)(vii) of the Act in circumstances where the joint venturers have agreed with each other that the non-resident joint venturer will not be entitled to receive more than 25% of its share of the principal amount of the mortgage within the first five years of the mortgage. You advise that the interest payment to each joint venturer will be based on the principal outstanding and that the Canadian resident joint venturers will receive more than 25% of their share of the principal amount of their shares of the mortgage within the first five years of the mortgage. We assume that the relationship between the joint ventures is not a partnership and that the trust is a bare trust, although these determinations would involve mixed questions of fact and law.
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
Subparagraph 212(1)(b)(vii) of the Act provides an exemption from Part XIII tax that would otherwise be exigible under subsection 212(1) of the Act in respect of:
"(vii) interest payable by a corporation resident in Canada to a person with whom that corporation was dealing at arm's length on any obligation where the evidence of indebtedness was issued by that corporation after June 23, 1975 if under the terms of the obligation or any agreement relating thereto the corporation may not under any circumstances be obligated to pay more than 25% of
...
within 5 years from the date of issue of that single debt issue or that obligation, as the case may be, except....."
Based on the above limited information, we would conclude that there is no clear legal relationship between the non-resident joint venturer and the purchaser such that the purchaser is not obligated to pay more than 25% of the non-resident joint venturer's share of the principal amount of the mortgage to the non-resident joint venturer. The fact that the joint venturers have, among themselves, agreed to apply certain nomenclature to the payments that the non-resident joint venturer will receive does not change our view.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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