2012 Ruling 2011-0431891R3 - XXXXXXXXXX

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: 1) Are XXXXXXXXXX prescribed debt obligations?
2) Does withholding apply in respect of interest paid on XXXXXXXXXX held by non-resident investors?

Position: 1) No.
2) No.

Reasons: 1) Paragraphs 7000(1)(a) to (d) of the Regulations are not applicable.
2) The interest paid is considered to be 'fully exempt interest' as defined in subsection 212(3) of the Act for the purposes of subparagraph 212(1)(b)(i) of the Act.

XXXXXXXXXX
2011-043189
XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are replying to your correspondence of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-mentioned taxpayer.

The Canadian income tax treatment of the subject of this ruling, that is, XXXXXXXXXX , forms the subject of a series of advance income tax rulings, the most recent being advance income tax ruling number XXXXXXXXXX.

We understand that, to the best of your knowledge, and that of the taxpayer, none of the issues described herein is:

a) 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;

b) under objection by the taxpayer or a related person; nor,

c) before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

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

Definitions

In this letter, the following terms have the meaning specified:

(a) “Act” means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof;
(b) “ARM” means an adjustable rate mortgage (with a floating interest rate), as described in 13 below;
(c) XXXXXXXXXX;
(d) “capital gain” has the meaning assigned by subsection 248(1) of the Act;
(e) “capital loss” has the meaning assigned by subsection 248(1);
(f) “capital property” has the meaning assigned by subsection 248(1);
(g) XXXXXXXXXX
(h) “CRA” means the Canada Revenue Agency;
(i) “excluded obligation” has the meaning assigned by paragraph 214(8)(a) of the Act;
(j) “excluded property” has the meaning assigned by paragraph 116(6)(d) of the Act;
(k) “Floating Rate XXXXXXXXXX ” means XXXXXXXXXX issued in respect of a pool of VRM (see ‘u’ below), ARM, or a WAC XXXXXXXXXX (see ‘v’ below);
(l) “Investors” has the meaning assigned in 7 below;
(m) “Issuer” has the meaning assigned in 7 below;
(n) “investment contract” has the meaning assigned by subsection 12(11) of the Act;
(o) “mark-to-market property” has the meaning assigned by subsection 142.2(1) of the Act;
(p) “XXXXXXXXXX ;
(q) “prescribed debt obligation” has the meaning assigned by subsection 7000(1) of the Income Tax Regulations;
(r) “Private Insurer” has the meaning assigned in 4 below;
(s) “Proposed Transactions” means the transactions described in 7 to 28 below;
(t) “specified debt obligation” has the meaning assigned by subsection 142.2(1);
(u) “VRM” means a variable rate mortgage (with a floating interest rate), as described in 13 below;
(v) “WAC XXXXXXXXXX ” means XXXXXXXXXX bearing an interest rate based on the weighted average coupon of mortgages (VRM or ARM) comprising the pool, as described in 15 below.
Our understanding of the facts and proposed transactions are as follows:

Facts

1. XXXXXXXXXX district taxation office is the XXXXXXXXXX Tax Services Office. XXXXXXXXXX address is XXXXXXXXXX and its taxation centre is the XXXXXXXXXX Taxation Centre.
2. XXXXXXXXXX.
3. XXXXXXXXXX.
4. XXXXXXXXXX.
5. As noted above, the Canadian income tax treatment of XXXXXXXXXX issued before XXXXXXXXXX forms the subject of a series of advance income tax rulings, the most recent being advance income tax ruling number XXXXXXXXXX.
6. The rulings requested result from, inter alia, the obligation of the issuer of XXXXXXXXXX to disclose to potential investors the principal Canadian federal income tax consequences of purchasing, holding and disposing of XXXXXXXXXX .

Proposed Transactions

7. An issuer of XXXXXXXXXX (generally, a financial institution) (the “Issuer”) will accumulate a pool of mortgages XXXXXXXXXX and that are XXXXXXXXXX or a Private Insurer and sell an undivided interest in the mortgages to investors (the “Investors”). The mortgages 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 .
8. XXXXXXXXXX
9. XXXXXXXXXX
XXXXXXXXXX
10. XXXXXXXXXX
11. XXXXXXXXXX
XXXXXXXXXX
12. XXXXXXXXXX
13. XXXXXXXXXX
14. XXXXXXXXXX
15. XXXXXXXXXX
16. XXXXXXXXXX
XXXXXXXXXX
17. XXXXXXXXXX
XXXXXXXXXX
18. XXXXXXXXXX
XXXXXXXXXX
19. XXXXXXXXXX
20. XXXXXXXXXX
21. XXXXXXXXXX
22. XXXXXXXXXX
23. XXXXXXXXXX
24. XXXXXXXXXX
25. XXXXXXXXXX
26. XXXXXXXXXX
27. XXXXXXXXXX
28. XXXXXXXXXX .

Purpose of the Proposed Transactions

29. It is anticipated that the issuance of additional XXXXXXXXXX will further the stated intent of the XXXXXXXXXX program, which is to XXXXXXXXXX .

Rulings Given

Provided that the above facts, Proposed Transactions and purpose of the Proposed Transactions are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof, and provided further that the Proposed Transactions are completed in the manner described above, we confirm that:

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, will be included in the income for the year of an Investor resident in Canada pursuant to paragraph 12(1)(c) of the Act or, where applicable, subsection 12(3) of the Act.
B. Provided that it is reasonable in amount, the Servicing Fee will be deductible in computing the income of the Investors pursuant to section 9 of the Act, and the deduction thereof will not be limited by paragraph 18(1)(a) of the Act nor precluded by paragraph 18(1)(b) of the Act. Consequently, Investors, other than a "financial institution" within the meaning of that term as defined in subsection 142.2(1) of the Act, 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 XXXXXXXXXX above.
C. XXXXXXXXXX .
D. By virtue of the fact that the interest in respect of a XXXXXXXXXX will be paid on a monthly basis 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, for the purpose of subsection 12(4) of the Act, a XXXXXXXXXX will not be an "investment contract", as that term is defined in subsection 12(11) of the Act, of such an Investor.
E. A XXXXXXXXXX will not constitute a prescribed debt obligation for the purpose of subsection 12(9) of the Act.
F. Pursuant to paragraph 212(1)(b) of the Act, 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, XXXXXXXXXX.
G. For purposes of subsections 214(6) and (7) of the Act, a XXXXXXXXXX is an “excluded obligation” within the meaning of paragraph 214(8)(a) of the Act.
H. Provided that an Investor, which is not a "financial institution" within the meaning of that term as defined in subsection 142.2(1), holds XXXXXXXXXX as "capital property", as that term is defined in subsection 248(1), 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", within the meaning of those terms in subsection 248(1).
I. A XXXXXXXXXX will be a "qualified investment" for a trust governed by a registered retirement savings plan (“RRSP”) pursuant to XXXXXXXXXX of the definition of that term in subsection 146(1) of the Act, a registered retirement income fund (“RRIF”) pursuant to XXXXXXXXXX of the definition of that term in subsection 146.3(1) of the Act, a registered education savings plan pursuant to XXXXXXXXXX of the definition of that term in subsection 146.1(1) of the Act, a deferred profit sharing plan or a revoked plan pursuant to XXXXXXXXXX of the definition of that term in section 204 of the Act, a registered disability savings plan pursuant to XXXXXXXXXX of the definition of that term in subsection 205(1) of the Act and a tax-free savings account (“TFSA”), pursuant to XXXXXXXXXX of the definition of that term in subsection 207.01(1) of the Act, and a XXXXXXXXXX will not be a “prohibited investment” for a trust governed by a RRIF, RRSP or TFSA.
J. For purposes of section 116 of the Act, a XXXXXXXXXX is an "excluded property" within the meaning of paragraph 116(6)(d).
K. Pursuant to subsection 248(4) of the Act, a XXXXXXXXXX will not constitute an interest in real property for purposes of the Act.
L. Where an Investor that is a "financial institution", within the meaning of that term as defined in subsection 142.2(1), holds a XXXXXXXXXX which is a "mark-to-market property", as that term is defined in subsection 142.2(1), the amount of any income, gain or loss arising therefrom will be determined pursuant to section 142.5 of the Act.

The above rulings, which are based on the Act in its 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 dated May 17, 2002, and is binding on the CRA in respect of XXXXXXXXXX issued from the date of this letter to XXXXXXXXXX .
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 specifically described in the rulings, nor has the CRA agreed to, reviewed or made any determination in respect of the fair market value of any property.
Yours truly,

XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch