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: Whether Regulation 7000(1) applies
Reasons: The BA rate applicable in a subsequent year is indeterminate at the time an investor acquires an XXXXXXXXXX ; the interest payable in respect of any year will not be dependent on a contingency existing after the year
Re: Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above taxpayer.
To the best of your knowledge and that of the taxpayer involved, the proposed transactions will not impact the ability of the taxpayer involved to pay its existing tax liabilities.
To the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request are:
(i) dealt with 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) subject to a ruling previously issued by the Income Tax Rulings Directorate (XXXXXXXXXX); or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
In this letter, the following definitions are used:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof;
(b) "Canco" means XXXXXXXXXX;
(c) "capital gain" has the meaning assigned by subsection 248(1);
(d) "capital loss" has the meaning assigned by subsection 248(1);
(e) "capital property" has the meaning assigned by subsection 248(1);
(g) "CRA" means the Canada Revenue Agency;
(h) "excluded obligation" has the meaning assigned by paragraph 214(8)(a);
(i) "excluded property" has the meaning assigned by paragraph 116(6)(d);
(j) "financial institution" has the meaning assigned by subsection 142.2(1);
(k) "Insurance Company" means XXXXXXXXXX or another private insurer approved by Canco;
(l) "interest in real property" has the meaning assigned by subsection 248(4);
(m) "Investors" or "Investors in VRMs" has the meaning assigned by Paragraph 5;
(n) "Issuer" or "Issuer of XXXXXXXXXX" has the meaning assigned by Paragraph 5;
(o) "investment contract" has the meaning assigned by subsection 12(11);
(p) "mark-to-market property" has the meaning assigned by subsection 142.2(1);
(r) "Paragraph" means a numbered paragraph in this advance income tax ruling;
(s) "prescribed debt obligation" has the meaning assigned by subsection 7000(1) of the Income Tax Regulations;
(t) "Proposed Transactions" means the transactions described in Paragraphs 5 to 16;
(u) "qualified investment" for a registered retirement savings plan has the meaning assigned by paragraph (a) of the definition of that term in subsection 146(1), for a registered retirement income fund has the meaning assigned by paragraph (a) of the definition of that term in subsection 146.3(1), for a registered education savings plan has the meaning assigned by paragraph (a) of the definition of that term in subsection 146.1(1), and for a deferred profit sharing plan or a revoked plan has the meaning assigned by paragraph (b) of the definition of that term in section 204;
(v) "specified debt obligation" has the meaning assigned by subsection 142.2(1);
(w) "Statute A" means the XXXXXXXXXX;
(x) "Statute B" means the XXXXXXXXXX;
(y) "TC" means Taxation Centre;
(z) "TSO" means Tax Services Office; and
(aa) "VRM" or "Variable Rate Mortgage" has the meaning assigned by Paragraph 4.
STATEMENT OF FACTS
4. A VRM is a mortgage which bears interest at a variable rate based on an underlying financial index (e.g., the prime rate of interest of a financial institution). The proportion of the monthly payment that consists of interest each month will vary depending on the performance of the underlying index, however the interest payable under a VRM is not contingent or dependent on the use of or production from property in Canada or computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion.
5. The Issuer will accumulate a pool of VRMs that are insured against borrower default by Canco or Insurance Company and will sell an undivided interest in the VRMs to Investors. The VRMs will be sold, on a fully-serviced basis, by the Issuer for a single aggregate consideration, with respective undivided beneficial ownership interests in such pool represented by XXXXXXXXXX , as described in more detail below.
PURPOSE OF THE PROPOSED TRANSACTIONS
17. There has been tremendous growth in the number of variable rate mortgages in the Canadian marketplace. It is anticipated that the inclusion of VRM in the XXXXXXXXXX program will further the stated intent of the XXXXXXXXXX program, which is to XXXXXXXXXX.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant warranties on page 1 of this advance income tax ruling, as well as all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below:
A. Amounts received or receivable, or, where applicable, accrued, as, on account, or in lieu of payment of, or in satisfaction of the stipulated interest in respect of a XXXXXXXXXX, whether through the Issuer, the XXXXXXXXXX or by XXXXXXXXXX pursuant to its guarantee as described in Paragraph 7, will be included in the income for the year of an Investor resident in Canada pursuant to paragraph 12(1)(c) or, where applicable, subsection 12(3).
B. Provided that it is reasonable in amount, the Servicing Fee referred to in Paragraphs 12 and 13 will be deductible in computing the income of the Investors pursuant to section 9, and the deduction thereof will not be limited by paragraph 18(1)(a) nor precluded by paragraph 18(1)(b). Consequently, Investors, other than a financial institution, will be permitted to report for Canadian income tax purposes the net amount remitted or to be remitted to them by, or on behalf of, the Issuer as described in Paragraph 13.
D. By virtue of the facts that the interest in respect of a XXXXXXXXXX will be paid on a monthly basis as described in Paragraph 11 and that the Investor (other than an Investor to whom subsection 12(3) applies) will have included in computing income throughout each of the Investor's preceding years in which the Investor held the XXXXXXXXXX, the interest accrued thereon for the monthly periods ending in such preceding years a XXXXXXXXXX will not be an investment contract of such an Investor and subsection 12(4) will not apply.
E. A XXXXXXXXXX will not constitute a prescribed debt obligation and therefore subsection 12(9) will not apply.
F. By virtue of subclause 212(1)(b)(ii)(C)(I), interest paid or credited in respect of XXXXXXXXXX to an Investor who is not resident in Canada will be exempt from tax otherwise exigible on such interest pursuant to paragraph 212(1)(b).
G. A XXXXXXXXXX is an excluded obligation and therefore subsections 214(6) and (7) will not apply.
H. Provided that an Investor that is not a financial institution holds a XXXXXXXXXX as capital property, the amount of any gain or loss realized by the Investor upon a disposition of XXXXXXXXXX will be a capital gain or a capital loss.
I. A XXXXXXXXXX will be a qualified investment for a registered retirement savings plan, a registered retirement income fund, a registered education savings plan, and for a deferred profit sharing plan or a revoked plan.
J. A XXXXXXXXXX is an excluded property.
K. A XXXXXXXXXX will not constitute an interest in real property.
L. Where an Investor that is a financial institution holds a XXXXXXXXXX that is a mark-to-market property, the amount of any income, gain or loss arising therefrom will be determined pursuant to section 142.5.
M. Where an Investor that is a financial institution holds a XXXXXXXXXX that is a specified debt obligation that is not a mark-to-market property, the amount of any income, gain or loss arising therefrom will be determined pursuant to sections 142.3 and 142.4.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA in respect of XXXXXXXXXX issued from the date of this letter to XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings.
Financial Industries Division
Income Tax Rulings Directorate
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