31 October 1996 External T.I. 9635705 - RRSP MORTGAGE

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 Department.

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

Principal Issues:

Do high yield mortgages qualify for RRSPs.

Position:

Yes

Reasons:

Nothing in law restricts interest on arms length mortgages

XXXXXXXXXX							5-963570

October 31, 1996

Dear XXXXXXXXXX:

Re: Mortgages held in RRSPs

This is in reply to your facsimile of October 25, 1996, regarding the holding of a mortgage in an RRSP.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990, and the special release thereto (enclosed). Accordingly, we can not address the specific situation detailed in your letter at this time. We can however provide you with the following general comments which may be of assistance to you.

The Department's position on the holding of mortgages in an RRSP is discussed in the enclosed Interpretation Bulletin IT-320R2. A mortgage secured by real property situated in Canada may be held as a qualified investment of an RRSP if the mortgagor is not the annuitant of the RRSP or is a person dealing at arm's length with both the RRSP and the annuitant of the RRSP. An RRSP may also hold a mortgage secured by real property situated in Canada where the mortgagor is the annuitant of the RRSP or a person not dealing at arm's length with the annuitant, if the mortgage:

(a)is administered by an approved lender under the National Housing Act;

(b)is insured under the National Housing Act or a corporation offering its services to the public as an insurer of mortgages;

(c)has an interest rate and other terms that reflect normal commercial terms and practices; and

(d)is administered as if it were a mortgage on property owned by a stranger.

The Income Tax Act (the "Act") does not impose any restrictions on the return that may be earned on an investment held in an RRSP and we are not aware of any administrative rules of this nature. However, in your letter you advised that the financial institution you are dealing with believes there is a 20% cap on yields permitted on investments held in an RRSP. Accordingly, it would appear to us that there may be some misunderstanding of some of the rules applicable to RRSPs and we would be pleased to discuss the issue with representatives of the institution should they wish to contact us directly.

You also indicated that you are concerned with the valuation of a mortgage to be transferred by an individual to the RRSP of the individual's spouse. In this respect we can advise that non-arm's length transfers of property to RRSPs should be made at the fair market value of the property at the time of the transfer and that the determination of this value should be made on the basis of all relevant information available at the time of the transfer. However, we can not provide you with this valuation or a confirmation that a value you have determined is correct. Nevertheless, the appraisals section of your local Tax Services Office may be able to provide some guidance in this regard.

We would also like to bring to your attention the provisions of paragraph 40(2)(g) of the Act. This section provides that any loss on the transfer of a capital property to an RRSP under which the vendor or the vendor's spouse is the annuitant is deemed to be nil. Accordingly no capital loss from the disposition of a mortgage held as a capital property to an RRSP under which the vendor or the vendor's spouse is the annuitant can be deducted in computing a vendors income.

We trust this information will be satisfactory to your needs. Please note that we can not provide a copy of this reply to the financial institution involved in your situation without written authorization to do so from the individual taxpayers involved.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosure