Stewart – Tax Court of Canada finds that a mortgage issued in a scam had full FMV

The RRSPs of the two taxpayers and for 117 other investors were defrauded. They were induced to purchase undivided interests in mortgages for an aggregate amount of $7 million, bearing interest at 12%, secured by mortgages on land with a value of around $5,000. Those proceeds immediately disappeared.

D'Arcy J first found that each purchased interest qualified as a “a mortgage secured by real property situated in Canada, or an interest therein” and, thus, as a qualified investment under former Reg, 4900(4) –which did not have the current requirement in Reg. 4900(1)(j) that the mortgage amount be “fully secured.” (Other mortgage provisions still lack this requirement.)

He also found that there was no income inclusion in the RRSP annuitants’ income under s. 146(9)(b), on the basis that such mortgage interests had a fair market value that equaled rather than being less than the cash consideration paid by the RRSPs therefor, stating that:

The fact that they paid a price similar to the price paid by 117 other individuals evidences that they negotiated the price in “a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length”. …

…[P]aragraph 146(9)(b) does not apply in a situation where a taxpayer directs his/her RRSP to make an investment with an arm’s length party for what the taxpayer believes is a fair market value consideration and the investment turns out to be a poor investment.

This case illustrates the proposition that the fair market value of an “investment” such as Bre-X can be rest on ignorance of reality.

Neal Armstrong. Summaries of Stewart v. The Queen, 2019 TCC 22 under Reg. 4900(1)(j), s. 146(9)(b) and General Concepts - FMV.