12 April 1994 External T.I. 9405785 - MORTGAGE INVESTMENT 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.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

WHETHER A PROPERTY USED FOR BOTH COMMERCIAL AND RESIDENTIAL PURPOSES QUALIFIES AS "RESIDENTIAL PROPERTY" UNDER SUBPARAGRAPH 130.1(6)(f)(i) AND THE BASIS FOR THAT DETERMINATION.

Position TAKEN:

THE MORTGAGE LOAN INSURANCE CRITERIA, ADMINISTERED BY CANADA MORTGAGE AND HOUSING CORPORATION ("CMHC"), FOR MIXED-USE PROPERTIES WILL BE TAKEN INTO CONSIDERATION IN MAKING THAT DETERMINATION. CURRENT GUIDELINES ALLOW FOR AN 80-20 RESIDENTIAL/NON-RESIDENTIAL SPLIT BASED UPON GROSS FLOOR AREA OF NON-RESIDENTIAL FACILITIES. GREATER RATIOS MAY BE ACCEPTABLE ALTHOUGH EACH CASE IS EXAMINED INDIVIDUALLY.

Reasons FOR POSITION TAKEN:

LEGISLATION REFERS TO "RESIDENTIAL PROPERTY" AS DEFINED BY THE RESIDENTIAL MORTGAGE FINANCING ACT ("RMFA"). THE RMFA REFERS TO CERTAIN DEFINITIONS IN THE NATIONAL HOUSING ACT ADMINISTERED BY CMHC. CMHC CRITERIA ARE INFLUENTIAL.

940578
XXXXXXXXXX G. Donell

Attention: XXXXXXXXXX

April 12, 1994

Dear Sirs:

Re: Mixed-use buildings as "Residential Property
Mortgage Investment Corporations; subparagraph 130.1(6)(f)(i)

This is in reply to your letter of March 2, 1994 in which you have requested our interpretation of the term "residential property" as that term is used in subparagraph 130.1(6)(f)(i) of the Income Tax Act, S.C.1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act"). Specifically you have presented hypothetical situations and asked whether the underlying properties, used partly for commercial and partly for residential use ("mixed-use building"), would qualify as residential property for this purpose and whether the ultimate determination is based upon square footage, cost or some other measure.

Although we are not able to comment specifically on the examples you have provided, we offer the following comments.

Subsection 130.1(6) presents numerous conditions that must apply throughout a taxation year to determine a corporation's status as a "mortgage investment corporation" ("MIC"). Paragraph 130.1(6)(f) requires that the "cost amount" as defined in subsection 248(1) of the Act of (i) debts secured on residential property, (ii) certain deposits and (iii) money of the corporation, together, equal 50% or more of the cost amount of all corporate property. Subparagraph 130.1(6)(f)(i) specifically states that "...residential property..." is "...as defined in the Residential Mortgage Financing Act (the "RMFA"),...". Subsection 2(1) of the RMFA defines "residential property" as "a house or the property included within a housing project". Subsection 2(2) of the RMFA states that certain words or expressions used in the RMFA, such as "house" and "housing project", have the same meaning as in the National Housing Act (the "NHA").

Included in the definition of "housing project" in the NHA is "...any public space, recreational facilities, commercial space and other buildings appropriate to the project". Although the Act does not specify what would be an "appropriate" level of such facilities, it is our understanding that the Canada Mortgage and Housing Corporation ("CMHC"), the entity responsible for the administration of the NHA, considers that such non-residential facilities should not normally exceed 20% of the gross floor area of the total project. Accordingly, construction or acquisition costs would be irrelevant to this determination.

Although the determination of an "appropriate" level of such non-residential facilities would, with respect to any particular property, be a question of fact to be resolved having regard to the particular circumstances of the project, it is our view that consideration would be given to the previously noted CMHC guidelines in making that determination.

We would also note that, should a project qualify as a residential property as required by subparagraph 130.1(6)(f)(i) of the Act, the full cost amount of that debt would qualify for inclusion in the determination of the 50% requirement of paragraph 130.1(6)(f) of the Act.

As noted previously, we are unable to consider specific hypothetical situations in a general letter of opinion. Should you wish the views of the Department with respect to a completed transaction, you should contact the appropriate District Taxation Office. Alternatively, if the hypothetical situations presented constitute actual proposed transactions, you may wish to request an advance income tax ruling in accordance with the Department's requirements as set forth in Information Circular 70-6R2 dated September 28, 1990.

While we trust that our comments are of assistance to you , we would advise that they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of any particular situation.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch