2004 Ruling 2004-0083491R3 - Qualified Investment for RRSP

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.

Principal Issues: Will an investment in an interest in a debenture secured by a mortgage and issued by an arm's length corporation be a "qualified investment" for an RRSP or a RRIF? Will it constitute "foreign property" within the meaning assigned by 206(1)?

Position: Yes, No

Reasons: The investment represents an interest in a mortgage within the meaning of current paragraph 4900(1)(j) of the Regulations. The proposed changes to paragraph 4900(1)(j) of the Regulations, announced in February 2004, have not been considered for purposes of this Ruling. This investment will not constitute foreign property within the RRSP and/or RRIF, as defined in 206(1) of the Act, provided the property securing the debenture is real property situated in Canada.

XXXXXXXXXX 2004-008349

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX (the "Taxpayer")

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the Taxpayer. We also acknowledge the information provided during our telephone conversation of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the Taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier return of the Taxpayer 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 Taxpayer or a related person,

(iii) under objection by the Taxpayer or a related person,

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the Taxpayer or a related person.

Except as otherwise noted, all statutory references in this document are references to the provisions of the Income Tax Act of Canada, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof (the "Act").

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. The Taxpayer is a taxable Canadian corporation and a private corporation within the meaning of subsection 89(1) of the Act. The Taxpayer is resident in Canada and was incorporated under the Business Corporations Act (XXXXXXXXXX) in XXXXXXXXXX.

2. The Taxpayer does not own any foreign property, as defined in subsection 206(1) of the Act ("Foreign Property"), nor does it derive any of its share value from Foreign Property.

3. The Taxpayer's business address is XXXXXXXXXX Its business number is still forthcoming from the Canada Revenue Agency (the "CRA"); however, it deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

4. XXXXXXXXXX ("TrustCo") is a registered trust company under the Trust and Loan Companies Act (Canada).

Proposed Transactions

5. The Taxpayer intends to acquire certain real property ("Land") located in XXXXXXXXXX, Canada, for purposes of developing such land in the future.

6. To finance the acquisition of the Land, the Taxpayer will issue an $XXXXXXXXXX debt with a fixed rate of interest which will be continually secured by a first mortgage registered against the Land (the "Debenture").

7. On behalf of one or more investors that are trusts governed by a Registered Retirement Savings Plan (an "RRSP") or a Registered Retirement Income Fund (a "RRIF"), TrustCo will hold the Debenture such that each investing RRSP and RRIF will acquire an interest in the Debenture proportionate to its investment.

8. The terms and conditions of the Debenture will include the following:

a. The Debenture is held by TrustCo on behalf of all RRSP and RRIF investors (the "Holder").

b. The principal amount is $XXXXXXXXXX;

c. The Debenture is redeemable, in whole or in part, by the Taxpayer at any time after the date that is XXXXXXXXXX years from its issuance;

d. The Debenture is redeemable, in whole or in part, at any time by the Taxpayer if the principal amount then outstanding is greater than the fair market value of the Land, otherwise than by a decline in the fair market value of the Land after the issuance of the Debenture;

e. The Debenture is redeemable by the Holder, once per XXXXXXXXXX-month period following the anniversary of the issuance, up to XXXXXXXXXX% of the amount then outstanding (subject to a XXXXXXXXXX% early redemption fee);

f. The Debenture matures in XXXXXXXXXX, although the term may be extended to XXXXXXXXXX at the option of the Taxpayer;

g. Interest accrues on the Debenture at XXXXXXXXXX% per annum (XXXXXXXXXX % in the extension period) and is payable semi-annually;

h. The Debenture is guaranteed by a corporation related to the Taxpayer;

i. The mortgage will be released and discharged from those portions of the Land that are sold by the Taxpayer in the ordinary course of its business, with any sale proceeds to be held in trust to repay the Debenture;

j. In the event of default, the Debenture Holder is authorized to exercise all rights provided by the Debenture, including seizure and sale of the Land; and

k. The Debenture will be repaid in full prior to the development and sale of all of the Land and prior to the complete discharge of the mortgage.

Purpose of the Proposed Transactions

9. The purpose of the proposed transactions is to allow the Taxpayer to finance the acquisition of the Land in a manner that is attractive to capital available in RRSPs and RRIFs.

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 the transactions are completed as proposed, we rule as follows:

A. Provided that the annuitant of an RRSP and/or a RRIF that acquires an interest in the Debenture deals at arm's length with the Taxpayer, the interest in the Debenture will be considered to be an interest in a mortgage and therefore, will, by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1) of the Act and paragraph (c) of the definition "qualified investment" in subsection 146.3(1) of the Act and paragraph 4900(1)(j) of the Income Tax Regulations (the "Regulations"), be a qualified investment for an RRSP and a RRIF.

B. Provided that the property used to secure the Debenture is real property situated in Canada, the interest in the Debenture held by an RRSP or a RRIF will not constitute Foreign Property.

Comment

We note that a proposed amendment to paragraph 4900(1)(j) of the Regulations was published by the Department of Finance in February, 2004. Whether the proposed transactions will satisfy the terms of paragraph 4900(1)(j) of the Regulations as so amended would be a question of fact and is not addressed by the advance income tax rulings herein.

These Rulings, which are based on the Act and Regulations in their 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 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch