2007 Ruling 2007-0225141R3 - XXXXXXXXXX

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: 1) Are XXXXXXXXXX prescribed debt obligations? 2) Does withholding apply in respect of interest on XXXXXXXXXX held by a non-resident investor?

Position: 1) No. 2) No.

Reasons: 1) Paragraphs 7000(1)(a) to (d) of the Regulations are not applicable. 2) Subclause 212(1)(b)(ii)(C)(I) will apply to exempt the interest payments from Part XIII tax.

XXXXXXXXXX  							2007-022514

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

To the best of your knowledge, and that of the taxpayer, none of the issues described herein is:

(i) dealt with in an earlier tax return of the taxpayer or a related person;

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

(iii) under objection by the taxpayer or a related person; nor

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired. .

Definitions

In this letter, the following terms have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof;

(b) "ARM" means an adjustable rate mortgage (with a floating interest rate), as described in Paragraph 13 below;

(c) "Canco" means the XXXXXXXXXX;

(d) XXXXXXXXXX;

(e) "CRA" means the Canada Revenue Agency;

(f) "excluded obligation" has the meaning assigned by paragraph 214(8)(a) of the Act;

(g) "excluded property" has the meaning assigned by paragraph 116(6)(d) of the Act;

(h) "Floating Rate XXXXXXXXXX" means XXXXXXXXXX issued in respect of a pool of VRM, ARM, or a WAC XXXXXXXXXX;

(i) "Investors" has the meaning assigned by Paragraph 7 below;

(j) "Issuer" has the meaning assigned by Paragraph 7 below;

(k) "investment contract" has the meaning assigned by subsection 12(11) of the Act;

(l) "mark-to-market property" has the meaning assigned by subsection 142.2(1) of the Act;

(m) XXXXXXXXXX;

(n) "Paragraph" means a numbered paragraph in this advance tax ruling;

(o) "prescribed debt obligation" has the meaning assigned by subsection 7000(1) of the Income Tax Regulations;

(p) "Private Insurer" has the meaning assigned in Paragraph 4 below;

(q) "Proposed Transactions" means the transactions described in Paragraphs 7 to 28;

(r) "specified debt obligation" has the meaning assigned by subsection 142.2(1) of the Act;

(s) "VRM" means a variable rate mortgage (with a floating interest rate), as described in Paragraph 13 below;

(t) "WAC XXXXXXXXXX" means XXXXXXXXXX bearing an interest rate based on the weighted average coupon of mortgages (VRM or ARM) comprising the pool, as described in Paragraph 15 below.

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

Facts

1. Canco's tax account number is XXXXXXXXXX, its district taxation office is the XXXXXXXXXX Tax Services Office and its taxation centre is the XXXXXXXXXX Taxation Centre.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

5. The Canadian income tax treatment of XXXXXXXXXX issued before XXXXXXXXXX forms the subject of a series of advance income tax rulings, including advance ruling number XXXXXXXXXX, and advance ruling number XXXXXXXXXX.

6. The rulings requested result from, inter alia, the obligation of the issuer of XXXXXXXXXX to disclose to potential investors the principal Canadian federal income tax consequences of purchasing, holding and disposing of XXXXXXXXXX.

Proposed Transactions

7. An issuer of XXXXXXXXXX (generally, a financial institution) (the "Issuer") will accumulate a pool of mortgages that are insured against borrower default by Canco or a Private Insurer and sell an undivided interest in the mortgages to investors (the "Investors"). The mortgages will be sold, on a fully-serviced basis, by the Issuer for a single aggregate consideration, with respective undivided beneficial ownership interests in such pool represented by XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

XXXXXXXXXX.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16.XXXXXXXXXX

17. XXXXXXXXXX

XXXXXXXXXX.

18.XXXXXXXXXX.

XXXXXXXXXX.

19. XXXXXXXXXX.

20. XXXXXXXXXX.

21. XXXXXXXXXX.

22. XXXXXXXXXX.

23. XXXXXXXXXX.

24. XXXXXXXXXX.

25. XXXXXXXXXX.

26. XXXXXXXXXX.

27. XXXXXXXXXX.

28. XXXXXXXXXX.

Purpose of the Proposed Transactions

29. It is anticipated that the issuance of additional XXXXXXXXXX will further the stated intent of the XXXXXXXXXX program, which is to XXXXXXXXXX

Rulings Given

Provided that the above facts, Proposed Transactions and purpose of the Proposed Transactions are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof, and provided further that the Proposed Transactions are completed in the manner described above, we confirm that:

A. Amounts received or receivable, or, where applicable, accrued, as, on account, or in lieu of payment of, or in satisfaction of the stipulated interest in respect of a XXXXXXXXXX, whether through the Issuer, the XXXXXXXXXX or by XXXXXXXXXX pursuant to its guarantee, will be included in the income for the year of an Investor resident in Canada pursuant to paragraph 12(1)(c) or, where applicable, subsection 12(3) of the Act.

B. Provided that it is reasonable in amount, the Servicing Fee will be deductible in computing the income of the Investors pursuant to section 9, and the deduction thereof will not be limited by paragraph 18(1)(a) nor precluded by paragraph 18(1)(b) of the Act. Consequently, Investors, other than a "financial institution" within the meaning of that term as defined in subsection 142.2(1) of the Act, will be permitted to report for Canadian income tax purposes the net amount remitted or to be remitted to them by, or on behalf of, the Issuer as described in Paragraph 26 above.

C. XXXXXXXXXX.

D. By virtue of the fact that the interest in respect of a XXXXXXXXXX will be paid on a monthly basis and that the Investor (other than an Investor to whom subsection 12(3) applies) will have included in computing income throughout each of the Investor's preceding years in which the Investor held the XXXXXXXXXX, the interest accrued thereon for the monthly periods ending in such preceding years, for the purpose of subsection 12(4), a XXXXXXXXXX will not be an "investment contract", as that term is defined in subsection 12(11) of the Act, of such an Investor.

E. A XXXXXXXXXX will not constitute a prescribed debt obligation for the purpose of subsection 12(9) of the Act.

F. By virtue of subclause 212(1)(b)(ii)(C)(I), interest paid or credited in respect of XXXXXXXXXX to an Investor who is not resident in Canada will be exempt from tax otherwise exigible on such interest pursuant to paragraph 212(1)(b) of the Act.

G. A XXXXXXXXXX, for purposes of subsection 214(7), is an "excluded obligation" within the meaning of paragraph 214(8)(a) by virtue of the fact that the interest paid or credited in respect thereof is exempt from tax by reason of subclause 212(1)(b)(ii)(C)(I) and for purposes of subsection 214(6) is an obligation described in paragraph 214(8)(a) of the Act.

H. Provided that an Investor, which is not a "financial institution" within the meaning of that term as defined in subsection 142.2(1), holds XXXXXXXXXX as "capital property", as that term is defined in subsection 248(1), the amount of any gain or loss realized by the Investor upon a disposition of XXXXXXXXXX will be a "capital gain" or a "capital loss", within the meaning of those terms in subsection 248(1) of the Act.

I. A XXXXXXXXXX will be a "qualified investment" for a registered retirement savings plan pursuant to paragraph (a) of the definition of that term in subsection 146(1), for a registered retirement income fund pursuant to paragraph (a) of the definition of that term in subsection 146.3(1), for a registered education savings plan pursuant to paragraph (a) of the definition of that term in subsection 146.1(1) and for a deferred profit sharing plan or a revoked plan pursuant to paragraph (b) of the definition of that term in section 204 of the Act.

J. For purposes of section 116 of the Act, a XXXXXXXXXX is an "excluded property" within the meaning of paragraph 116(6)(d).

K. Pursuant to subsection 248(4), a XXXXXXXXXX will not constitute an interest in real property for purposes of the Act.

L. Where an Investor that is a "financial institution", within the meaning of that term as defined in subsection 142.2(1), holds a XXXXXXXXXX which is a "mark-to-market property", as that term is defined in subsection 142.2(1), the amount of any income, gain or loss arising therefrom will be determined pursuant to section 142.5 of the Act.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are 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 in respect of MBS issued from the date of this letter to XXXXXXXXXX.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted any other tax consequences relating to any facts or proposed transactions referred to herein other than those specifically described in the rulings, nor has the CRA agreed to, reviewed or made any determination in respect of the fair market value of any property.

Comment

With respect to Ruling L above, it should be noted that on December 28, 2006, in News Release 2006-091, the Department of Finance announced proposals to the taxation of financial institutions. It has been proposed that, effective for taxation years commencing after October 1, 2006, all specified debt obligations held by financial institutions that, by virtue of generally accepted accounting principles, must be carried for financial reporting purpose at their fair market value, will be treated as mark-to-market properties.

Yours truly,

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