17 March 1986 Income Tax Severed Letter 5-0419 - [Section 146 and Part XI.1 of the Income Tax Act]

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

J.E. Grisé March 17, 1986

Dear Sirs:

This is in reply to your letter of January 17, 1986 concerning the application of section 146 and Part XI.1 of the Income Tax Act.

You describe a circumstance where the trust governed by a registered retirement savings plan (RRSP) undertakes power of sale proceedings in connection with a mortgage it owns where the mortgagor is unable to remedy his default under it. A power of sale gives a right to the mortgagee by virtue of provisions in the mortgage deed to sell the property without a court order. Notice of intention to sell must be given to the mortgagor and all subsequent encumbrancers, following which the mortgagee may sell the property. On sale, the mortgagee is only entitled to receive the money owing to him plus his costs. Any excess is paid to the next encumbrancer in priority, with proceeds in excess of all mortgages being paid to the mortgagor. It is your understanding that the mortgagee must already have possession, either by a court order or by taking possession after the mortgagor vacates, in order to use this remedy, and that it is common practice to sue only for possession, get judgement, evict the mortgagor and then sell under the power of sale clause.

It is your view that the power of sale proceedings do not result in the mortgagee becoming the beneficial owner of the real property and his only property continues to consist of the amounts owing to him. In order to protect his interest in the mortgage, the mortgagee may maintain the property by paying municipal taxes and other costs of keeping the property in good repair to prevent a diminution in its value that would adversely effect the value of the mortgage. The power of sale permits the mortgagee to realize on his mortgage and he does not stand to gain over and above the amounts that are due to him. Furthermore, power of sale proceedings do not eliminate the debt owing to the mortgagee since if the proceeds from the sale of the property are less than the amount owing to the mortgagee by the mortgagor, the debt is not extinguished, and the mortgagee can attempt to recover the remaining balance from other assets of the mortgagor.

We agree with your view that an RRSP that has undertaken power of sale proceedings as described above with respect to a mortgage it owns does not acquire legal or beneficial ownership of the real property. Since the power of sale proceedings will not result in the RRSP acquiring ownership of real property it will not have acquired a non-qualified investment as defined in paragraph 146(1)(e) of the Income Tax Act. Subsection 146(10) and 207.1(1) of the Act would not apply providing the original mortgage investment is a qualified investment as defined in paragraph 146(1)(g) of the Act.

Yours truly,

for Director Bilingual Services and Resource Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch