7 August 1990 Income Tax Severed Letter - Leveraged investments in U.S. real estate partnerships

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.

Dear Sirs:

Re: Leveraged Investments in U.S. Real Estate Partnerships

This is in response to your letter of December 11, 1989 wherein you enquired about the Canadian tax implications of structuring a U.S. real estate offering in a particular manner. The attributes of the investment vehicle you are contemplating are as follows:

• 1. XXX
• 2. XXX
• 3. XXX
• 4. XXX
• 5. XXX

In response to your question on the Canadian withholding tax implications of the information you have presented, the question of whether a mortgage or a similar debt obligation is secured by property situated outside Canada is a question of fact. At present we are unaware of a debt instrument where it can be said that the debt is non-recourse debt secured by a property where no mortgage has been officially registered. Accordingly, without further details, we are unable to comment on whether interest paid on such debt would qualify for exemption from Part XIII withholding tax under subparagraph 212(1)(b)(viii) of the Act. In any case, it is our understanding that such a mortgage would not be considered a bona fide mortgage for U.S. estate tax purposes and may therefore be ineffective in reducing such taxes.

As is the case with the issue in subparagraph 212(1)(b)(viii) of the Act, the application of GAAR is a question of fact. Given the limited details you have represented, we are unable to comment on the application of section 245 of the Act. However, we would refer you to the Department's response to question number 42 at the 1989 Canadian Tax Foundation Conference Revenue Canada Round Table which addresses a similar set of facts.

Subsections 18(2), 18(3.1) and subparagraph 111(1)(e)(i) of the Act may also operate to limit the extent to which interest and CCA are deductible under Part I of the Act under these circumstances.

We hope that the above is of assistance to you.