28 September 1995 External T.I. 9515395 - LIMITED RECOURSE FINANCING

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.

Principal Issues:

Will a conventional mortgage having a 5 year term but amortized over 25 years (subject to bona fide repayment of capital & interest) be subject to proposed subsection 143.2(7) of the Act?

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

Subsection 143.2(7) provides that the principal of a debt would be considered limited recourse unless bona fide arrangements for repayment are made within a reasonable period not exceeding 10 years.

		5-951539
XXXXXXXXXX		Franklyn S. Gillman

Attention: XXXXXXXXXX

September 28, 1995

Dear Sirs:

Re: Subsection 143.2(7) of the Income Tax Act (the "Act")

This is in reply to your letter dated May 31, 1995 wherein you requested clarification regarding the interpretation and application of proposed draft legislation subsection 143.2(7) of the Act.

You queried whether new proposed draft subsection 143.2(7) of the Act would apply to limited partnership real estate syndications who use mortgage financing (25 year amortization term) of a 1-5 year period to purchase residential real estate with the intention that when the mortgage matures it would either be renewed or refinanced with another mortgage using similar arrangements. The mortgages would be subject to bona fide arrangements and the interest and principal would be paid on a regular basis. However, you stated that at the end of 10 years there would likely remain an unamortized principal balance and repayment of this balance would probably occur beyond a 10 year period using a similar debt instrument described above.

Your concern was whether proposed draft subsection 143.2(7) of the Act would apply to the above scenario since the limited partnership was to maintain the financing subsequent to the 10 year period provided for in the proposed draft subsection.

It is our opinion that the debt described above would be subject to proposed draft subsection 143.2(7) of the Act in that the period the debt would be outstanding exceeds 10 years.

We hope these comments are of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate