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.
Principal Issues:
Is a mortgage acquired by an RRSP a qualified investment under 4900(1)(j) of the Regulations where the mortgage is insured by a life insurance policy?
Where an RRSP acquires a life insurance policy to insure a mortgage, granted to the annuitant, in case of the death of the annuitant, is there an advantage prohibited by paragraph 146(2)(c.4) of the Act?
Is an interest in a life insurance policy a qualified investment?
Position:
Question of fact. No definitive answer.
Probably.
No, unless the conditions stipulated in subsection 198(6) of the Act are met.
Reasons:
Subparagraph 4900(1)(j)(i) of the Regulations deals with insurance against risks in the event of default of the borrowers (see section 8 of the National Housing Act). Subparagraph 4900(1)(j)(ii) of the Regulations requires that the mortgage be insured by a corporation offering its services as insurer of mortgages. Whether or not a mortgage insured by a life insurance policy meets these conditions is a question of fact, which requires a review of the life insurance policy, the mortgage, and the surrounding facts.
Subparagraph 146(2)(c.4)(iii) of the Act excludes only an advantage under a life insurance policy in effect on December 31, 1981. But, it is a question of fact, which requires an examination of the life insurance policy, the mortgage and surrounding facts.
Wording of subsection 198(6) of the Act.
XXXXXXXXXX 2003-002781
A. St-Amour, CA
March 30, 2004
Dear XXXXXXXXXX:
Re: Life Insurance on Mortgages held in Registered Retirement Savings Plans
This is in response to your letter of July 3, 2003, requesting our views on the tax consequences concerning a life insurance policy used to guarantee payments of a mortgage held as an investment in a trust governed by a registered retirement savings plan (hereafter "RRSP").
In a telephone conversation (St-Amour/XXXXXXXXXX), you described two hypothetical situations in which an RRSP will acquire an investment, which is a mortgage in respect of real property situated in Canada. In order to secure the mortgage's payment in the event of the mortgagor's death, it is intended that a life insurance will be acquired. Upon the mortgagor's death, the proceeds will be paid to the RRSP as beneficiary of the life insurance policy. In situation 1, the RRSP will acquire an interest in the life insurance policy as the policyholder and will pay the premium, while, in situation 2, the mortgagor will be the policyholder and will pay the premium under the policy. You also indicated that in either situations, the annuitant or a person no dealing at arm's length with such person is the mortgagor and the cash surrender value of the policy is nil.
The subject matter of your letter appears to pertain to particular situations. 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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, any inquiries should be addressed to the relevant tax services office. However, we are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature and may not apply in a particular situation.
Is the mortgage insured by a life insurance policy a qualified investment?
The Canada Revenue Agency's (hereafter "CRA") general views regarding qualified investments held by a trust governed by an RRSP are found in Interpretation Bulletin IT-320R3. Paragraphs 11 and 12 of IT-320R3 outline the conditions under which a mortgage may be a qualified investment for an RRSP.
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 Income Tax Regulations (hereafter the "Regulations") are met. Where the mortgagor is a person who is an annuitant or a beneficiary under 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.
Paragraph 8 of the National Housing Act states that Canada Mortgage and Housing Corporation may provide insurance against risks relating to housing loans to indemnify lenders in the event of default of the borrowers. In our view, paragraph 4900(1)(j) of the Regulations would not contemplate that a mortgage be insured by a life insurance policy. However, we are unable to conclude if a life insurance policy, would, by itself, have a bearing on whether or not a mortgage, which is insured by such policy, would constitute a qualified investment for an RRSP. However, you may wish to pursue this matter further by requesting an advance income tax ruling.
Is there an advantage under paragraph 146(2)(c.4)?
We note that paragraph 11 of Interpretation Bulletin IT-320R3 makes it very clear that the annuitant or a person not dealing at arm's length with the annuitant cannot have an advantage from the existence of the mortgage. Consequently, the mortgage interest rate and other terms must reflect normal commercial practices and it must be administered as if it was a mortgage on property owned by a stranger. This requirement is based on paragraph 146(2)(c.4) of the Income Tax Act (hereafter the "Act"), which requires that no benefit or advantage be conferred on the annuitant of an RRSP. This paragraph requires among other that no advantage other than an advantage from life insurance in effect on December 31, 1981.
Where paragraph 146(2)(c.4) the Act is not met, the RRSP would be deregistered pursuant to subsection 146(12) of the Act or penalties could be applied pursuant to subsection 146(13.1) of the Act. For additional information on subsections 146(12) and 146(13.1) of the Act, you may consult Interpretation Bulletin IT-415R2 at the following Internet address: http://www.cra-arc.gc.ca/E/pub/tp/it415r2/README.html
The determination of whether the acquisition of an interest in a life insurance policy is an advantage prohibited by paragraph 146(2)(c.4) of the Act can only be made following a review of all the facts and circumstances surrounding a particular situation including the review of the life insurance contract. As stated above, you may wish to pursue this matter further by requesting an advance income tax ruling.
RRSP and life insurance policy
The definition of qualified investment for an RRSP does not include a life insurance policy. However, by virtue of subsections 146(11) and 198(6) of the Act, a life insurance policy which meets certain conditions will not be deemed to be the acquisition of a non-qualified investment by an RRSP. The following conditions, provided in paragraphs 198(6)(c), (d) and (e) of the Act, must be met:
1. The trust is, or by virtue of the payment about to become, the only person (other than the insurer) entitled to any rights or benefits under the policy. In particular, the insurance element of the policy as well as its cash value (including dividends) must be payable to the RRSP,
2. The cash surrender value of the policy (exclusive of accumulated dividends) is or will be, at or before the end of the year in which the insured person attains 69 years of age, if all premiums under the policy are paid, not less than the maximum total amount (exclusive of accumulated dividends) payable under the policy, and
3. The total of the premiums payable in any year under the policy is not greater than the total of the amounts that, if the annual premiums had been payable in monthly instalments, would have been payable as such instalments in the 12 months commencing with the date the policy was issued.
In such a case, the payment of a premium of a life insurance policy will be deemed not to be the acquisition of a non-qualified investment at a cost equal to the amount of the payment. In our view, a life insurance policy with no cash surrender value would not be subject to subsection 198(6) of the Act. The CRA's general views regarding life insurance policies as investments for RRSPs are set out in Interpretation Bulletin IT-408R. A copy can be obtained on our website at the following address: http://www.cra-arc.gc.ca/F/pub/tp/it408r/i408rf.txt.html.
When an RRSP acquires a property that is a non-qualified investment, the fair market value of that property at the time it is acquired is added to the income of the annuitant pursuant to subsection 146(10) of the Act. However, when an RRSP disposes of a property that is a non-qualified investment, subsection 146(6) of the Act allows a deduction in computing the income for the year of disposition, an amount equal to the lesser of
? the amount previously included in income at the time the property was acquired, and
? the proceeds of its disposition.
If the income inclusion exceeds the proceeds of disposition of that property, the excess cannot be deducted.
Tax consequences at the time of death of the mortgagor
Interpretation Bulletin IT-500R sets out the provisions of the Act that apply on the death of an RRSP annuitant and explains the CRA's general positions on the tax implications arising under various arrangements. Paragraph 5 states that where an annuitant under an RRSP dies (whether before or after its maturity), subsection 146(8.8) of the Act deems the deceased annuitant to have received, immediately before death, a benefit equal to the fair market value, at time of death, of all property of the RRSP, if the paragraphs 6 to 11 do not apply. This benefit is included in the deceased annuitant's income under subsection 146(8) of the Act. We are of the view that where the mortgagor who is the annuitant under the RRSP dies, the fair market value of all property of the RRSP at the time of death would include the proceeds of the life insurance policy payable to the RRSP.
Where the mortgagor who is a person that does not deal at arm's length with the annuitant, dies, the RRSP will, at the time of death of that person, acquire a right to receive an amount that is equal to the proceeds of the life insurance policy. In this situation, there is no deemed disposition of all property of the RRSP, since the annuitant is still alive. However, we are of the view that the right to receive an amount is a "property" as defined under subsection 248(1) of the Act. The Act and the Regulations do not provide for an RRSP to acquire a property that is a right to receive proceeds from a life insurance policy as a qualified investment. Therefore, we are of the view that a non-qualified investment would be acquired at the time the RRSP acquires the right to receive the proceeds from the life insurance policy and the consequences mentioned above would apply.
Due to the complexity of the issues discussed herein and the lack of information and relevant documents regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions of the Act that could be applicable and under no circumstances are they to be considered to be either comprehensive or all inclusive. The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA.
Yours truly,
for the Director,
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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