2007 Ruling 2007-0222661R3 - Refinancing - Pension Corporation

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: Will the refinancing of money borrowed for the purpose of earning real income from real property satisfy the conditions of clause 149(1)(o.2)(ii)(C) of the Act?

Position: Yes

Reasons: Provided that the original borrowed money satisfied the conditions of clause 149(1)(o.2)(ii)(C), we will consider that the refinancing of the borrowed money will not, in and of itself, cause the pension corporation to fail to comply with clause 149(1)(o.2)(ii)(C) of the Act.

XXXXXXXXXX 								2007-022266

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation") XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced Corporation. We acknowledge receipt of your emails sent XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the above-referenced Corporation, none of the issues involved in the ruling request is:

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

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

(iii) under objection by the Corporation or a related person;

(iv) before the courts; nor,

(v) the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Definitions

a) "CRA" means the Canada Revenue Agency;

b) "Former Shareholder" means XXXXXXXXXX;

c) "Lender" means XXXXXXXXXX;

d) "Parent" means XXXXXXXXXX; and

e) "Property" means the land, building and all fixtures and chattels related thereto at XXXXXXXXXX.

Facts

1. The Corporation was incorporated under the Business Corporations Act (XXXXXXXXXX ) on XXXXXXXXXX. Initially, the Former Shareholder and the Parent each owned 50% of the common shares of the Corporation. There were not, nor have there ever been, other shareholders of the Corporation.

2. The Corporation has a registered office at XXXXXXXXXX.

3. The relevant tax services office for the Corporation is the XXXXXXXXXX Tax Services Office.

4. The Corporation is exempt from Part I tax under the Act pursuant to paragraph 149(1)(o.2) of the Act.

5. On XXXXXXXXXX , the Corporation purchased the Property with money borrowed, approximately CDN $XXXXXXXXXX, from the Parent ("Loan A") and the Former Shareholder ("Loan B") (collectively, the "Original Loans").

6. The Corporation was incorporated for the sole purpose of owning the Property and earning rental income from the Property. Accordingly, the money borrowed, as described in 5 above, was used solely for the purpose of earning income from real property pursuant to clause 149(1)(o.2)(ii)(C) of the Act.

7. The Property is a XXXXXXXXXX that generates rental income for the Corporation.

8. On XXXXXXXXXX, the Parent purchased all of the Former Shareholder's common shares and became the sole shareholder of the Corporation. At the time of this purchase, the Corporation wished to borrow money from third party sources to repay Loan B from the Former Shareholder to the Corporation but as a result of various commercial and timing issues, was not able to raise the third party financing at that time. Accordingly, at the time of the purchase of the Former Shareholder's common shares, the Parent also purchased and was assigned Loan B. The Parent purchased Loan B from the Former Shareholder for its principal amount of CDN $XXXXXXXXXX. Other than the assignment of Loan B from the Former Shareholder to the Parent, no other amendments, revisions or changes were made to the terms of Loan B.

9. The Parent currently owns all of the shares of the Corporation.

Proposed Transaction

10. The Corporation will borrow CDN $XXXXXXXXXX from the Lender. This borrowing will be secured by a mortgage against the Property. The entire amount to be borrowed, i.e., CDN $XXXXXXXXXX, will be used to refinance part of the Original Loans. Accordingly, the entire amount to be borrowed will be used solely for the purpose of earning income from real property, pursuant to clause 149(1)(o.2)(ii)(C) of the Act

Purpose of the Proposed Transaction

11. The purpose of the proposed transaction is to provide the Corporation with better financial leverage, thereby improving the returns to the Parent and increasing the value of the Property.

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 as described above, we rule as follows:

A. The borrowing by the Corporation from the Lender as described in 10 above and partial repayment of the Original Loans will not, in and of itself, cause the Corporation to fail to comply with clause 149(1)(o.2)(ii)(C) of the Act.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the proposed transaction is completed by XXXXXXXXXX.

Yours truly,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch