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:
1.Is the reference to "income" in clause 149(1)(0.2)(iii)(C) intended as a reference to "net income"?
2.Where a corporation participates in a mortgage loan or originates a mortgage loan for which it receives inducement payments, loan fees or commitment fees, will such income be considered "income from investments" for the purposes of the income test in clause 149(1)(o.2)(iii)(C)?
Position:
1.Yes.
2.Factual determination. If the payments or fees can be directly traced to a particular investment, such amounts would generally constitute income from investments for the purposes of the income test in clause 149(1)(o.2)(iii)(C).
Reasons:
1.Consistent with previous opinions on the meaning of "income" in other provisions of the Act (#E9404195, E9324505, E5098l, E9627656, IT-288R2 and Special Release to IT-110R2).
2.The income test in clause 149(1)(o.2)(iii)(C) is that the corporation has to derive at least 98% of its income for the period from, or from the disposition of, investments. The word "derived" has a broad meaning. If the payments and fees are distinctly traceable to a specific mortgage loan investment, it would appear that such payments and fees are derived from investments. This view is consistent with CICA Accounting Guideline AcG-4 which concludes that loan fees and commitment fees in certain circumstances would be considered an integral part of the return earned on lending activities and therefore should be recognized as an adjustment of the yield. In addition, we gave an opinion (E9111325) that fees earned for loaning securities are amounts derived from the securities for the purposes of the definition of "pooled trust fund" in subsection 5000(7) of the Regulations.
XXXXXXXXXX 5-963604
Attention: XXXXXXXXXX
May 8, 1997
Dear Sirs:
Re: Pension Corporations - Clause 149(1)(o.2)(iii)(C)
This is in reply to your letter of October 23, 1996 in which you requested a technical interpretation with respect to certain conditions which must be met in order for a corporation to qualify for the tax exemption under subparagraph 149(1)(o.2)(iii) of the Income Tax Act (the "Act"). We apologize for the delay in responding.
Your first question concerns the meaning of "income" in clause 149(1)(o.2)(iii)(C) of the Act. The purpose of this provision is to ensure that at least 98% of the corporation's income is from, or from the disposition of, investments that a pension fund or plan is permitted to make under the Pension Benefits Standards Act, 1985 or a similar law of a province. In our view, "income" as used in clause 149(1)(o.2)(iii)(C) of the Act means net income as calculated under Part I of the Act. Moreover, in calculating income from each source, expenses are to be applied directly to the income to which they relate. Expenses that relate to more than one source of income should be apportioned on a reasonable basis to the applicable sources of income.
Your second question relates to commitment fees, loan fees or inducement payments received by a corporation in connection with a mortgage loan. You describe such fees/payments as follows:
?Commitment fees would generally refer to fees charged for entering into an agreement that obligates an investor to make or acquire a loan under a specified condition. Such fees may be non-refundable or refundable in the event that the investor actually makes or acquires the loan.
?Loan fees would normally refer to nonrefundable fees charged to a borrower for activities carried out in connection with originating a loan (e.g., loan origination fees, processing fees and inspection fees). Such fees are intended as a catch-all type of fee and are payable when and if the loan is made and serve to cover the investor's expenses in conducting its own due diligence in respect of the loan and in administering the loan.
?Inducement payments may generally be described as amounts paid by a borrower as additional compensation to the investor for agreeing to lend money and assume a given risk. They may be paid at the time the mortgage loan is advanced or may represent a bonus payable at the time the loan is repaid.
You advise that, in the investment context, other than the advancing of funds, there is no distinct service or activity being performed by an investor in respect of which such fees and payments would be earned.
Whether a particular fee or payment constitutes income from investments for the purposes of the income test in clause 149(1)(o.2)(iii)(C) of the Act is a factual determination to be made on a case by case basis. In our view, nonrefundable commitment fees, loan fees and inducement payments which can be directly traced to a specific mortgage loan investment would generally constitute income from investments under clause 149(1)(o.2)(iii)(C) of the Act. However, in the case of refundable commitment fees, such fees would be earned only if the investment is not made. Given that there is no related investment, it is our view that refundable commitment fees would not normally constitute income from investments notwithstanding that they would constitute income from an investment business. Accordingly, expenses related to such fees would not reduce income from investments for the purposes of the income test in clause 149(1)(o.2)(iii)(C) of the Act.
While not determinative for income tax purposes, we note that for accounting purposes Accounting Guideline AcG-4 published by the Canadian Institute of Chartered Accountants provides that loan fees and certain nonrefundable commitment fees are to be included in computing the return on investment. With regard to refundable commitment fees, this guideline provides that "When an enterprise believes it is unlikely that its commitment will be called upon and result in a loan, the enterprise is providing a separate and distinct service and the commitment fee is not an integral part of the return on a specific future lending arrangement".
While we hope that our comments are of assistance to you, they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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