17 April 2008 External T.I. 2007-0249571E5 - Mortgage Investment Corporations and Foreclosures

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 a corporation can develop or lease property under foreclosure circumstances and continue to qualify as a mortgage investment corporation.

Position: No.

Reasons:

The requirements under paragraph 130.1(6)(b) will not be met.

								2007-024957
XXXXXXXXXX 							Helen Zelobowski
(519) 571-6987
April 17, 2008

Dear XXXXXXXXXX :

Re: Mortgage Investment Corporations and Foreclosures

We are writing in response to your letter dated July 13, 2007 in which you enquired whether a corporation can develop or lease property under foreclosure circumstances and continue to qualify as a mortgage investment corporation ("MIC"). You have suggested that in many foreclosures of property under development, it is necessary for the corporation to complete the development to a certain stage in order to avoid municipal liabilities. You indicate that it may be financially beneficial for a corporation to rent or lease a property acquired by foreclosure until the market to sell the property improves.

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 of an advance income tax ruling request submitted in accordance with the guidelines established in Information Circular 70-6R5. 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.

To qualify as a MIC for the purposes of the Income Tax Act (the "Act"), a corporation must, throughout the year, satisfy the criteria in subsection 130.1(6) of the Act, which include restrictions on the types of activities in which the corporation may engage. Paragraph 130.1(6)(b) requires that the corporation's "only undertaking was the investing of funds of the corporation" and that the corporation "did not manage or develop any real property".

The legislation does not provide an exception to this requirement for property acquired by foreclosure. Accordingly, where a corporation manages or develops any real property acquired by foreclosure, the corporation will fail to satisfy this requirement and will not qualify as a MIC for that year.

Whether this requirement is met by a particular corporation is a question of fact to be determined upon a review of all relevant information regarding the real property investments made by the corporation. However, as stated in our document #2002-0165325, it is our view that where the MIC provides services to tenants of a rental property that the MIC has acquired, or develops the property while the property is held for resale, the MIC would be considered to be managing or developing real property for the purposes of paragraph 130.1(6)(b). A MIC will also be considered to be managing or developing real property where it hires another party to provide services under a rental agreement to tenants of a property or to develop the property on its behalf.

If from a tax policy perspective you believe that the requirement under paragraph 130.1(6)(b) should not apply in respect of property acquired by foreclosure, 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.

We trust that these comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch