1999 Ruling 9831683 - Second mortgages, Qualified INVESTMENTS

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 a second mortgage be a qualified investment for an RRSP?

Position:		Yes.

Reasons 4900(4) of the Regulations.

XXXXXXXXXX
XXXXXXXXXX 983168
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

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 noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

Relevant Facts

1. XXXXXXXXXX (the “Company”) was incorporated in XXXXXXXXXX under the laws of XXXXXXXXXX to develop a XXXXXXXXXX real estate project (the “Project”) situated in XXXXXXXXXX. The Company 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”).

The Company carries on its business in the region serviced by the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.

2. XXXXXXXXXX Canadian resident individuals (the “Shareholders”) each own XXXXXXXXXX% of the outstanding shares of the Company. The individuals are not related persons, within the meaning assigned by subsection 251(2) of the Income Tax Act (the “Act”), and they deal at arm’s length with each other.

3. One of the individuals, XXXXXXXXXX will be responsible for managing the development of the real estate project.

4. The Company has acquired an existing property located at XXXXXXXXXX. The Project will result from substantial renovations to this property. Upon completion, the Project will have a fair market value of approximately $XXXXXXXXXX.

5. The Company has secured first mortgage financing of approximately $XXXXXXXXXX and it would like secure an additional $XXXXXXXXXX in second mortgage financing.

Proposed Transaction

6. Each of the Shareholders, other than XXXXXXXXXX, will have their self-directed registered retirement savings plans (“RRSP”) invest $XXXXXXXXXX in a second mortgage secured by the Project. The second mortgages will be administered by a financial institution, will bear interest at a rate that the financial institution would generally charge for similar second mortgages offering similar security and will mature on a date that a similar second mortgage issued by the financial institution would normally mature. XXXXXXXXXX will not have his RRSP invest in a second mortgage because there are no funds available in his RRSP.

Purpose of the Proposed Transaction

7. The purpose of the proposed transaction is to provide the company with a source of necessary funding which will only be secured by second mortgages on the Project.

Additional Information

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

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

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

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

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

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

Ruling

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

A. Provided that the annuitants of the RRSPs that will invest in the second mortgages on the Project deal at arm’s length with the Company, the second mortgages 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.

The above ruling, which is based on the Act in its present form and does not take into consideration 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 transaction is completed 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

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