18 February 1986 Income Tax Severed Letter A-2052 - []

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.

XXXX G. Kauppinen (613) 993-7295

February 18, 1986

Dear Mr. XXXX

We are writing in reply to your letter dated October 31, 1985 regarding the application of paragraph 146(2)(c.4) of the Income Tax Act in a particular circumstance. The situation you have outlined is as follows:

You act as trustees of self-directed registered retirement savings plans which are permitted, within the requirements set out in Regulation 4900(1)(j), to invest in a mortgage where the annuitant under the plan is the mortgagor. In order to avoid any possible suggestion that the provisions of 146(2)(c.4) may be violated, your supplementary documentation with respect to such arrangements requires that the only available mortgage is a XXXX product that is identical to the mortgage loans you offer to the general public.

In a time of changing interest rates, your written policy stipulates that the rate which prevails at the time the loan is negotiated is the one which will apply. However, where there is a decline in the mortgage rate after negotiation of the loan, but before closing, competitive considerations have given rise to a practice of writing the loan at the lower rate.

In the case of a self-directed RRSP, you have had an annuitant request you to leave in place the higher interest rate that existed at the time the loan was negotiated. In examining this request in the light of 146(2)(c.4), you have reached the conclusion that no prohibited advantage would be extended were you to agree to the request. Your reasoning is that any advantage is accruing to the RRSP rather than to the annuitant. You believe a situation prevails which is essentially the same as that addressed by Bill Toyota of our Division in his January 11, 1985, letter to the XXXX XXXX.

The above-noted letter to which you refer, contained the following comment with respect to a Departmental News Release dated October 15, 1984 concerning RRSPs and advantages under paragraph 146(2)(c.4)

"We confirm your understanding that benefits or advantages such as an interest bonus or higher rate of interest given to a RRSP and not to the annuitant are not in conflict with paragraph 146(2)(c.4)."

In our opinion, the situation you have outlined is not the same as that contemplated by the Departmental release. In your situation the taxpayer is requesting that a higher interest rate be charged to him, as mortgagor. The advantage of a higher interest rate offered on RRSP funds by a financial institution as a marketing incentive to attract such funds is not the same as a taxpayer willing to pay a higher than market interest rate into his self-directed RRSP which holds a mortgage of which he is the mortgagor.

However, in our view, it is the provisions of paragraph 204.2(1)(b) rather than 146(2)(c.4) which could be applicable to the situation you have described should the above-noted interest rate not be adjusted to the lower market rate existing at the closing of the loan.

If the application of paragraph 204.2(1)(b) results in an excess amount to the RRSP by virtue of section 204.2 as otherwise applied, the RRSP would be subject to Part X.1 tax.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch