2020-0872241R3 Pension Corporation - Financing

Principal Issues: Whether the proposed borrowing of money by a corporation, where such borrowed money will be secured by a mortgage granted by the corporation on existing real property owned by the corporation and will be used for activities described in subclause 149(1)(o.2)(ii)(A)(I) or (II), satisfies the requirements in subparagraph 149(1)(o.2)(ii).

Position: Yes.

Reasons: The use of existing real property to secure additional borrowing, where such borrowed money is used for activities described in subclause 149(1)(o.2)(ii)(A)(I) or (II), is part of acquiring and investing in real property for the purposes of subparagraph 149(1)(o.2)(ii).

Author: XXXXXXXXXX
Section: 149(1)

XXXXXXXXXX
                                                                                            2020-087224

XXXXXXXXXX, 2021

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX updating the request for an advance income tax ruling (“Ruling”) on behalf of XXXXXXXXXX (the “Taxpayer”) with respect to an acquisition of property using borrowed money. We also acknowledge the additional information provided by email.

To the best of your knowledge and that of the Taxpayer, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the Taxpayer or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by the Taxpayer or a related person; or

C. the subject of a current or completed court process involving the Taxpayer or a related person; or

ii. the subject of a Ruling request previously considered by this Directorate.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions, and any references thereto are provided solely for the convenience of the reader.

Definitions

Unless otherwise stated:

i. all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations);

ii. all terms and conditions used in this Ruling that are defined in the Act (or in the Regulations) have the meaning given in such definition; and

iii. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“ACo” means the Taxpayer;

“ACo Real Property” refers to the land, building and all fixtures and chattels related thereto located at XXXXXXXXXX;

“Board” refers to the XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Intermediate Corporation” refers to XXXXXXXXXX;

“Intermediate Corporation Shareholders” refer to (i) the Board, on behalf of the Plan, XXXXXXXXXX;

“Lender” means a Canadian financial institution that operates at arm's length with ACo and the Intermediate Corporation Shareholders for purposes of the Act; and

“Plan” refers to the XXXXXXXXXX.

Facts

1. The Board was created under the XXXXXXXXXX for the purposes of administering the XXXXXXXXXX and to act as trustee of the Plan.

2. The Plan is a registered pension plan and a “defined benefit plan” for purposes of the Act, providing pension benefits to the employees of XXXXXXXXXX. The Plan’s CRA registration number is XXXXXXXXXX.  

3. The Board also administers various trust accounts in addition to the Plan and acts as an investment manager for other funds including XXXXXXXXXX.  

4. ACo is a corporation incorporated under the Canada Business Corporations Act and is exempt from Part I income tax under subparagraphs 149(1)(o.2)(ii) and (iv). All of the issued and outstanding shares of ACo are owned by the Intermediate Corporation. The Intermediate Corporation is exempt from Part I income tax under subparagraphs 149(1)(o.2)(iii) and (iv). All of the issued and outstanding shares of the Intermediate Corporation are owned by the Intermediate Corporation Shareholders. All of the Intermediate Corporation Shareholders are exempt from tax under paragraph 149(1)(c), paragraph 149(1)(d) or paragraph 149(1)(o) as a “registered pension plan” as defined under the Act.

5. ACo owns the ACo Real Property. The ACo Real Property was acquired by ACo for the purpose of earning income from real property and is capital property to ACo for purposes of the Act.

Proposed Transactions

6. ACo will borrow an amount (the “Borrowed Funds”) from the Lender. The Borrowed Funds will be secured by a mortgage granted by ACo in respect of the ACo Real Property. Any new property acquired with the Borrowed Funds will not be given as security. It is estimated that the applicable loan-to-value ratio will be between XXXXXXXXXX% and XXXXXXXXXX%.

7. ACo will use the Borrowed Funds to acquire property to be owned by ACo that is either (i) real property situated in Canada, or (ii) an interest in a limited partnership, formed under the laws of a province of Canada, that limits its activities to acquiring, holding, maintaining, improving, leasing or managing capital property that is real property situated in Canada owned by the partnership.

8. Any investment by ACo using the Borrowed Funds will be in property described in paragraph 7.

9. Any investment or property acquired using the Borrowed Funds will be on account of capital.

10. The Borrowed Funds are solely for the purpose of earning income from real property.

11. In the event ACo disposes of any property acquired using the Borrowed Funds, the proceeds of disposition will be used to repay any outstanding indebtedness in respect of the Borrowed Funds (the “Outstanding Indebtedness”) or to acquire other property described in clause 149(1)(o.2)(ii)(A), to the extent of the amount of the Outstanding Indebtedness. Any proceeds of disposition remaining after extinguishing the Outstanding Indebtedness will be used in any manner deemed appropriate by ACo.

12. No other arrangements will be entered into in connection with the investment or acquisition of property using the Borrowed Funds other than those reasonably required to conclude or complete said investment or acquisition of property.

Purpose of Proposed Transactions

13. The purpose of the proposed transactions is to introduce, given the current favorable interest rate environment, a moderate level of leverage against the ACo Real Property so as to achieve a reasonable rate of return for the Intermediate Corporation Shareholders in a manner which is prudent under the circumstances. 

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

The borrowing by ACo from the Lender as described in paragraph 6, and the acquisition of property as described in paragraph 7 will not, in and of themselves, cause ACo to fail to comply with subparagraph 149(1)(o.2)(ii).

This ruling is subject to the limitations and qualifications set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2021, and are binding on the CRA provided that the proposed transactions described in paragraphs 6 and 7 are completed no later than the end of XXXXXXXXXX.

Comments

The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.



Yours truly,





XXXXXXXXXX
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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