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.
Principal Issues: Where a mortgage investment corporation ("MIC") forecloses on a rental property, what level of service can it provide to tenants before it no longer meets the requirement of paragraph 130.1(6)(b) of the Act throughout a taxation year?
Position: Question of fact. However, it is our view that where a corporation provides services, or hires another party to provide services on its behalf, to tenants of a rental property that it has acquired, the corporation will be considered to be managing the property and will therefore not meet the requirement of paragraph 130.1(6)(b) of the Act throughout the taxation year.
Reasons: Wording of paragraph 130.1(6)(b). Consistent with previous interpretations.
XXXXXXXXXX
2010-038752
T. Elsey
February 22, 2011
Dear XXXXXXXXXX :
Re: Mortgage Investment Corporations
We are writing in response to your email dated November 17, 2010 wherein you have asked us to clarify what level of services may be provided to tenants by a mortgage investment corporation ("MIC") that has foreclosed on a rental property before it is considered to no longer meet the requirement of paragraph 130.1(6)(b) of the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments which may be of assistance.
To qualify as a MIC for the purposes of the Act, a corporation must, throughout the taxation year, satisfy the criteria in subsection 130.1(6) of the Act, which include restrictions on the types of activities in which the corporation may engage. Paragraph 130.1(6)(b) of the Act requires that the corporation's "only undertaking was the investing of funds of the corporation" and that the corporation "did not manage or develop any real property".
Whether the requirement of paragraph 130.1(6)(b) of the Act is met by a particular corporation is a question of fact that can only be determined upon a review of all relevant information. However, consistent with our previous interpretations, it is our view that the provision of services to tenants of a rental property that a corporation has acquired, or the hiring of another party to provide these services under a rental agreement, would be considered to be managing real property for the purposes of paragraph 130.1(6)(b) of the Act. Managing real property would include repairs and maintenance to a rental unit and the negotiation of new leases with tenants. Accordingly, we are of the view that where a corporation undertakes any such activities, it would not meet the requirement of paragraph 130.1(6)(b) of the Act.
We note that the role of the CRA is to administer and enforce the Act as passed by Parliament. If from a tax policy perspective you believe that the requirement under paragraph 130.1(6)(b) of the Act should not apply in respect of property acquired by foreclosure, we would recommend that you send your views to the Department of Finance as the setting of tax policy and making legislative amendments is within their mandate.
We trust these comments are of assistance.
Yours truly,
Jenie Leigh
Section Manager
for Division Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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