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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
1)Is a mortgage a qualified investment for an RRSP where the annuitant is a member of a church and the church is the mortgagor?
2)Can the interest be paid as a balloon payment at the end of the mortgage term?
1)Provided the annuitants of the RRSP deal at arm's length with the church, the mortgage will be a qualified investment under 4900(4).
If not, the mortgage could be a qualified investment under 4900(1)(j) if the conditions are met.
2)If parties are dealing at arm's length, there is no requirement in the Act, regulations or Department's position regarding interest rates and when they are paid.
If parties are not dealing at arm's length, IT-320R2 par. 9 states that it needs to reflect normal commercial practice.
Reasons FOR POSITION TAKEN:
IT-320R2 par. 9 RRSP - Qualified Investments
IT-419 par. 10 - 14. - Meaning of arm's length
February 8, 1994
Object: Using RRSP funds for a Mortgage
This is in response to your letter of January 4, 1994, requesting a ruling concerning qualified investments for a trust governed by a registered retirement savings plan ("RRSP").
More particularly, you mention that the XXXXXXXXXX will finance a second mortgage by having members of the local churches who are annuitants of RRSPs use their RRSP trusts to acquire an interest therein. You propose to arrange the mortgage so that the interest is payable as a balloon payment at the end of the term.
Confirmation of the tax implications in particular situations may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the Department's Information Circular 70-6R2, a copy of which is enclosed. As indicated in paragraph 15 thereof, a request must include a complete description of the facts and each proposed transaction, including a statement of its purposes and the relevant provisions of the Act that are of concern. While we are unable to provide you with a ruling as requested at this time, we are able to provide you with the following comments which may or may not be applicable to the circumstances of your particular situation. They are, therefore, of a general nature only, and are not binding on the Department.
Qualified investments of a trust governed by an RRSP are listed in paragraphs 146(1)(g) and 204(e) of the Income Tax Act (the "Act") and section 4900 of the Income Tax Regulations (the "Regulations"). Depending upon the relationship between the mortgagor and the mortgagee, a mortgage may qualify as a qualified investment under paragraph 4900(1)(j) or subsection 4900(4) of the Regulations.
Pursuant to subsection 4900(4) of the Regulations, a mortgage secured by real property situated in Canada or an interest therein, is a qualified investment for an RRSP unless the mortgagor is the annuitant of the RRSP or is a person with whom the annuitant does not deal at arm's length. As stated in Interpretation Bulletin IT-419 paragraph 10 (copy attached), it is a question of fact whether persons not related to each other are dealing with each other at arm's length. Generally, where two parties deal at arm's length, the terms of the mortgage including the mortgage interest can be arranged in any manner.
Where the mortgagor is the annuitant of the RRSP or does not deal at arm's length with the annuitant, a mortgage may also be a qualified investment by virtue of paragraph 4900(1)(j) of the Regulations provided it is in respect of real property situated in Canada. The mortgage must be insured under the National Housing Act, or insured by a corporation offering its services to the public in Canada as an insurer of mortgages and administered by an approved lender under the National Housing Act. Paragraph 9 of Interpretation Bulletin IT-320R2 mentions other requirements to be met which include
-the amount of the mortgage interest rate and other terms must reflect normal commercial practice, and
-the mortgage must be administered as if it were on property owned by a stranger.
Whether or not mortgage interest reflect normal commercial practice is a question of fact. The Department is not in a position to advise an RRSP annuitant as to the proper interest terms to be charged on a mortgage. This determination must be made by the annuitant and, if applicable, the approved lender, in light of the requirements for qualified investments as set out in the Income tax Act.
It is not necessary that the mortgage be a first mortgage; an interest in a second mortgage could qualify.
As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions do not hesitate to contact us.
Financial Industries Division
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