19(1) 5-8347
H. K. Tilak
(613) 957-2122September 1, 1989
Dear Sirs:
Re: Paragraph 212(13)(f) of the Income Tax Act
We are writing in response to your letter of June 22, 1989 to Mr. R. M. Beith in which you requested the Department's opinion regarding the application of paragraph 212(13)(f) of the income Tax Act (the "Act") in the hypothetical situation described below.
In the hypothetical situation that you describe, a non-resident pays an amount in satisfaction of interest on a mortgage that was entered into after March 31, 1977 and which is secured by real property situated in Canada and, for the purposes of Act, the amount so paid by the non-resident is deductible in computing the non-resident's taxable income earned in Canada. The amount of the mortgage exceeds the fair market value of the mortgage security, that is, the real property situated in Canada.
It is your view that, in the hypothetical situation you describe, paragraph 212(13)(f) of the Act should not apply to deem the non-resident to be a person resident in Canada in respect of the full amount paid by him in satisfaction of interest on the mortgage but should only apply in resect of that proportion of the amount so paid that the fair market value of the real property is of the amount of the mortgage over the fair market value of the real property is not, in effect, secured by the real property.
We so not agree with your view. It is our opinion that any indebtedness accompanied by a conveyance of property form the debtor to the creditor as security for the indebtness and on condition that the property will be reconveyed by the creditor or the debtor upon full repayment of the indebtedness in accordance with the terms f the indebtedness is a mortgage for the purposes of paragraph 212(13)(f) of the Act. Where, as in the hypothetical situation you describe, the property so conveyed by the debtor or the creditor as security is real property situated in Canada, it is our opinion that, notwithstanding that the amount of the mortgage exceeds the fair market value of the real property, paragraph 212(13)(f) of the Act would apply to deem the non-resident to be a person resident in Canada in respect of the full amount paid by the non-resident in satisfaction if interest on the mortgage because the mortgage security would not be extinguished, and the property reconveyed to the debtor, until the mortgage was repaid in full.
Our comments in this letter represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion.
Yours truly,
M.A. Hiltz Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch