12 November 1997 External T.I. 9724895 - RRSP INVESTMENTS

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:

Discussion of the method and consequences of writing off or disposing of non-performing investments held in an RRSP.

Position:

Outlined possible tax consequences and noted RCT does not approve or rule on the valuation or propriety of such transactions

Reasons:

The material sent in with the letter attributes a number of requirements to Revenue Canada. Our reply was used to address the incorrect information provided.

									972489

XXXXXXXXXX							W.C. Harding

November 12, 1997

Dear Sir:

Re: Non-performing properties held in an RRSP

This is in reply to your letter of August 26, 1997 in which you requested our permission to replace or write off a non-performing mortgage held in your RRSP.

As discussed during our recent telephone conversation (XXXXXXXXXX-Harding), Revenue Canada can not provide rulings or approval with respect to the write-off of investments held in an RRSP. How such properties are treated is dependent on the facts pertaining to the investment and the terms of the trust agreement that governs the RRSP. We also can not provide comments on the valuation of an RRSP investment for the purposes of computing any fees charged by the trustee of the RRSP. However, we can provide the following general comments on the valuation of a mortgage investment for purposes of the Income Tax Act which may be of assistance to you.

In respect to a mortgage that is in default, the first factor that must be determined is whether the investment exists at the particular time. This is a question of law. However, a mortgage will not generally cease to exist until such time as it is legally discharged. Where a mortgage no longer exists, it can be freely removed from the records of the RRSP.

Where a mortgage continues to exist, it may only be removed from the RRSP as a withdrawal from the RRSP or by sale to another party. In this respect, where the property is sold to a person dealing with the RRSP at arm's length, the property is simply removed from the RRSP records and the agreed upon proceeds added to the RRSP. However, where the property is sold to the annuitant of the RRSP or to another person who is not dealing with the RRSP at arm's length, it should be ensured that the proceeds of the disposal are equal to the fair market value of the mortgage at the time of the disposal or certain unintended consequences may arise.

For example, if a property is sold for less than the fair market value of the property, the difference must be added to the annuitant's income for the year in which the sale is made. On the other hand, if the property is sold for more than it is worth, the excess will be considered to be a gift or a contribution to the RRSP and could be subject to Part X.1 tax.

Where a mortgage is simply withdrawn from an RRSP by the annuitant, an amount equal to the fair market value of the property at that time must be included in the annuitant's income.

You provided us with a copy of a letter written to you by the financial institution that administers your RRSP. In that letter, a number of comments on this subject were made along with a comment that some of these were attributable to Revenue Canada.

The letter first states that a non performing mortgage can be replaced with another asset of equivalent value where that value is equal to the value of the mortgage, including any arrears, at the time of its replacement. As noted above any property should generally be replaced at its fair market value. However, what this fair market value is, is a question of fact and may or may not include any arrears at the time of replacement.

The letter secondly states that if a property is not sold but is removed from the RRSP, 4 appraisals have to be provided. As noted above, a property may be removed from an RRSP at any time and if proceeds equal to the property's fair market value are received, any income inclusions or unintended taxation as described above, will be avoided. However, how the fair market value of an asset is determined or substantiated for this purpose has never been specifically set out by Revenue Canada.

The letter finally states that permission to write off the value of a mortgage must be obtained from Revenue Canada in the form of a ruling. Permission from Revenue Canada is not required in order to write off a property held in an RRSP. Furthermore such permission could not be provided in the form of a ruling.

We hope 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