10 June 1996 External T.I. 9609315 - MORTGAGE, RRSP, QUALIFIED PROPERTY

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.

	                              					960931
XXXXXXXXXX                            					 M.P. Sarazin

Attention: XXXXXXXXXX

June 10, 1996

Dear Sirs:

Re: Registered Retirement Savings Plan Qualified Investment

This is in reply to your letter dated March 13, 1996, wherein you requested our comments regarding qualified investments for purposes of a registered retirement savings plan ("RRSP") and the responsibilities that trustees of the RRSP may have in relation to the acquisition of non-qualified investments by the RRSP.

Comments

In your letter you have outlined what appears to be an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of Tax Services offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance.

The role of a trustee of a self-directed RRSP is not defined in the Income Tax Act (the "Act"). However, the trust agreement, in order to be accepted for registration as an RRSP, must comply with the provisions of subsection 146(2) of the Act including the requirement under paragraph 146(2)(c.4) of the Act that no advantage that is conditional in any way on the existence of the RRSP be extended to the annuitant or to a person with whom the annuitant does not deal at arm's length. Pursuant to paragraph 251(1)(b) of the Act, it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length. Interpretation Bulletin IT-419R and the Special Release thereto discuss the criteria used by the Department in determining whether persons deal with each other at arm's length for purposes of the Act.

Interpretation Bulletin IT-320R2 provides general information with respect to the kinds of property that constitute qualified and non-qualified investments for a trust governed by an RRSP and the income tax consequences of an RRSP acquiring and holding a non-qualified investment. Common types of debts that qualify for the purposes of an RRSP include:

(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) debt obligations of corporations listed on a prescribed stock exchange in Canada; and

(c) mortgages secured by real property situated in Canada, or an interest therein, is a qualified investment for an RRSP

(i) in any case where the mortgage is administered by an approved lender under the National Housing Act and is insured under the National Housing Act or by a corporation offering its services to the public as an insurer of mortgages; or

(ii) in any other case, where the mortgagor is not the annuitant under the plan and deals at arm's length with the annuitant.

In an arm's length situation, we would expect a mortgage to reflect normal commercial terms and practices. In a non-arm's length situation, it is our position that a mortgage must reflect normal commercial terms and practices and must be administered as if the property were owned by a stranger in order to avoid offending the prohibition against undue benefits and advantages contained in paragraph 146(2)(c.4) of the Act. Generally, the trustee of the RRSP will also be acting as the administrator of the mortgage and, accordingly, we would expect the mortgage to be administered in accordance with the usual business practices that the trustee would apply in similar arm's length transactions when conducting its own affairs. In any case where the mortgage does not reflect normal commercial terms and practices, we would consider the application of paragraph 146(2)(c.4) of the Act which could result in the deregistration of the RRSP.

Where an RRSP acquires a non-qualified investment and paragraph 146(2)(c.4) of the Act does not apply, the annuitant is required by subsection 146(10) of the Act to include the fair market value of the investment in his or her income. The trustee is required by subsection 214(2) of the Income Tax Regulations (the "Regulations") to issue an information slip with respect to this amount. Subsection 146(10.1) of the Act will also apply to the trust and taxes will be exigible with respect to any taxable income earned by the trust in respect of the non-qualified investment.

If an RRSP acquires a property which, at the time of acquisition, was a qualified property and that property subsequently becomes a non-qualified property, the provisions of Part XI.1 of the Income Tax Act will generally apply and the trust will be subject to a tax of 1% of the fair market value of the property for each month the property was held as a non-qualified investment. If Part XI.1 tax is applicable, an RRSP must file a return under Part XI.1 of the Act and pay the amount of the tax payable for the months ending in the year within 90 days after the end of the year. Furthermore, in accordance with subsection 207.2(2) of the Act, the trustee of the RRSP will be personally liable for the payment of the Part XI.1 taxes and any penalties or interest applicable thereto.

We trust the above comments will be of assistance to you and a copy of each of IT-320R2 and IT-419R is enclosed for your perusal.

Yours truly,

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

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