8 July 1996 External T.I. 9618415 - RRSP MORTGAGE SECURED BY COLLATERAL

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:

Can mortgage on real property and other collateral be held in RRSP

Position:

No.

Reasons:

In our opinion this was not intended. Also consider the effect if real property was low in value or decreased in value and all security was from collateral

XXXXXXXXXX 5-961841

Attention: XXXXXXXXXX

July 8, 1996

Dear Sirs:

Re: Collateral Security Taken on a Mortgage which is a Qualified
Investment for a Registered Retirement Savings Plan (an "RRSP")

This is in reply to your letter of May 23, 1996 in respect of the above noted topic.

Subsection 4900(4) of the income Tax Regulations (the " Regulations") provides that a mortgage secured by real property situated in Canada is a qualified investment of an RRSP unless the mortgagor is the annuitant under the plan or is a person with whom the annuitant does not deal at arms length. Paragraph 4900(1)(j) of the Regulations also provides that a mortgage in respect of real property situated in Canada is a qualified investment if:

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

(b)it is administered by an approved lender under the National Housing Act.

If the annuitant of the RRSP is the mortgagor or is related to the mortgagor, the Department accepts that a mortgage will be a qualified investment for an RRSP in accordance with subsection 4900(1)(j) of the Regulations. However in this case we also require that:

(c)the mortgage interest rate and other terms reflect normal commercial practice, and

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

In your submission you have limited your query to mortgages that would be qualified investments for an RRSP in accordance with subsection 4900(4) of the Regulations. You have also limited it to cases where the RRSP trustee wishes to take additional security, collateral to the mortgage, in the form of an assignment of leases, an assignment of rents, an assignment of book debts and a general security agreement ("Collateral Security"). You have then asked us to confirm the following:

1.that the Collateral Security granted to the RRSP will not be a "non-qualified investment" within the meaning of subsection 146(1) of the Income Tax Act (the "Act");

2.that the Collateral Security will not taint the status of the mortgage investment for the RRSP;

3.that if the Collateral Security is held directly by the annuitant of the RRSP it will not amount to a taxable benefit to the annuitant of the RRSP pursuant to subsection 146(8) of the Act.

Our comments are as follow:

1.In our opinion the Collateral Security as an obligation distinct from the mortgage, would constitute a non-qualified investment for an RRSP. From the limited description provided it appears to us that the Collateral Security would be either a mortgage which is not secured or in respect of real property situated in Canada or a right to property which is not included under subsection 4900(1)(e) of the Regulations.

2.If the Collateral Security is a part of the mortgage it is also our opinion that the Collateral Security could taint the status of the mortgage as a qualified investment for an RRSP under subsection 4900(4) of the Regulations. The intent of this provision is to limit mortgages to those that are secured solely by real property located in Canada. Therefore if a mortgage is secured in whole or in part by chattels or other forms of security it would not meet the definition.

3.In our opinion the collection of amounts by the annuitant in the event of a default on a mortgage held by an RRSP would require the concurrence of the trustee of the RRSP since it would mean the payment of amounts due to the RRSP trustee under the mortgage would be redirected to the annuitant. In our opinion the receipt of such amounts would constitute benefits from the RRSP. Furthermore subsection 146(9) of the Act could have application if the payments result in the disposition, as defined in section 54 of the Act, of the mortgage for less then its fair market value. Finally we would think that the acceptance of such collateral terms by the trustee of an RRSP would constitute the conferral of an advantage on the annuitant which would be contrary to paragraph 146(2)(c.4) of the Act.

We trust these comments will be of assistance to you.

Yours truly,

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