31 October 1995 Internal T.I. 9524767 - MORTGAGE AS A QUALIFIED INVESTMENT FOR AN RRSP

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.

Principal Issues:

Whether the mortgage was insured as provided by the Regulations to be a qualified investment for purposes of a self-directed RRSP

Position:

No

Reasons:

Conditions set for insuring were not fulfilled.

 			October 31, 1995

	TORONTO TAX SERVICES	HEADQUARTERS
M. Shea-DesRosiers
	Attn:  Terry Assels	(613) 957-8953
	         Section 471-1-1
	         Room 661
			7-952476

Qualified Investment Registered Retirement Savings Plan("RRSP")
Paragraph 4900 (1)(j) of the Income Tax Regulations (the"Regulations")

Further to our telephone conversations (Assels/Shea-DesRosiers) of October 23 and 24, 1995, please find attached XXXXXXXXXX letter of June 1, 1995, requesting our opinion on whether the mortgage described in his letter is a qualified investment for the purpose of a self-directed RRSP.

Since the matter concerns completed transactions and all the facts are not contained in XXXXXXXXXX letter, we are unable to inform XXXXXXXXXX of the applicable treatment in his case. Such questions are to be addressed by the relevant Tax Services Office. Our Division's only role is to interpret the Act.

We can however offer our interpretation of the Act as it applies to a situation similar to the one presented by XXXXXXXXXX.

Qualified investments of a trust governed by an RRSP are listed in subsection 146(1) and section 204 of the Income Tax Act (the "Act") and section 4900 of 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.

Arm's length is defined in subsection 251(1) of the Act. Pursuant to paragraph 251(a) therein, related persons are deemed not to deal with each other at arm's length.

Where the mortgagor is the annuitant under the RRSP or is a person with whom the annuitant does not deal at arm's length, such as in the present case, a mortgage may qualify under paragraph 4900(1)(j) of the Regulations provided it satisfies all of the following conditions:

(a)the mortgage is in respect of real property situated in Canada;

(b)the mortgage is insured under the National Housing Act, or by a corporation offering its services to the public in Canada as an insurer of mortgages;

(c)the mortgage is administered by an approved lender under the National Housing Act;

(d)the rate of interest on the mortgage and other terms reflect normal commercial practice; and

(e)the mortgage is administered as if it were a mortgage on a property owned by a stranger.

In the situation at hand, the problem that arises is whether the mortgage was ever insured by the insurance company as required by the Regulations. Two RRSPs made a loan in 1991 to a corporation owned by the annuitant of each RRSP. The company defaulted on its payments in 1994. At the time of the default, the trustee of the RRSPs was not the same as the one when the loan was made by the RRSPs.

The insurance was provided on specific terms being that the mortgagor be one of the annuitant and that the mortgage be personally guaranteed by both annuitants. However, both conditions were never fulfilled since the mortgagor was the company and the personal guarantees were not given.

The fact that the trustee of an RRSP believes that an investment meets the conditions of paragraph 4900(1)(j) of the Regulations does not make the investment a qualified investment. It is the duty of a trustee to check whether the conditions of paragraph 4900(1)(j) of the Regulations are met. It cannot rely on the fact that it became the trustee after the loan was granted and therefore assume that the investment is a qualified investment. There may be a liability on the part of the first trustee but this is a matter to be determined between the parties involved and not the Department. Furthermore the fact that the insurance company discovers only at a later date that the conditions were never met, for example after having issued the certificate of insurance, will not make the mortgage a qualified investment up to that time since the conditions had to be met from the beginning for the insurance to be issued.

In such a situation both RRSPs would have acquired a non-qualified investment. Subsection 146(10) of the Act would apply to include, in computing the income for the year of the taxpayer who is the annuitant under the plan at that time, the fair market value of the non-qualified investment at the time it was acquired by the trust.

The fact that the insurance company refuses to pay the insurance claim is a matter to be settled between the parties involved, that is the trustee of the RRSPs and the insurance company. The Department does not get involved in such matters.

We trust the above comments will be of assistance to you. Should you require further assistance, you can contact M. Shea-DesRosiers at (613) 957-8953.

Chief
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch