15 February 2002 External T.I. 2002-0119675 - RRSP&MORTGAGE FORECLOSURE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the Agency should extend its administrative position (para. 10 of IT-320R2) not to apply the provisions of subsection 146(10) or section 207.1 of the Act beyond the normal one-year period.

Position: Perhaps.

Reasons: Determination that must be made by TSO, comments provided to assist in this determination.

		February 15, 2002

	Client Services	HEADQUARTERS
	Calgary TSO	Karen Power, CA
(613) 957-8953
	Attention:  Kim Shaw
		2002-011967

Qualified Investments in a Registered Retirement Savings Plan ("RRSP")

Recently, Mr. Scott Matheson provided our office with a copy of an enquiry dated January 2, 2002 and submitted to your office by the XXXXXXXXXX, concerning the situation where an RRSP trust acquires real property as a result of a default by the mortgagor. As indicated in our recent telephone calls (Shaw/Power), we have agreed to provide you with our comments to assist you in making your determination and preparing your reply.

Our Comments

Real property is not a qualified investment for an RRSP trust. Where an RRSP trust acquires a non-qualified investment,

a) subsection 146(10) of the Income Tax Act (the "Act") provides that the fair market value ("FMV") of the non-qualified investment is to be included in the annuitant's income, and

b) subsection 146(10.1) of the Act provides that the RRSP trust is required to pay taxes under Part I of the Act in respect of the income earned on the non-qualified investment, and

c) for each month that it holds the property subsection 207.1 of the Act provides that the trust shall pay a tax of 1% of the FMV of the non-qualified investment, other than property the FMV of which was included in the annuitant's income under subsection 146(10) of the Act.

However, as noted in paragraph 10 of Interpretation Bulletin IT-320R2 entitled Registered Retirement Savings Plans - Qualified Investments, the Canada Customs and Revenue Agency will not regard the acquisition of real property as an acquisition of a non-qualified investment where

d) the original mortgage investment of the RRSP trust was a qualified investment,

e) the acquisition through foreclosure or other procedure was necessary to protect the mortgage investment of the trust and was a result of actions or default of actions on the part of the mortgagor, and

f) the RRSP trustee holds the real property in the trust for the sole purpose of disposing of it and in fact does dispose of it within a reasonable period of time. A "reasonable period of time" is usually a year from the time of acquisition but may extend beyond a year provided any delays can be justified having regard to the facts of the particular case.

With respect to any particular situation, when the foreclosure property is put up for sale at a price above its market value, this may indicate that there is no real intent of disposing of the property within a reasonable period of time and, as such, the condition in (f) above would not be met. In our view, where a disposition is delayed because the property's current FMV is less than the original cost of the property, the conditions in (f) above would not be satisfied and the acquisition on the foreclosure should be treated as an acquisition of a non-qualified investment for purposes of the Act.

However, you may wish to consider relief, where a majority of the investors in the original mortgage are not RRSP trusts and the minority RRSP trust investors have no control over the disposition of the real property, since this would be considered an unusual circumstance referred to in paragraph 10 of IT-320R2.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a severed copy using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

We trust that the above comments will be of assistance.

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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