2 December 2002 External T.I. 2002-0165325 - INVESTING ACTIVITIES OF MIC

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Can a Mortgage Investment Corporation for purposes of section 130.1 of the Act ("MIC"), invest in units of trusts that are Mutual Fund Trusts for the purposes of section 132 of the Act, without causing the corporation to lose its status as a MIC?

2. Can a MIC invest in units of a limited partnership that owns real property without causing the corporation to no longer qualify as a MIC?

3. Can a MIC hold real property that it has acquired by either purchase or foreclosure, without causing the corporation to no longer qualify as a MIC?

Position:

1. Generally yes.

2. Maybe. Will depend upon the relevant facts.

3. Generally yes.

Reasons:

1. Unless specific facts indicate otherwise, the MIC would be considered to be investing its funds in units of a mutual fund trust. The MIC would generally be considered to be holding units in a trust and not the bonds, stocks, real property or other assets that are owned by the trust.

2. Depending on the particular facts, the MIC may be considered to be carrying on the business of the partnership which would be more activity that the mere investing of its funds. It would, in such circumstances, not satisfy the requirement in paragraph 130.1(6)(b).

3. Provided the MIC does not manage or develop the real property while it is held for resale, and provided the MIC does not purchase real property that would cause it to exceed the limitation for the total cost of all property that may be invested in real property (130.1(6)(g)), the acquisition of the property would generally not cause the corporation to no longer qualify as a MIC.

XXXXXXXXXX 						2002-016532
							Alison Campbell
December 2, 2002

Dear XXXXXXXXXX:

Re: Investment Activity of a Mortgage Investment Corporation (MIC)

This is in reply to your letter of September 27, 2002, wherein you requested our views on several investing activities and their potential impact on the status of a corporation as a MIC. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

The requirements for a corporation to qualify as a MIC for purposes of the Income Tax Act (the "Act") are found in subsection 130.1(6) of the Act. In addition to specific requirements regarding the ownership structure of the corporation, subsection 130.1(6) also contains restrictions as to the nature of investment activities in which a MIC may engage, and the proportion of its property that that must be, and that can be, in the form of particular types of property.

Investing in Units of Mutual Fund Trusts

A number of your concerns seem to relate to the investment by a MIC in the units of a mutual fund trust. We assume that you are referring to units of trusts that are mutual fund trusts for purposes of section 132 the Act. Where a MIC acquires units of a mutual fund trust, it will be considered to have an investment in units of a trust and not to have any interest in the property held by the trust. For example, if a MIC were to acquire units of a mutual fund trust that held mortgages on real property, shares of corporations and Canadian corporate bonds, for the purposes of applying subsection 130.1(6) of the Act, the MIC will be considered to own units of the mutual fund trust and not an interest in the mortgages, shares and bonds held by the trust. Provided all other criteria for being a MIC are satisfied and, provided there are no facts in a particular case which would suggest that the MIC has any direct beneficial ownership of the property held in the trust or is involved in the management or development of any real property in held by the trust, the fact that the MIC holds units in mutual fund trust would not, in and of itself, cause the corporation to lose its status as a MIC for purposes of the Act.

Where a MIC invests in units of a trust that is not a mutual fund trust for purposes of the Act, whether the investment could cause the corporation to lose its status as a MIC, would require an examination of all the relevant facts regarding the trust agreement and any involvement of the MIC in the activities of the trust. If, for example, a MIC acquires units of a "bare trust" it would be our view that the MIC itself owns the property to which the trust holds legal title rather than holding an interest in a trust as an investment. The MIC would also generally be considered to be carrying on any activities of management or development in that may be undertaken respect of the property held in the bare trust.

Investing in Limited Partnerships That Manage and/or Develop Real Property

Regarding investments by MIC's in limited partnerships, it will be dependent upon the facts of a particular investment as well as the partnership law in the relevant jurisdiction, whether the acquisition of limited partnership units could cause a corporation to lose its status as a MIC. Under the common law, the courts have held that where the jurisdictional law regarding partnerships provides that a partnership is an agreement among the partners to carry-on business in common, then regardless of the extent of a particular partner's risk or involvement, each partner will be considered to be carrying on the business of the partnership. (See The Queen v. Robinson et al. 98 DTC 6232 (F.C.A.)).

Subsection 253.1 of the Act, to some extent modifies the above noted common law principal. This section provides that for the purposes of certain provisions of the Act, including paragraph 130.1(6)(b), where a trust or corporation holds an interest in a partnership and by operation of any law respecting partnerships the liability of the partner as a member of the partnership is limited, the trust or corporation will not be considered to carry on any business or other activity of the partnership, solely because the trust or corporation acquired and holds the partnership interest. As a consequence, whether a MIC that holds a limited partnership interest in a partnership that manages and/or develops real property, would be considered to itself carry on the business of management and/or development of real property and therefore be considered to be offending paragraph 130.1(6)(b) of the Act, can only be determined after a review of all the relevant facts.

Acquisition of Unimproved Real Estate

Finally, you asked whether, all other conditions for being a MIC having been satisfied, if a MIC could lose its status as a MIC for purposes of the Act, if it were to acquire unimproved real property, by purchase or by foreclosure and hold it for resale. As we stated in our document #9726425, based on the conditions listed in paragraphs 130.1(6)(a) to (i) of the Act, a corporation will not be precluded from being a MIC solely because it may happen to own real property. However, the following specific conditions with respect to the real property must be met:

1) the real property must be considered as part of its sole undertaking to only invest funds of the corporation and that the corporation does not manage or develop any real property;

2) the real property must not be situated outside Canada; and

3) the cost amount of all real property, including leasehold interests in such property (but excluding real property acquired by the corporation by foreclosure or otherwise after default made on a mortgage, hypothec or agreement of sale of real property) must not exceed 25% of the cost amount to it of all its property.

Whether each of these above criteria are met, is a question of fact to be determined upon a review of all relevant information regarding the real property investments made by the corporation.

For the purposes of the requirement that a MIC not manage or develop any real property, it is our view that where the MIC provides services to tenants of a rental property that the MIC has acquired, or develops the property while the property is held for resale, the MIC would be considered to be managing or developing real property for the purposes of paragraph 130.1(6)(b). Furthermore, a MIC will also be considered to be managing or developing real property where it hires another party to provide services under a rental agreement to tenants of a property or to develop the property on its behalf.

We hope that our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Section Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch