Section 130.1

Would shareholdings of a specified shareholder include those of a brother or sister? CRA stated:

[R]elated 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.

underline;">: Background. Opco, which qualifies as a MIC under s. 130.1(6), acquired real property (the Property) on foreclosing on a mortgage. Parent1 together with his children is a significant shareholder. Parent1 is the sole director of the manager of Opco.

Transactions

Opco will transfer the Property to LP in consideration for units of LP, with LP then managing and developing the Property. The sole shareholder, director and office of the general partner (GP Co) of LP will be a relative of Parent1, and GP Co's articles prohibit Opco from owning its shares. The Partnership Agreement will prohibit LP from acquiring any (foreign) property listed in s. 130.1(6)(c).

GP Co will be solely responsible for the management and control of the LP and will conduct the affairs of LP in such a manner that the liability of the limited partner will be limited. … Opco may advance funds to the LP from time to time for working capital and development… on arm's length commercial terms… .

Ruling

S. 253.1 will apply such that the acquisition of the LP units by Opco will not cause Opco to be carrying on LP's business for purposes of s. 130.1(6)(b).

In response to a question as to whether a mortgage investment corporation ("MIC") will satisfy the requirements in s. 130.1(6)(b) that its only undertaking be the investing of funds, and that it not manage or develop real property, if it invests in shares of a corporate subsidiary which owns and manages real property, CRA stated that such investment would not cause the MIC to no longer qualify as such provided that:

there are no facts which would suggest that the MIC is involved in the management or development of any real property held by the corporation.

After noting that s. 253.1 applied only for the purposes of s. 130.1(6)(b) rather than the other provisions of s. 130.1(6)(b), CRA noted that "the notion of a corporation investing indirectly in real estate situated outside Canada through a limited partnership and still qualifying as a MIC may be viewed as being inconsistent with the underlying tax policy of this provision," namely, "to increase the flow of private sector financing for residential housing in Canada by enabling small investors to pool their funds together in a flow-through investment vehicle."

For the purposes of the 20-shareholder test in s. 130.1(6)(d), an individual and the individual's RRSP and TFSA trusts would each count as a separate shareholder unless s. 104(2) was applied.

Where a corporation (intended to qualify as a mortgage investment corporation) has two classes of shares with identical attributes except that only one of the classes is entitled to bonus dividends, both classes of shares would qualify as common shares, so that s. 130.1(6)(e) (which is relevant only where there are holders of preferred shares) would not apply to require that the payment of dividends be ordered in the specified manner.

"Where a corporation otherwise would have met all the conditions outlined in subsection 130.1(6) of the Act acquires real property either for rent or for development, the corporation would not be considered a MIC since the condition that the corporation must not manage or develop real property, as outlined above, would not be met. It is also our view that the provision of services, which would likely be required where one is the owner of a rental property, is something other than the mere investing of funds. This would also be the case where the corporation hires a third party to manage or otherwise undertake the development of the real property, even where the property was acquired by the corporation as a result of a foreclosure ... ."

A corporation the common shares of which are held by one shareholder and the preferred shares of which are held by 19 shareholders potentially could comply with the test.

The phrase "like amount" in s. 130.1(6)(e) means that both the common and prefered shares must contain provisions entitling the holders to dividends, determined by reference to a fixed percentage of the stated capital of each class.

Investments in the shares of a mutual fund corporation investing in mortgages would not qualify as a type of property listed in s. 130.1(6)(f)(i).

A mortgage investment corporation will not necessarily lose its status as such by entering into an advisory management services agreement with an arm's length financial institution for asset/liability management activities on behalf of the mortgage investment corporation, provided the activity is undertaken solely to protect its investments.

Retirement and nursing homes qualify as residential property.