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.
Whether or not a 2nd mortgage that is in default is still a qualified investment.
Question of fact on what normal commercial practise is with respect to mortgage. If the mortgage is still secured by real property in Canada then it would still be a qualified investment, if not the RRSP has acquired a non-qualified investment.
February 26, 1996
Re: Mortgage in an Registered Retirement Savings Plan
This is in reply to your facsimile of November 30, 1995 in which you request a technical interpretation with respect to a mortgage being held in your registered retirement savings plan (RRSP).
The situation described in your letter is an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance tax ruling request submitted in the manner set out in Information Circular 70-6R2. Consequently, we may only offer the following general comments.
A mortgage secured by real property situated in Canada, or an interest therein, is a qualified investment for an RRSP, as provided in paragraph 4900(1)(j) and subsection 4900(4) of the Regulations.
When a transaction takes place between arms length parties and it involves an RRSP, it should be recorded for tax purposes in the same manner one would record any similar transaction where an RRSP is not involved. If it is normal business practice to discharge a 2nd mortgage when the mortgagor declares bankruptcy then the same practice should be employed when the mortgage is held by an RRSP. Similarly, if the normal business practice is to wait for the outcome of a power of sale, then that same procedure should be followed when an RRSP is involved. Revenue Canada is not in a position to advise what the proper action might be.
To be a qualified investment for an RRSP, the requirements of subsection 146(1) "qualified investment" of the Act, as extended to paragraph 204(e) of the Act and section 4900 of the Income Tax Regulations (the "Regulations") must be met. As noted in paragraph 3 of Interpretation Bulletin IT-320R2 (copy enclosed) "Some of the common types of investment considered to qualify for the purposes of an RRSP are as follows:
(a)certain bonds, debentures and similar obligations of the Government of Canada, a province, municipality, or Crown corporation or such indebtedness guaranteed by the Government of Canada;
(b)guaranteed investment certificates, issued by a Canadian trust company;
(c)shares and debt obligations of corporations listed on a prescribed stock exchange in Canada;
(d)shares listed on a prescribed stock exchange outside Canada;
(e)shares of the capital stock of certain public corporations;
(f)units of a mutual fund trust.
If an RRSP acquires a property which, at the time of acquisition, was a qualified investment and that property subsequently becomes a non-qualified investment, the RRSP will be subject to a special tax imposed under subsections 146(10.1) and 207.1(1) of the Act.
Pursuant to subsection 146(10.1) of the Act, the RRSP trust will be subject to tax under Part I for a taxation year if the trust held a non-qualified investment in the year. The taxable income of the trust for the year will be its income from non-qualified investments and capital gains realized on non-qualified investments.
Subsection 207.1(1) of the Act (Part XI.1) imposes a tax at the end of each month on an RRSP in respect of non-qualified investments held by it. The RRSP is required to pay a tax in respect of each month of 1% of the fair market value at the time of acquisition of all property which the RRSP continues to hold that constitutes a non-qualified investment.
If the RRSP were to acquire a non-qualified investment, the fair market value thereof at the time it was acquired will be added to the income of the annuitant under the plan pursuant to subsection 146(10) of the Act. When the RRSP disposes of a non-qualified investment, the annuitant can deduct from income for the year of disposition, the lesser of the amount previously included in income in respect of the acquisition of that non-qualified investment and the proceeds of its disposition.
We trust our comments will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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