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: 1. A mortgage is held in an RRSP. RRSP annuitant would like to use interest income generated by the mortgage held in the RRSP to reduce the principal of the mortgage. Is this permitted without tax consequences to the RRSP annuitant?
2. A mortgage is held outside an RRSP. The mortgage is paid off early before end of the mortgage term and an interest penalty is charged by the financial institution. A new mortgage is then set up in an RRSP. Is the penalty deductible by the RRSP or the RRSP annuitant?
Position: 1. No
2. No
Reasons: 1. Since interest income of the mortgage is the property of the RRSP, interest income generated by the mortgage investment cannot be used by the RRSP annuitant to reduce principal of the mortgage held by the RRSP. However, if the RRSP annuitant chooses to withdraw the interest income from the RRSP in order to apply it to reduce the principal on the mortgage, the withdrawal will be taxed in the hands of the RRSP annuitant for the year the withdrawal is made. The trustee of the RRSP would be required to report this amount on an information return (T4RSP information slip). 2. No deduction for RRSP trust or RRSP annuitant permitted by Income Tax Act for this type of penalty.
2004-008599
XXXXXXXXXX G. Moore
(613) 957-2747
October 21, 2004
Dear XXXXXXXXXX:
We are writing in response to your request for our views regarding a mortgage held in a self-directed registered retirement savings plan ("RRSP").
Written confirmation of the tax implications inherent in particular transactions is 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, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA").
The Canada Revenue Agency's ("CRA") position on the holding of mortgages in an RRSP is discussed in Interpretation Bulletin IT-320R2, Qualified investments - trusts governed by registered retirement savings plans, registered education savings plans and registered retirement income funds. This and other publications referred to in this letter can be accessed on the CRA web site at the following address: http://www.ccra-adrc.gc.ca/formspubs/menu-3.html.
RRSP trusts are separate and distinct from their annuitants. The property of an RRSP trust is administered by a trustee and the RRSP annuitant is the beneficiary of the trust.
If certain conditions are met, a mortgage secured by real property situated in Canada can be held as a qualified investment of an RRSP. Paragraph 11 of IT-320R3 explains these requirements, as set out under the Income Tax Act (the "Act"). Generally, a mortgage held by an RRSP will receive payments of principal and interest. The interest component is the income earned by the RRSP, not the RRSP annuitant.
Since interest income generated by a mortgage investment held within an RRSP is the property of the RRSP, it cannot be used by the RRSP annuitant-mortgagor for any purpose including to reduce the principal of the mortgage held by the RRSP. However, if an RRSP annuitant chooses to withdraw the interest income from the RRSP to have it at his or her disposal for example to apply it to reduce the principal on the mortgage on his or her home, the withdrawal will be taxed in the hands of the RRSP annuitant for the year the withdrawal is made. The trustee of the RRSP is required to report this amount on an information return (T4RSP information slip).
You have also asked if an interest penalty paid to a bank for the prepayment of principal of a mortgage on the mortgagor's home held outside an RRSP before the expiry of its term is deductible. As for the mortgagor, there are no provisions in the Act that would allow for the deductibility of the penalty payment on a mortgage on his or her home. We note that IT-104R3, Deductibility of Fines or Penalties, deals with the deductibility of fines and penalties in computing income from a business or property. Since the penalty applies to a personal mortgage on your home, IT-104R3 is not applicable.
We trust our 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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