15 August 1997 External T.I. 9720045 - MORTGAGE INTEREST BUY-DOWN

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)whether 18(9.1) applies to interest buy-down on a mortgage taken out on land held to produce rental property.

2)whether a combination of 18(9.1) and 20(1)(e)(ii.1) apply to a payment made in connection with the restructuring or rescheduling of the mortgage which includes an interest rate reduction.

Position:

1)Yes;

2)No, just 20(1)(e)e)(ii.1) applies.

Reasons:

1)Meets conditions in provision;

2)a payment is not made partly for one purpose and partly another, but rather the whole payment can reasonably be considered to be in respect of the restructuring/rescheduling (and therefore excluded under 18(9.1)(a) of the Act) which conversion involves an interest rate reduction.

XXXXXXXXXX 972004

Attention: XXXXXXXXXX

August 15, 1997

Re: Mortgage Interest Buy-down

This is in reply to your letter of July 14, 1997, in which you describe two hypothetical situations and ask for our views on the application of subsection 18(9.1) and subparagraph 20(1)(e)(ii.1) of the Income Tax Act (the "Act").

Although the following comments are not binding on the Department, we hope they assist.

SITUATION 1

The situation you describe involves a taxpayer who acquires real estate to hold as a long-term investment in order to yield rental income. As part of the purchase price, the taxpayer assumes the mortgage of the vendor which is held by a third party financial institution. The vendor is released from all obligations under the mortgage.

At the time of the purchase or later, the taxpayer enters into an agreement with the financial institution to reduce the existing interest rate on the assumed mortgage.

COMMENTS

It is our opinion that where an amount is paid as an interest buy-down in the circumstances described above and is not a payment which is described in paragraph 18(9.1)(a) or (b) of the Act, paragraph 18(9.1)(c) of the Act will apply. To the extent that the interest buy-down does not exceed the value of the amount that but for the buy-down would have been paid or payable by the taxpayer as interest on the mortgage for a taxation year of the taxpayer ending after the time of payment, the deeming provisions in paragraphs 18(9.1)(e) and (f) of the Act provide that the payment is considered interest on the mortgage and paid or payable as interest pursuant to a legal obligation. It is thus deductible in accordance with paragraph 20(1)(c) of the Act subject to subsection 18(9.2) of the Act.

SITUATION 2

As an alternative, the taxpayer described in Situation 2 enters into an arrangement to convert the assumed mortgage into a new obligation which bears a lower interest rate. The taxpayer makes one payment which covers the reduced interest rate and the costs for rescheduling or restructuring the debt obligation. You ask us to assume that the conditions in subparagraph 20(1)(e)(ii.1) of the Act are satisfied in respect of this conversion.

COMMENTS

In our view no part of the payment by the taxpayer would be eligible for consideration under subsection 18(9.1) of the Act because of the explicit exclusion of those payments described in paragraph 18(9.1)(a) of the Act. The "payment" cannot be segregated into two parts but would be viewed as a single payment to convert the mortgage to another debt obligation which conversion includes the reduction in the interest rate. Therefore the payment would be deductible in accordance with subparagraph 20(1)(e)(ii.1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

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