9 March 1999 e9829795.txt - MORTGAGES HELD IN AN RRSP

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:

Tax consequences of holding mortgages in an RRSP since 1980.

Position:

Explained relevant taxing authorities in general terms.

Reasons:

Relevant provisions have changed over time and the proper assessment of old RRSP will depend upon the specific facts, which have not been provided. Referred to RPD for additional action as they see fit.

XXXXXXXXXX 		982979
W. C. Harding
Attention:  XXXXXXXXXX 

March 9, 1999

Dear Sirs:

Re: Mortgages held in an RRSP

This is in reply to your letter of November 20, 1998, concerning a mortgage held in an RRSP since 1980.

Since your letter deals with an existing, factual situation, this Division may not make any specific comments but can provide the general comments that follow below. However, in the circumstances, we have forwarded your letter and our comments to our Registered Plans Division for their consideration. They may be able to provide further information if necessary.

The role of the trustee of an RRSP is not defined in the Income Tax Act (the "Act"). However, any trust agreement must comply with the provisions of the definition "retirement savings plan" in subsection 146(1) and subsection 146(2) of the Act in order to be accepted for registration as an RRSP. Furthermore, we would generally expect a trustee to administer the plan in a manner consistent with the intent of these provisions. On the other hand, the wording of these provisions has been changed on several occasions and care must be taken to ensure which provisions are applicable to any particular plan.

The provisions of the Act and the Income Tax Regulations (the "Regulations") pertaining to mortgages have changed since 1980. In 1980 the only provision specific to mortgages was former paragraph 4900(1)(h) of the Regulations which provided that a mortgage was a qualified investment for an RRSP if it was:

"(h) a mortgage, or interest therein, secured by real property situated in Canada, and acquired by the savings plan trust, other than a mortgage in respect of which the mortgagor is the annuitant under the plan governing the savings plan trust or a person with whom the annuitant does not deal at arm's length".

Pursuant to paragraph 251(1)(b) of the Act, it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length. Interpretation Bulletin IT-419R and the Special Release thereto discuss the criteria used by the Department in determining whether persons deal with each other at arm's length for purposes of the Act.

Regulation 4900 was replaced with effect from January 1, 1981, and paragraph 4900(1)(h) was superseded by subsection 4900(4). Paragraph 4900(1)(j) was also introduced to permit a mortgage to be held as qualified investment where the mortgage was:

"(j) a mortgage, in respect of real property situated in Canada, insured

(i) under the National Housing Act, or
(ii) by a corporation offering its services to the public in Canada as an insurer of mortgages and administered by an approved lender under the National Housing Act."

The effect of these changes is that a mortgage acquired in 1980 in a non-arm's length situation would be a non-qualified investment on its acquisition by an RRSP. However, if it met the tests detailed in paragraph 4900(1)(j), it may be a qualified investment after 1980.

When a mortgage is held by an RRSP in an arm's length situation, we would expect the mortgage to reflect normal commercial terms and practices from the date of its acquisition by the RRSP. Generally, the trustee of the RRSP would also be acting as the administrator of the mortgage and, we would expect the mortgage to be administered by the trustee in accordance with the usual business practices that the trustee would apply in similar arm's length transactions when conducting its own affairs. However, if a mortgage that was qualified ceases to reflect such normal commercial terms and practices or ceases to be administered as if it was owned by a stranger, we would think it reasonable to assume that the mortgagor was no longer dealing at arm's length with the annuitant of the RRSP. In this latter situation the mortgage might cease to be a qualified investment for the RRSP.

If an RRSP acquires a mortgage in 1980 in an arm's length situation, the terms could provide that both the principal and interest are payable only on demand by the trustee of the RRSP. It is not a question of tax law when a trustee should demand payment of either the principal or interest in such a situation. However, other laws may be relevant to this question and a trustee might be prudent to seek legal advise with respect to its obligations where the mortgage remains unpaid for a period of time. On the other hand, if the trustee does demand payment and no payments are made in accordance with the terms of the mortgage, the Department would insist on the trustee taking all further actions necessary to collect the amount then due, to the same extent the trustee would do so in any other situation, following such normal commercial terms and practices as would be applicable. A trustee's failure to do so could lead to a consideration by the Department that the plan was not being used in a manner consistent with the provisions of the Act as noted above. This could then lead to its deregistration by the Department.

Where an RRSP acquires a non-qualified investment the annuitant is required by subsection 146(10) of the Act to include the fair market value of the investment in his or her income and the trustee is required by subsection 214(2) of the Regulations to issue an information slip with respect to this amount. (Where the property was acquired after October 31, 1985, subsection 146(10.1) of the Act will also apply to the trust and taxes will be exigible with respect to any taxable income earned by the trust in respect of the mortgage).

Where subsection 146(10) applies to include an amount in the income of the RRSP annuitant no assessment under Part XI.1 of the Act would be issued in respect of the investment. However, if an RRSP acquires a property which, at the time of its acquisition, was a qualified investment and that property subsequently becomes a non-qualified investment, the provisions of Part XI.1 of the Act will generally apply.

If Part XI.1 tax is applicable, the trust will be subject to a tax of 1% of the fair market value of the property for each month the property was held as a non-qualified investment. In addition, an RRSP trust must file a return under Part XI.1 of the Act and pay the amount of the tax payable for the months ending in the year within 90 days after the end of the year. Furthermore, in accordance with subsection 207.2(2) of the Act, the trustee of the RRSP will be personally liable for the payment of the Part XI.1 taxes and any penalties or interest applicable thereto.

It should be noted that if a non-qualified investment is acquired by an RRSP and no amount is included in the income of the annuitant under 146(10) of the Act, an assessment under Part XI.1 of the Act is not precluded. Accordingly, an assessment under Part XI.1 could be made for every year such a mortgage is held if a mortgage presumed to be eligible on acquisition is subsequently found to be a non-qualified investment.

We trust the above comments will be of assistance to you.

Yours truly,

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

c.c: Registered Plans Division

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