30 November 1996 Ruling 9706793 - MORTGAGE BOND, QUALIFIED INVESTMENT

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) Will a mortgage bond be a qualified investment?

2) Will the interest rate paid result in a non-arm's length relationship?

Position:

1) Yes
2) Probably not but question of fact

Reasons:

1) Mortgage bond considered mortgage for 4900(4).

2) Ruling withdrawn since question of fact.

XXXXXXXXXX							970679
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

1. XXXXXXXXXX

XXXXXXXXXX is a non-profit organization for the purposes of the Income Tax Act (the "Act").

XXXXXXXXXX

2. XXXXXXXXXX

3. XXXXXXXXXX

4. XXXXXXXXXX

5. XXXXXXXXXX has entered into a credit agreement (the "Credit Agreement") with the XXXXXXXXXX which provides for credit facilities of approximately $XXXXXXXXXX. The credit facilities include a combination of term and demand loans at various interest rates.

6. XXXXXXXXXX

provides investment, asset management, trust and securities custody services, including trustee services in connection with group registered retirement savings plans ("RRSP"). Revenue Canada has approved a declaration of trust and application form (together, the "XXXXXXXXXX") for a group RRSP of which XXXXXXXXXX acts as trustee (hereinafter referred to as the "XXXXXXXXXX Group RRSP"), which has been assigned Revenue Canada number XXXXXXXXXX.

7. XXXXXXXXXX is a trust company incorporated under the laws of Canada having its principal business office at XXXXXXXXXX. XXXXXXXXXX provides corporate trust services, including acting as trustee or administrator under mortgage and bond indentures.

Proposed Transactions

8. XXXXXXXXXX intends to sponsor a group RRSP (the "XXXXXXXXXX Group RRSP"), of which XXXXXXXXXX will be the trustee. Members of XXXXXXXXXX that are members of XXXXXXXXXX and their spouses, as well as XXXXXXXXXX and other employees of the XXXXXXXXXX that are members of XXXXXXXXXX will be able to open an RRSP account under the XXXXXXXXXX Group RRSP. The XXXXXXXXXX Group RRSP will be used for this purpose. An investment committee (the "Investment Committee") has been established by XXXXXXXXXX to identify and evaluate XXXXXXXXXX whose mortgage bonds might be acquired by the XXXXXXXXXX Group RRSP. The members of the Investment Committee include a member of the Board of Directors of XXXXXXXXXX and certain other individuals with professional financial expertise.

9. The XXXXXXXXXX will enter into a Deed of Trust and Mortgage with XXXXXXXXXX (the "Mortgage Deed"), pursuant to which two series of mortgage bonds issued by the XXXXXXXXXX will be provided for, Series XXXXXXXXXX Bonds and Series XXXXXXXXXX Bonds (hereinafter collectively referred to as the "Mortgage Bonds"). The aggregate maximum principal amount of bonds which may be outstanding under the Mortgage Deed at any time will be $XXXXXXXXXX. The Mortgage Bonds will be administered by XXXXXXXXXX and, in the event of default, XXXXXXXXXX will institute proceedings for the purpose of realizing upon the mortgaged property on behalf of the holders of the Mortgage Bonds in accordance with the Mortgage Deed.

10. The principal terms and conditions of the proposed Series XXXXXXXXXX Bonds will include the following:

(a) The Series XXXXXXXXXX Bonds will be redeemable by the issuer at any time, in whole or in part. The holder may require repayment annually by delivery of a demand for repayment at any time between XXXXXXXXXX and repayments will take place within XXXXXXXXXX days of XXXXXXXXXX.

(b) The Series XXXXXXXXXX Bonds will bear interest, payable monthly on the last day of each calendar month. The interest rate payable on the Series XXXXXXXXXX Bonds will be established annually, on XXXXXXXXXX of each year, effective for the balance of the year, by the Investment Committee. The rate may either be fixed, or may be a variable rate, but will not be less than the one-year GIC rate quoted by the XXXXXXXXXX from time to time throughout the year and will not exceed the XXXXXXXXXX prime rate in effect from time to time, plus XXXXXXXXXX%. It is proposed that, subject to this minimum rate, the interest rate for 1997 will be the XXXXXXXXXX prime rate, less XXXXXXXXXX%.

(c) In the event of a default, the Series XXXXXXXXXX Bonds will rank pari passu with the Series XXXXXXXXXX Bonds.

11. The principal terms and conditions of the proposed Series XXXXXXXXXX Bonds will include the following:

(a) The Series XXXXXXXXXX Bonds will be redeemable at the option of the holder.

(b) The Series XXXXXXXXXX Bonds will bear interest, payable monthly on the last day of each calendar month. The interest payable in respect of the Series XXXXXXXXXX bonds will be the amount of interest payable in respect of all amounts outstanding under the Credit Agreement.

(c) In the event of a default, the Series XXXXXXXXXX bonds will rank pari passu with the Series XXXXXXXXXX Bonds.

(d) Subject to the terms of the Credit Agreement, the XXXXXXXXXX will have the right to redeem the Series XXXXXXXXXX Bonds at any time.

12. The Series XXXXXXXXXX Bonds will be acquired by and held by XXXXXXXXXX, as trustee of the XXXXXXXXXX Group RRSP, for the account of each of the trusts established pursuant to the XXXXXXXXXX Group RRSP, as security for moneys advanced by such trusts to the XXXXXXXXXX. The Series XXXXXXXXXX Bonds will be acquired by XXXXXXXXXX, as security for moneys advanced by the XXXXXXXXXX to the XXXXXXXXXX from time to time under the Credit Agreement. It is intended that moneys advanced by trusts established pursuant to the XXXXXXXXXX Group RRSP and secured by the Series XXXXXXXXXX Bonds will be applied by the XXXXXXXXXX to reduce its indebtedness under the Credit Agreement, thereby reducing the principal amount secured by the Series XXXXXXXXXX Bonds. To the extent that a holder of Series XXXXXXXXXX Bonds demands repayment, the repayment will, subject to certain limitations and conditions contained in the Credit Agreement, be funded by increased borrowings pursuant to the Credit Facility, thereby increasing the principal amount secured by the Series XXXXXXXXXX Bonds. It is contemplated that interest credited on the Series XXXXXXXXXX Bonds will be re-invested in additional Series XXXXXXXXXX Bonds.

13. The annuitants for each of the RRSPs under the XXXXXXXXXX Group RRSP will include, but will not be limited to, members of the XXXXXXXXXX. Participation by members of the XXXXXXXXXX in the XXXXXXXXXX Group RRSP will not result in any benefit to the member or in any change in the XXXXXXXXXX by a member of the XXXXXXXXXX.

Purpose of the Proposed Transactions

14. The purpose of the establishment and sponsorship by XXXXXXXXXX of the XXXXXXXXXX Group RRSP is to provide XXXXXXXXXX with the opportunity to invest RRSP moneys in mortgage bonds issued by such XXXXXXXXXX, with a view to provide investor members with a reasonable rate of return on the invested funds and to provide the XXXXXXXXXX with a source of funding on reasonable terms.

Additional Information

15. To the best of your knowledge and the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.

Rulings Given

Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all of the relevant facts and proposed transactions, and that the proposed transactions are completed in the manner described herein, we rule as follows:

A. Provided that the annuitants of the individual plans to be established under the XXXXXXXXXX Group RRSP deal at arm's length with the XXXXXXXXXX, the investment by the XXXXXXXXXX, in its capacity as trustee for individual plans established under the XXXXXXXXXX Group RRSP, in Class XXXXXXXXXX Bonds issued by the XXXXXXXXXX under the terms of the Trust Deed will, by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1) of the Act and subsection 4900(4) of the Income Tax Regulations, be a qualified investment for a registered retirement savings plan established under the XXXXXXXXXX Group RRSP.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada provided that the proposed transactions are completed as described herein within six months of the date of this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch