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: Would a corporation's status as a "mortgage investment corporation" be affected if the corporation invests in a limited partnership or trust that holds property that would otherwise not be permitted to be held by a mortgage investment corporation.
Position: General comments provided.
Reasons: Consistent with previous opinions, the determination is a question of fact.
XXXXXXXXXX
2011-041564
Bob Naufal
(613) 952-1505
March 29, 2012
Dear XXXXXXXXXX :
Re: Mortgage Investment Corporation
We are writing in response to your email dated July 29, 2011, wherein you requested our views as to whether a mortgage investment corporation ("MIC") would continue to qualify as such if the corporation invests in a limited partnership ("LP") or units in a trust ("Trust"), where the LP or Trust, as the case may be, holds property that would not otherwise be permitted to be held directly by the corporation. You provided an example of a MIC investing in a LP that owns real property situated outside Canada.
Our Comments
Subsection 130.1(6) of the Income Tax Act (the "Act") defines a MIC for purposes of the Act. In this regard, to qualify as a MIC, a corporation must meet all of the criteria stated in subsection 130.1(6) of the Act throughout a taxation year. The criteria include, inter alia, specific requirements regarding the share ownership structure of the corporation, restrictions as to the nature of investment activities in which the corporation may engage, and the types property and proportion of such property that must be, and that can be, held by the corporation.
We have previously opined that where a MIC acquires units of a mutual fund trust, it will be considered to have an investment in units of a trust and not to have any interest in the property held by the trust (document 2002-016532). Provided all other criteria for being a MIC are satisfied and, provided there are no facts in a particular case which would suggest that the MIC has any direct beneficial ownership of the property held in the trust or is involved in the management or development of any real property held by the trust, the fact that the MIC holds units in mutual fund trust would not, in and of itself, cause the corporation to lose its status as a MIC for purposes of the Act.
Where a MIC invests in units of a trust that is not a mutual fund trust for purposes of the Act, whether the investment could cause the corporation to lose its status as a MIC, is a question of fact that would require an examination of all the relevant facts regarding the trust agreement and any involvement of the MIC in the activities of the trust. If, for example, a MIC acquires units of a "bare trust" it would be our view that the MIC itself owns the property to which the trust holds legal title rather than holding an interest in a trust as an investment.
Where a MIC invests in a limited partnership, it will be dependent upon the facts of a particular investment as well as the partnership law in the relevant jurisdiction, whether the acquisition of limited partnership units could cause a corporation to lose its status as a MIC. We note that section 253.1 of the Act provides that for the purposes of certain specified provisions of the Act stated therein, including paragraph 130.1(6)(b) of the Act, where a trust or corporation holds an interest in a partnership and, by operation of any law in respect of the partnership, the liability of the partner as a member of the partnership is limited, the trust or corporation will not be considered to carry on any business or other activity of the partnership, solely because the trust or corporation acquired and holds the partnership interest. However, it should be noted that the other paragraphs of subsection 130.1(6) of the Act are not specified provisions in section 253.1 of the Act.
As you are aware, a MIC is prohibited by subparagraph 130.1(6)(c)(iv) of the Act from holding real property situated outside Canada or any leasehold interest in such property. This rule reflects the original purpose or intent of section 130.1 of the Act which was to increase the flow of private sector financing for residential housing in Canada by enabling small investors to pool their funds together in a flow-through investment vehicle (i.e., the MIC). The notion of a corporation investing indirectly in real property situated outside Canada through a limited partnership and still qualifying as a MIC may be viewed as being inconsistent with the underlying tax policy of this provision. However, a determination of whether a corporation would jeopardize its status as a MIC in a particular situation is a question of fact that can only be determined on a case-by-case basis and require an examination of all the relevant facts and circumstances including a review of any relevant documentation with respect to the investment, as well as the relevant provincial partnership law.
We trust these comments are of assistance.
Yours truly,
Jenie Leigh
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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