9 September 1998 External T.I. 9806885 - MICS

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 section 84 of the Act apply to a mortgage investment corporation and if so, can a capital gains dividend election be made?

Position:

Yes section 84 can apply. The ability to make a capital gains dividend election on a deemed dividend will depend on the facts.

Reasons: The law.

XXXXXXXXXX 980688

Attention: XXXXXXXXXX

September 9, 1998

Dear Sirs:

Re: Mortgage Investment Corporations

This is in reply to your facsimile letter dated March 17, 1998 concerning your request for our views on certain income tax consequences that may arise as a result of a distribution of property on a winding-up of a mortgage investment corporation ("MIC") as defined in subsection 130.1(6) of the Income Tax Act (the "Act") or a redemption, acquisition or cancellation of shares issued by a MIC.

Specifically, you requested our views as to whether a taxable dividend that is deemed by section 84 of the Act will qualify for the capital gains dividend treatment if the MIC otherwise had adequate taxed capital gains, as defined in subsection 130.1(9) of the Act for the year and filed the appropriate election pursuant to subsection 130.1(4) of the Act. You indicate that MICs are not specifically exempted from the application of section 84 of the Act, such as is the case for mutual fund corporations (see subsection 131(4) of the Act), and that it is your view that a capital gains dividend election may be possible on such deemed dividends.

Your request appears to relate 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. Although we are not able to comment specifically on the situations you have provided, we can offer the following general comments.

We agree that a MIC is not specifically exempted from the application of section 84 of the Act. However, 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 and the proper determination of this matter remains a question of fact that can only be determined on a case by case basis. Accordingly, a MIC’s ability to make a capital gains dividend election on deemed dividends will not only depend on whether it has sufficient taxed capital gains for the year but also whether the corporation continued to qualify as a MIC throughout the entire taxation year referred to in subsection 130.1(4) of the Act.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 and are not binding on the Department in respect of any particular situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch