15 February 1993 Income Tax Severed Letter 9231345 - Pension Realty Corporation

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

5-923134
XXXXXXXXXX R. Albert
(613) 957-2140

Attention: XXXXXXXXXX

February 15, 1993

Dear Sirs:

Re: Paragraph 149(1)(o.2) of the Income Tax Act (the "Act")

We are writing in reply to your letter of October 20, 1992 wherein you have asked for clarification of the views expressed in our letter to you of August 28, 1992 (file # 922187).

In particular, you are concerned with the activities permitted under the provisions of clauses 149(1)(o.2)(ii)(B) and 149(1)(o.2)(iii)(A) of the Act and the activities allowed under the Pension Benefits Standards Act, 1985 or a similar law of a province ("PBA"). You are also concerned with the requirement under clause 149(1)(o.2)(ii)(B) which restricts the issuing of debt obligations. You have noted that the easiest way for a pension plan to loan money to a subsidiary corporation to facilitate the transfer of monies into and out of the corporation is by way of a non- interest bearing demand loan. You have asked if such a loan is acceptable or would it make a corporation which is otherwise considered exempt to be taxable.

Our Comments

Clause 149(1)(o.2)(ii)(A) of the Act limits the activities of a pension realty corporation to "acquiring, holding, maintaining, improving, leasing or managing capital property that is real property or an interest therein owned by the corporation". To further clarify our August 28, 1992 letter, in our view, the overriding limitation on the activities permitted is that the property remain `capital property'. Activities undertaken to increase the return on investment on the capital property would be acceptable. In this context, the development of capital property may be synonymous with the improvement of capital property as long as the activities are associated with the earning of passive investment income on capital property. However, activities undertaken with respect to an asset that was acquired with the intent to improve and develop for sale at a profit would not be acceptable. Whether an asset is acquired with the intention of holding and managing it as an investment or with the intention to resell the asset itself at a profit is a question of fact. We also refer you to paragraph 3 of IT-218R which lists several factors which would need to be considered in resolving whether in fact the asset was a capital property.

In our view, a non-interest bearing loan from a pension plan to a subsidiary corporation to facilitate the transfer of monies into and out of the corporation would not be prohibited by virtue of clause 149(1)(o.2)(iii)(B) as long as such a loan was permitted under a PBA.

Finally, paragraph 6(e) of IC 72-13R8 [Information Circular 72-13R8] was referred to in the previous letter only to note that the development of real property was not discussed in that paragraph which dealt specifically with acceptable activities for a trust governed by a registered pension plan.

We trust that these additional comments will be of assistance.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch