Registered Plans Division Financial Industries DivisionS. M. Kotlar Director
Attention: Philip Kohnen
Registered Investments Section 204.4
This is in reply to your memorandum of March 25, 1993 requesting our assistance concerning an enquiry you received from XXXXXXXXXX
We understand that XXXXXXXXXX enquiry is on behalf of a Real Estate Mutual Fund Trust that is considering applying for registered investment status under section 204.4 of the Income Tax Act (the "Act") as a pooled fund trust. In this regard, XXXXXXXXXX has requested any assistance you can provide with respect to the interpretation of the following phrases contained in subparagraphs 204.4(2)(a)(iii) and (iv) and subsections 204.6(2) and (3) of the Act:
1. "the fair market value at the time of acquisition";
2. "the aggregate of all amounts each of which is an amount owing by it on account of its acquisition of real property"; and
3. "where at the end of any month a taxpayer that is a registered investment".
Our comments on the points raised by XXXXXXXXXX are as follows:
Fair Market Value
The fair market value of a property at the time of its acquisition is not a question of interpretation of the law, it is a question of fact. A well accepted definition of "fair market value" is that contained in Black's Law Dictionary, 6th edition, which reads as follows:
"the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts".
Because it is a question of fact, the Department does not provide advance rulings on the fair market value of a property nor does it as a general rule predetermine the fair market value of a property in any other context.
Rather, the determination of the fair market value of a property would be the responsibility of the fund administrators. The Department would normally become involved only after the fact and only if it considered the value assigned to a property to be unreasonable in the circumstances. This is a function of the valuations staff in the relevant District Taxation Office. At Head Office, it is the function of the Valuations Services Section of the Audit Technical Support Division.
Consequently, although the purchase price paid by the fund for a particular property may very well be the fair market value of the property at the time of its acquisition, we are unable to confirm that such is the case. The same thing applies to XXXXXXXXXX question concerning the fair market value of "cash property", although where the cash property is Canadian currency we would expect that the fair market value of the Canadian currency at the date of its acquisition would be equal to the amount of Canadian currency on hand at the relevant time.
Amount Owing on Account of the Acquisition of Real Property
We note that the phrase "on account of" is used in subparagraphs 204.4(2)(a)(ii) and (iii) and subsection 204.6(3) of the Act, whereas the phrase "in respect of" is used in subsection 204.6(2) of the Act. We consider these phrases to be interchangeable for the purposes of sections 204.4 and 204.6.
We agree with XXXXXXXXXX that "an amount owing on account of the acquisition of real property" would include
(a) principal and accrued interest owing in respect of any mortgage assumed on the acquisition of a real property,
(b) principal and accrued interest owing in respect of any mortgage negotiated to finance the acquisition of a real property,
(c) principal and accrued interest owing in respect of any mortgage negotiated to finance construction of a building, and
(d) principal and accrued interest owing in respect of any mortgage negotiated to refinance the debt referred to in any of (a) to (c) above and (e) below.
We also agree with XXXXXXXXXX that "an amount owing on account of the acquisition of real property" would include
(e) principal and accrued interest owing in respect of any mortgage negotiated to finance capital improvements in relation to an existing real property, provided the improvements are real property.
However, we do not agree that "an amount owing on account of the acquisition of real property" would include principal and accrued interest owing in respect of any other indebtedness that is secured by real property. We fail to see why simply securing a debt with real property would have the effect of transforming a debt that is not an amount owing in respect of the acquisition of real property into one that is.
At the end of any Month
Where applicable, tax is exigible under section 204.6 of the Act only where property is held at the end of a particular month that occurs after the particular trust has become a registered investment. We thus agree with XXXXXXXXXX that where a pre-existing fund applies for registered investment status as a pooled fund trust and is accepted for registration, the fund would not become retroactively liable for tax under section 204.6 of the Act in respect of any month ending prior to the effective date of its registration.
Assessing Policy
XXXXXXXXXX has asked if Revenue Canada has an assessing practice with respect to providing relief from the imposition of Part X.2 tax where a registered investment is in the course of liquidating its portfolio to effect a termination.
There is nothing in our files indicating that such a practice exists. However, this is an administrative issue that presumably would be dealt with by the T2 and T3 Programs Division of the Assessment of Returns Directorate. We therefore suggest that you (XXXXXXXXXX) contact that Division in this regard.
for DirectorFinancial Industries DivisionRulings Directorate HAA7200-6