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:
Is a mortgage secured by a building on leased land a qualified investment for an RRSP
Position:
No if it is a chattel mortgage but yes if it is a fixture that becomes a part of the real property and a leasehold interest of the lessee
Reasons:
A fixture becomes part of the land. Accordingly the landowner can mortgage it. As well the lessee has a leasehold interest and following similar positions previously taken, we have accepted that a lessee can mortgage his leasehold interest and it will be a qualified property for an RRSP
XXXXXXXXXX 5-962988
Attention: XXXXXXXXXX
September 19, 1996
Dear Sirs:
Re: Qualified Investments for RRSPs
This is in reply to your facsimile of September 9, 1996, in which you requested a ruling in respect of the holding of a mortgage secured by a cottage located on leased property.
Since the subject of your enquiry relates to a factual proposal, we are unable to provide you with any specific comments at this time. Confirmations of the tax implications in particular situations may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the Department's Information Circular 70-6R2 available from your local Tax Services Office. However, while we are unable to address your specific situation, we can provide you with the following general comments on this topic.
A mortgage secured by real property situated in Canada can be held by an RRSP as discussed in paragraph 9 of the Department's Interpretation Bulletin IT-320R2 available from your local Tax Services Office. As discussed in the Bulletin a mortgage may qualify as a qualified investment under paragraph 4900(1)(j) or subsection 4900(4) of the Income Tax Regulations (the "Regulations") depending upon the relationship between the mortgagor and the annuitant.
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 Income Tax Act (the "Act") and paragraph (a) therein deems related persons to not deal at arm's length. Please refer to Interpretation Bulletin IT-419 for a discussion of this topic.
If a mortgage is not qualified under subsection 4900(4) of the Regulations it 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 administered by an approved lender under the National Housing Act;
(c) 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;
(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.
Mortgages secured by chattels are not qualified investments for an RRSP. However, when chattels are physically attached to land they may either retain their identity and remain chattels or become part of the land, in which case they are generally called fixtures. As fixtures are really part of the land they will then be included in the definition of real property if both the land and fixtures are owned by the same person.
If fixtures are built by a lessee on land situated in Canada owned by another person, the fixtures will be leasehold improvements to the lessee and the lessee will generally have a leasehold interest in the real property. In such cases, the Department is prepared to accept that the leasehold interest will be an interest in the real property in accordance with the provisions of subsection 248(1) of the Act such that a mortgage granted by the lessee in respect of the leasehold interest will be a qualified investment for an RRSP as described above. In addition, since the fixtures will generally become the property of the owner of the land and will be part of the real property of that person, it is also our opinion that the fixture would be real property situated in Canada and a mortgage given by the owner of the land in respect of the fixture would also be a qualified investment of an RRSP as discussed above. In either case, however, the ability of the lessee or lessor to mortgage the property will be a question of fact which may only be determined on a review of all relevant information.
The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Department.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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