6 June 1996 Internal T.I. 9616606 - RRSP MORTGAGE DEFAULT

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:

Effects of default on mortgage held in an RRSP

Position:

Routine. Referred to source deductions for their comments

Reasons:

Routine

						June 6, 1996

	HEADQUARTERS				HEADQUARTERS
	Assessment and Collections Branch	W.C. Harding
	Trust Accounts Division			(613) 957-8953
	Attention: Jim Ivey
						7-961660
	Mortgages held in Registered Retirement Savings Plans

We recently received the attached correspondence from the XXXXXXXXXX from you. It was originally faxed to Head Office Source Deductions by the Financial Institution at the suggestion of Source Deductions at the Toronto Tax Services Office and was then referred to us for reply.

We have prepared the attached draft reply to the concerns raised on which we can respond. However, since this is a completed transaction and deals with the preparation of T4RSP information returns, we are returning it to your office for your review and finalization.

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

DRAFT REPLY

XXXXXXXXXX					7-961660

Attention: XXXXXXXXXX

June 10, 1996

Dear Sirs:

Re: Mortgages held in a Registered Retirement Savings Plan (RRSP)

This is in reply to your letter of March 4, 1996, concerning the discharge of a mortgage held in an RRSP.

Since the subject matter of your enquiry relates to an actual situation, the Department can not provide any comments that relate specifically to it without first being provided all relevant details. However, we can provide the following general comments that may or may not apply in your circumstances.

The Department's position on the holding of mortgages in an RRSP is discussed in Interpretation Bulletin IT-320R2. When a self directed RRSP holds a mortgage secured by real property owned by a person dealing at arms length with both the RRSP and the annuitant of the RRSP, the mortgage may be held as a qualified investment of the RRSP as long as the real property is situated in Canada. When a self directed RRSP holds a mortgage secured by real property owned by the annuitant of the RRSP or a person not dealing at arms' length with the annuitant, our position is that the mortgage must reflect normal commercial terms and practices, must be administered by an approved lender under the National Housing Act as if the property used as security were owned by a stranger and must be insured under the National Housing Act or by a corporation offering its services to the public as an insurer of mortgages. Generally the trustee of the RRSP will also be acting as the administrator of the mortgage. Accordingly, we normally expect a mortgage will 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.

If the mortgage goes into default, we would expect the trustee to take any necessary steps to secure the investment including foreclosure or a sale of the property if such action is warranted. If an arm's length mortgage goes into default and no actions are taken to secure the investment it raises some doubt as to whether the mortgagor has been or is still dealing at arm's length with the annuitant of the RRSP. Furthermore, where there is sufficient equity in the mortgaged property to cover the principal and interest of the mortgage but the RRSP annuitant agrees to discharge the mortgage without any payment, it would appear that the annuitant and the mortgagor are not dealing at arm's length. Consequently, the mortgage would not be a qualified investment unless the conditions noted above have been met.

Section 54 of the Act defines disposition to include the cancellation of a mortgage. If a mortgage is discharged and the mortgagor and RRSP annuitant are found to be dealing with each other at arm's length at the time, no action by the RRSP trustee will be required simply as a consequence of the discharge of the mortgage as long as the RRSP trust receives proceeds equal to the fair market value of the mortgage. However, if a mortgage is discharged and no proceeds are received or the proceeds are less than the fair market value of the mortgage, subsection 146(9) of the Act will require the annuitant of the RRSP to include an amount equal to the difference in income and subsection 214(2) of the Regulations will require the trustee of the RRSP to report this amount on an information return.

As a matter of interest, section 80 of the Act could also have application to the debtor in such cases to have any gain from the settlement of the debt applied to reduce the debtor's available losses or the ACB of the debtor's capital property.

If a non arm's length mortgage that was a qualified property on its acquisition by an RRSP ceases to be properly administered or is no longer insured as required, it is our opinion that the property will cease to be a qualified investment at that time. In this case subsection 146(10.1) of the Act provides that the RRSP will be subject to taxation on the interest earned by the mortgage as long as the mortgage continues to be a non-qualified investment. In addition, 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 mortgage, at the time it was acquired, 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 tax and any penalties or interest applicable thereto.

We trust this information will be satisfactory to your needs.

Yours truly,

for Director