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: Can we authorize an RRSP trustee to write off a defaulted mortgage held in an RRSP?
Position: The CRA cannot provide such authorization. A mortgage in an RRSP cannot be written off, but the RRSP can dispose of the mortgage.
Reasons: Information provided about the tax consequences of disposing of a mortgage held in an RRSP
2004-008530
XXXXXXXXXX Renée Shields
(613) 948-5273
September 16, 2004
Dear XXXXXXXXXX:
Re: Write off of a Mortgage Held in a Registered Retirement Savings Plan ("RRSP") Trust
This is in response to your letter of May 7, 2004 addressed to the Summerside Taxation Centre requesting the Canada Revenue Agency's ("CRA's") authorization to write off a mortgage held in your RRSP. Your letter was forwarded to the Income Tax Rulings Directorate on July 12, 2004.
Although it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling, we note that the CRA cannot provide rulings or approval with respect to the write-off of investments held in an RRSP. How such properties are treated is dependent on the facts pertaining to the investment and the terms of the trust agreement that governs the RRSP. We also cannot provide rulings dealing with the valuation of property held in an RRSP. However, we can provide the following general comments with respect to the valuation of a mortgage investment for purposes of the Income Tax Act (the "Act"), which may be of assistance to you.
With respect to a mortgage that is in default, the first factor that must be determined is whether the investment exists at a particular time. This is a question of law. However, a mortgage will generally continue to exist until such time as it is legally discharged. Where a mortgage no longer exists, it can be freely removed from the records of the RRSP.
Where a mortgage continues to exist, it may only be removed from the RRSP as a withdrawal from the RRSP or by sale to another party. In this respect, where the property is sold to a person dealing with the RRSP at arm's length, the property is simply removed from the RRSP records and the agreed upon proceeds added to the RRSP. However, where the property is sold to the annuitant of the RRSP or to another person who is not dealing with the RRSP at arm's length, it should be ensured that the proceeds of disposal are equal to the fair market value of the mortgage at the time of the disposal or certain unintended consequences may arise. For example, if a property is sold for less than the fair market value of the property to the annuitant or to a person who is not dealing with the RRSP at arm's length, the difference must be added to the annuitant's income for the year in which the sale is made. On the other hand, if the property is sold for more than it is worth, the excess will be considered to be a gift or a contribution to the RRSP and could be subject to Part X.1 tax applicable to over contributions to RRSPs.
How the fair market value of an asset is determined or substantiated for this purpose has never been specifically set out by the CRA. The determination of the fair market value of any property is a question of fact. In determining the fair market value of a mortgage, a valuator would consider all of the underlying facts related to the particular mortgage including whether any income could be subsequently received from the mortgage.
Where a mortgage is simply withdrawn from an RRSP by the annuitant, an amount equal to the fair market value of the property at that time must be included in the annuitant's income. For example, if the value of the mortgage is nil, the income inclusion in respect of the mortgage would also be nil.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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