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Attention: XXXXXXXXXX
Dear Sirs:
RE: Paragraph 115(1)(b) and subsections 115(3) and 248(4)
This is in reply to your letter dated June 2, 1992 in which you requested our interpretation of the above noted provisions of the Income Tax Act to a hypothetical situation.
Assumptions
For the purpose of providing our views, we have assumed the following:
1. A non-resident individual loans funds to a partnership which is a "Canadian partnership" as defined in the Act. Amounts payable under the loan are secured by way of a second mortgage on a Canadian building owned by the partnership.
2. The loan will be for a term of three years and will bear interest at a rate of 11% per annum. The terms of repayment will be principal plus interest plus 10% of the increase in value of the building, if any, over the three-year term as determined by an independent appraisal.
3. The non-resident may, during the term of the loan, dispose of the loan to another non-resident individual.
Opinion Requested
You asked whether we would consider the disposition of the loan to be a disposition of "real property situated in Canada" for the purposes of paragraph 115(1)(b).
Our Opinion
In our view the loan, which gives the lender the right to participate in the appreciation of particular real property in Canada and which is secured by real property in Canada, is "real property situated in Canada" within the meaning of paragraph 115(1)(b).
Discussion
Under subsection 115(3), interests in real property situated in Canada include "any interest therein". Under subsection 248(4) the meaning of interests in real property is restricted. Subsection 248(4) reads as follows:
In this Act, an interest in real property includes a leasehold interest in real property but does not include an interest as security only derived by virtue of a mortgage, hypothec, agreement for sale or similar obligation.
In our view, the non-resident's interest in the building, which includes a right to participate in the appreciation of the building, is not "an interest as security only". Subsection 248(4) does not prevent the non- resident's interest from being an interest in real property.
The foregoing opinions are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch