4 December 1997 External T.I. 9726425 - MIC'S AND REAL ESTATE

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:

Can a MIC invest in real property either directly or indirectly through a trust?

Position:

This is a question of fact.

Reasons:

While it is possible for MIC to own real property situated in Canada it must not manage or develop such property. Since the determination of these issues are mainly factual it is not possible to answer the taxpayer's questions without additional information.

972642
XXXXXXXXXX Michael Cooke

December 4, 1997

Dear Sir:

Re: Mortgage Investment Corporations and Subsection 130.1(6)

This is in reply to your facsimile letter to Mr. Ian Rathwell of Revenue Canada's Large Business Audit Division, dated August 5, 1997 that has been referred to our Directorate for response. In your letter you outlined four separate fact situations that deal with the types of investments and/or activities undertaken by a mortgage investment corporation ("MIC") as defined in subsection 130.1(6) of the Income Tax Act (the "Act") and the income tax consequences that may follow as a result.

Specifically, you requested our views as to whether certain investments in real property, either made directly by the corporation or indirectly by having the corporation own units of a trust that owns real property would cause the Department to consider that the particular corporation did not qualify as a MIC for the purposes of subsection 130.1(6) of the Act.

It is our understanding that your request relates to either a proposed fact situation or perhaps a completed transaction. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the guidelines set out in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Questions concerning the proper determination of the income tax consequences of completed transactions should be addressed to the relevant Tax Services Office. Further, certain matters raised in your letter involve questions of fact (such as the determination as to whether a gain or loss is on income or capital account) which as noted in paragraph 15 of Information Circular 70-6R3 we may be unable to rule on. Although we are not able to comment specifically on the situations you have provided, we can offer the following general comments.

The original purpose or intent of section 130.1 of the Act was to increase the flow of private sector financing for residential housing in Canada by enabling small investors to pool their funds together in a flow-through investment vehicle (i.e., the MIC). This legislation basically allows a MIC to acquire and hold property, substantially mortgages on residential property in Canada, and pay dividends to its shareholders that are essentially treated as interest for tax purposes.

As you are aware, in order for a corporation to qualify as a MIC all the conditions as outlined in subsection 130.1(6) of the Act must be met throughout the corporation's entire taxation year. Based on the conditions listed in paragraphs 130.1(6)(a) to (i) of the Act, a corporation will not be precluded from being a MIC solely because it may happen to own real property. However, in order for a corporation owning real property to be considered a MIC, assuming all the other conditions in that subsection are met:

1.the real property must be considered as part of its sole undertaking to only invest funds of the corporation and that the corporation does not manage or develop any real property (paragraph 130.1(6)(b) of the Act);

2.the real property must not be situated outside Canada (subparagraph 130.1(6)(c)(iv) of the Act); and

3.the cost amount of all real property, including leasehold interests in such property (other than such property acquired as a result of a foreclosure), must not exceed 25% of the cost amount of all property owned by the corporation (paragraph 130.1(6)(g) of the Act).

The proper determination of all these matters are questions of fact that can only be determined on a case by case basis and the department would require a complete description of the surrounding facts and circumstances as well as any relevant documentation with respect the real property investment made by the corporation.

However, it is our view that where a corporation that otherwise would have met all the conditions outlined in subsection 130.1(6) of the Act acquires real property either for rent or for development the corporation would not be considered a MIC since the condition that the corporation must not manage or develop real property, as outlined above, would not be met. It is also our view that the provision of services, which would likely be required where one is the owner of a rental property, is something other than the mere investing of funds. This would also be the case where the corporation hires a third party to manage or otherwise undertake the development of the real property, even where the property was acquired by the corporation as a result of a foreclosure on a debt described in subparagraph 130.1(6)(f)(i) of the Act where such foreclosure was made to protect the corporation's investment.

Whether a corporation can invest in the units of a trust that owns real estate and still qualify as a MIC involves a question of fact that can only be determined on a case by case basis. Subsection 130.1(6) of the Act contains no specific restriction that would prevent a MIC from making a direct investment in the units of a trust and while a question of fact, generally the holder of the units of a trust would not normally be considered to represent a direct investment in the property owned by the trust. However, the terms of any such trust arrangement would have to be examined to consider, for example, whether a bare trust arrangement was established. Moreover, depending on the level of involvement in the trust's activities by the MIC (e.g., if the directors of the MIC are the trustees of the trust or can be viewed as agents of the trustees) then it may be possible to consider that the MIC's sole undertaking was not limited to the investing of its funds.

We trust that our comments are of assistance to you.

Yours truly,

Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch