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 a loan provided by the RRSPs of several minority shareholders of a corporation to the corporation would be a qualified investment for an RRSP?
Position:
Several questions of fact at issue. Question of fact whether a particular investment is a mortgage. Also, parties may not be arm's length, thus may not meet the conditions in 4900(1)(j). Also, may violate 146(2)(c.4).
Reasons:
High interest rate and terms may indicate the shareholders are acting in concert and thus not arm's length with the corporation. Also, the RRSPs may derive an advantage.
XXXXXXXXXX 2002-014321
P. Kohnen
October 16, 2002
Dear XXXXXXXXXX:
Re: Request for technical interpretation - Qualified Investments and RRSPs
This is in reply to your memorandum of May 31, 2002, wherein you requested our views with respect to whether an investment in a particular scenario would constitute a qualified investment for a registered retirement savings plan ("RRSP").
In the scenario that you have provided, the shareholders of a privately held corporation are not related to each other. The corporation owns a commercial property. The shareholders of the company will loan funds from their self-directed RRSPs to the company. In return, the company will provide a mortgage on the property, the proportionate interest of which will be held by each RRSP. However, the aggregate amounts to be loaned by the RRSP trusts will be approximately 50% in excess of the market value of the property and, consequently, the rate of interest on the loans will significantly exceed that of a standard commercial mortgage.
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 advanced income tax ruling request. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.
The types of investments that are qualified investments for an RRSP trust are set out in the definition of "qualified investment" in subsection 146(1) of the Income Tax Act (the "Act"), and in the prescribed investments described in section 4900 of the Income Tax Regulations (the "Regulations").
An investment that is a mortgage in respect of real property situated in Canada, or an interest in such a mortgage, will be a qualified investment for an RRSP provided that all of the conditions in paragraph 4900(1)(j) of the Regulations are met. Where the mortgagor is a person who is an annuitant or a beneficiary of an RRSP, or any person who does not deal at arm's length with such a person, the mortgage will be a qualified investment for an RRSP, if it is:
A. administered by an approved lender under the National Housing Act, and
B. insured
(I) under the National Housing Act, or
(II) by a corporation that offers its services to the public in Canada as an insurer of mortgages and that is approved as a private insurer of mortgages by the Superintendent of Financial Institutions pursuant the powers assigned to the Superintendent under subsection 6(1) of the Office of the Superintendent of Financial Institutions Act.
It is a question of fact as to whether a particular investment held in an RRSP trust would be a mortgage or an interest therein. Black's Law Dictionary defines the term "mortgage" as "an interest in land created by a written instrument providing security for ... the payment of a debt".
It should be noted that where an RRSP trust holds a mortgage on real property owned by the annuitant or by a person not dealing at arm's length with the annuitant, the interest rate on the mortgage as well as its other terms must reflect normal commercial practice. This requirement is based on the condition in paragraph 146(2)(c.4) of the Act that (except for certain advantages listed in that provision which are not relevant to this query) no benefit or advantage be conferred on the annuitant of an RRSP. Where the condition in paragraph 146(2)(c.4) is violated, the RRSP would be deregistered, pursuant to subsection 146(12) of the Act.
As is noted in paragraph 24 of Interpretation Bulletin IT-419R, where a shareholder does not control a corporation and is not otherwise related to the corporation, there is a general presumption that the shareholder deals at arm's length with the corporation. However, where a sufficient number of minority shareholders act in concert in order to direct the affairs of a corporation, they may be considered not to be dealing at arm's length with the corporation.
Pursuant to paragraph 251(1)(c) of the Act, it is a question of fact whether, at a particular time, unrelated persons are dealing with each other at arm's length. For example, the courts have held that when one person or group of persons is, in fact, the bargaining agent, or the mind by which the bargaining is directed, on behalf of both or all parties to a transaction, then the parties can not be dealing at arm's length. Furthermore, failure to carry out a transaction at fair market value may also be indicative of a non-arm's length transaction.
A determination of whether the mortgagor is a person not dealing at arm's length with the annuitants of an RRSP can only be made following a review of all the facts and circumstances surrounding a particular situation. You may wish to refer to the case of P Millward v The Queen, 1986 DTC 6538, which deals with the issue of whether unrelated parties to a mortgage are dealing at arm's length.
The above comments are an expression of opinion and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R5.
We trust that the above comments are of assistance.
Yours truly,
Roberta Albert, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
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