30 November 1997 Ruling 9823103 - 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:

Will an investment in an arm’s length mortgage bond be a qualified investment under subsection 4900(4) of the Regulations?

Position: Yes.

Reasons:

We have previously ruled that a mortgage bond is an interest in a mortgage and all of the other conditions in subsection 4900(4) are satisfied.

XXXXXXXXXX
XXXXXXXXXX 982310
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX and your facsimile dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

RELEVANT FACTS

1. XXXXXXXXXX (the “Corporation”) was incorporated in XXXXXXXXXX under the Companies Act (XXXXXXXXXX) and was continued under XXXXXXXXXX. The Corporation is a Canadian-controlled private corporation and a taxable Canadian corporation. The expressions “Canadian-controlled private corporation” and “taxable Canadian corporation” have the meanings assigned by subsection 125(7) and subsection 89(1) of the Income Tax Act (the “Act”), respectively.

The Corporation files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. The Corporation owns a XXXXXXXXXX. The estimated current fair market value of the Property is between $XXXXXXXXXX. The Property is subject to a first mortgage which was placed on the property on XXXXXXXXXX in the amount of $XXXXXXXXXX in favour of the XXXXXXXXXX.

3. The Corporation has been advised that there is no commercial market for second mortgages on commercial real estate. Chartered Banks would normally lend up to 65% (in exceptional situations perhaps 75%) on commercial real estate and then only with collateral security in the nature of rent assignments and personal guarantees (only in a first position basis). Secondary lenders that are willing to consider high ratio loans will only do so where collateral security is provided in respect of the loan and the repayment terms are as specified by the lender.

4. An independent mortgage broker, who has declined to open a file regarding a second mortgage on the Property because he did not feel he would be able to find a lender willing to assume the risks, has advised the representative that “private financing” may be the Corporation’s only alternative. He has advised the Corporation that interest rates charged for residential second mortgages with recognized lenders are running in the 15 to 17% range and rates for commercial funding usually exceeds residential by 1.5 to 4%.

5. The Corporation would like to borrow $XXXXXXXXXX using only a second mortgage on the Property as security for the debt. In addition, the Corporation only wants to pay interest until the second mortgage’s maturity five years from now (subject to early redemption rights being granted to the Corporation) and the owners of the corporation do not want to provide any personal guarantees in respect of the debt.

PROPOSED TRANSACTIONS

6. The Corporation intends to enter into a Trust Deed pursuant to which a series of mortgage bonds (the “Mortgage Bonds”) will be issued by the Corporation. The Mortgage Bonds will only be secured by a second mortgage on the Property. The aggregate amount of Mortgage Bonds, which may be outstanding under the Trust Deed, will be $XXXXXXXXXX. The Mortgage Bonds will be certified, in the form and manner set out in the Trust Deed, by a chartered accountant (the “Accountant”) retained by the Corporation to act as a liaison between the Corporation and Mortgage Bond holders. In the event of default, the Accountant will institute proceedings for the purpose of realizing upon the Property on behalf of the Mortgage Bonds in accordance with the Trust Deed.

7. The principal terms and conditions of the Mortgage Bonds will include the following:

(a) The Mortgage Bonds will be redeemable by the Corporation at any time, in whole or in part, after the expiration of two years from the issuance of the Mortgage Bonds.

(b) The Mortgage Bonds will mature on the expiration of five years from the date of issuance of the Mortgage Bonds.

(c) The Mortgage Bonds will be issued in denominations of $XXXXXXXXXX and its multiples.

(d) The Mortgage Bonds will bear interest at the rate of XXXXXXXXXX% per annum, calculated semi-annually, not in advance. Interest on the Mortgage Bonds will be payable monthly on the first day of each and every month that the Mortgage Bonds are outstanding commencing on the first day of the month immediately following the month in which they are issued and continuing until the maturity date.

(e) In the event of default, all Mortgage Bonds will rank pari passu.

(f) The Accountant will act as the Corporation’s agent for purposes of dealing with Mortgage Bond holders. The purchasers of the Mortgage Bonds will pay the acquisition price for the Mortgage Bonds to the Accountant for distribution to the Corporation and the Corporation will pay the required interest and redemption amounts to the Accountant for distribution to Mortgage Bond holders.

8. The Corporation will try to find investors that may be interested in purchasing its Mortgage Bonds. Where the investor is a registered retirement savings plan (“RRSP”) within the meaning assigned by subsection 146(1) of the Act, the annuitant under the particular RRSP will not be related, within the meaning assigned by subsection 251(2) of the Act, to the Corporation. The principal shareholders of the Corporation will approach arm’s length business acquaintances to see if they are interested in acquiring Mortgage Bonds personally or through their RRSPs.

PURPOSE OF THE PROPOSED TRANSACTIONS

9. The purpose of the proposed transactions is to provide the Corporation with a source of funding which is only secured by a second mortgage on the Property and only requires the payment of interest until its maturity or redemption.

ADDITIONAL INFORMATION

10. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Corporation or of a person related to the Corporation;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Corporation or of a person related to the Corporation;

(c) is under objection by the Corporation or by a person related to the Corporation;

(d) is before the courts in respect of the Corporation or a person related to the Corporation; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate to the Corporation.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described herein, we rule as follows:

A. Provided that the annuitants of the RRSPs that may acquire Mortgage Bonds issued by the Corporation deal at arm’s length with the Corporation, the Mortgage Bonds 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 an RRSP.

B. Provided that an interest rate of XXXXXXXXXX% represents the market rate that would normally be charged for a second mortgage which is subject to the terms described in paragraph 7 above and secured in the manner described in paragraph 6 above, the acquisition of the Mortgage Bonds by an RRSP will not, in and by itself, result in a non-arm’s length relationship between the annuitant of the RRSP and the Corporation.

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

COMMENT

Where a person acts as agent for another person, a T3 does not have to be filed by the person acting in the agency capacity. However, the determination of whether an agency relationship exists is a question of fact.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate