2014-0528311E5 Mortgage Investment Corporation - RRSP

Principal Issues: Is the brother or sister of a shareholder of a mortgage investment corporation (MIC) a specified shareholder for purposes of the definition of MIC in 130.1(6)? For purposes of determining if an RRSP annuitant has a significant interest in an investment, for purposes of the RRSP prohibited investment rules, is the annuitant's brother or sister a specified shareholder?

Position: No. Yes.

Reasons: Subparagraph 130.1(6)(d)(iv) modifies the meaning of "related persons" for purposes of the meaning of "specified shareholder" used in paragraph 130.1(6)(d). The definition of "specified shareholder" in 248(1) which is used in determining "significant interest" for purposes of the RRSP prohibited investment rules will include the brother or sister of the RRSP annuitant.

Author: Allen, Gary
Section: 130.1(6), 207.01, 4900(1)(c), 248(1), 251

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                                                                                                                                                    2014-052831
                                                                                                                                                    G. Allen         

March 20, 2015

Dear XXXXXXXXXX:

Re: Mortgage Investment Corporation (MIC)

This is in reply to your email sent to us on April 15, 2014 regarding the conditions that must be satisfied for a corporation to be a MIC, as defined in subsection 130.1(6) of the Income Tax Act (the “Act”), and the rules that apply for MICs to be qualified investments for registered retirement savings plans (RRSP).  Specifically, you enquire whether for purposes of the MIC definition, a specified shareholder will include the shareholder’s brother or sister.  You also enquire, for purposes of the definition of “prohibited investment” that applies to RRSP trusts, and whether an RRSP annuitant has a significant interest in a corporation, whether a specified shareholder will include a brother or sister of the RRSP annuitant.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Subsection 130.1(6) describes the conditions that must be satisfied for a corporation to be a MIC for purposes of the Act.  Subparagraph 130.1(6)(d)(iv) amends the definition of “related persons” in paragraph 251(2)(a), for purposes of paragraph 130.1(6)(d), such that a related person means an individual and:

*     the individual’s child, as defined in subsection 70(10), who is under 18, or
*     the individual’s spouse or common-law partner.

Accordingly, related persons for purposes of subparagraph 130.1(6)(d)(ii) and the meaning of “specified shareholder” as modified in paragraph 130.1(6)(d), will only include, in general, an individual’s minor child, spouse, or common-law partner and not an individual’s brother or sister.

In general, paragraph 4900(1)(c) of the Income Tax Regulations (the "Regulations") permits a share of a MIC to be a qualified investment for an RRSP trust provided the MIC does not hold as part of its property any indebtedness of a person who is a connected person under the RRSP.  Subsection 4901(2) of the Regulations defines a "connected person" and includes the annuitant of an RRSP or any person who does not deal at arm's length with the annuitant.

Subsection 207.01(1) defines the term “prohibited investment” for an RRSP and basically prohibits closely-held investments, in relation to the RRSP annuitant, from being held by an RRSP trust.  Specifically, an investment will be a prohibited investment where the RRSP annuitant has a “significant interest” in the investment (“the particular investment”).  For the purpose of determining whether an RRSP annuitant has a significant interest, an interest in the particular investment held by a person not dealing at arm’s length with the RRSP annuitant is also taken into account.

In accordance with subsection 207.01(4) of the Act, an individual has a significant interest in a corporation at any time if the individual is a specified shareholder of the corporation at that time. In general, subsection 248(1) of the Act defines a "specified shareholder" as a taxpayer, including a person with whom the taxpayer does not deal at arm’s length, who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of capital stock of the corporation or any other corporation that is related to the corporation. Consequently, if the annuitant, and persons not dealing at arm’s length with the annuitant, of the RRSP, individually or together own directly or indirectly 10% or more of any class of shares of the MIC, the investment in the MIC will be considered a prohibited investment for the RRSP.  For purposes of the above, and pursuant to the definitions of “arm’s length”, “related persons” and “blood relationship” in section 251 of the Act, an annuitant and a brother or sister of the annuitant are persons who do not deal with each other at arm’s length. 

We trust that our comments will be of assistance. 

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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