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:
An annuitant's RRSP holds a mortgage on an arm's length person's home and the arm's length person's RRSP holds a mortgage on the annuitant's home, would the simultaneous reduction of the mortgages result in a withdrawal or benefit being received out of the RRSP?
Position:
Question of Fact.
Reasons:
Appears that the parties may not deal at arm's length and the mortgages will not qualify unless annuitants deal at arm's length so only general comments were provided.
972790
XXXXXXXXXX M.P. Sarazin
Attention: XXXXXXXXXX
November 27, 1997
Dear Sirs:
Re: Write-Down of Investment in Mortgage held by RRSP
This is in reply to your letter addressed to the Halifax Tax Services Office dated September 9, 1997 which has been forwarded to our Directorate, wherein you describe a fact situation where each of two non-related individuals had their registered retirement savings plan ("RRSP") trusts invest in a mortgage issued by the other. One of the individuals is now in financial difficulty and that individual's mortgage may have to be written down, which means both mortgages must be written down since they are to be treated equally. You were asking whether the agreement by one individual to reduce the principal of the mortgage held in his RRSP in return for a an equal reduction in his mortgage will be considered a withdrawal or benefit received from the RRSP.
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 Department's position on the holding of mortgages in an RRSP is discussed in Interpretation Bulletin IT-320R2. A mortgage will be a qualified investment where the mortgage is on real property situated in Canada and the real property is owned by a person that deals at arm's length with the annuitant of the RRSP. However, a non-arm's length mortgage on real property situated in Canada may also qualify as a qualified investment if certain conditions are satisfied. The determination of whether certain individuals deal at arm's length is a question of fact which can only be determined after all of the facts related to the particular case have been reviewed. IT-419R discusses the criteria used by the Department to determine whether or not persons deal with each other at arm's length. We note that there are situations where non-related individuals are considered to deal with each other on a non-arm's length basis and, in this regard, we refer you to the comments provided in paragraphs 15 to 19 of IT-419R.
Where annuitants agree to use their RRSP funds to invest in each other's mortgage under the same terms and conditions, it would appear that the two annuitants may not deal at arm's length with each other. If it is concluded that the annuitants do not deal at arm's length with each other, the mortgages will be qualified investment only if the conditions described in paragraph 9 of IT-320R2 are satisfied.
Where an RRSP acquires a mortgage that, at the time of its acquisition, was not a qualified investment, the provisions of subsection 146(10) of the Income Tax Act (the "Act") would apply to include the fair market value of the mortgage in the annuitant's income at that time. In addition, under the provisions of subsection 146(10.1) of the Act, the RRSP would have to pay tax under Part I of the Act in respect of the income earned on the non-qualified investment. Where a mortgage held by an RRSP subsequently becomes a non-qualified investment or where there was no income inclusion under subsection 146(10) of the Act, the provisions of Part XI.1 of the Act will apply and the RRSP will be subject to a tax of 1% of the fair market value of the mortgage at the time it was acquired by the RRSP for each month the mortgage was held by the RRSP as a non-qualified investment. If Part XI.1 of the Act 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 and interest applicable thereto.
We also refer you to paragraph 7 of IT-448 which states that a reduction in the principal amount of a debt would constitute a significant change in the terms of the debt thereby resulting in a disposition of the original debt for purposes of the Act. In our view, where a mortgage is reduced, there would be a disposition of the original mortgage for proceeds of disposition equal to the fair market value of the reduced mortgage. If such proceeds of disposition are less than the fair market value of the original mortgage, subsection 146(9) of the Act will require the annuitant of the RRSP to include an amount equal to the difference in his or her income and subsection 214(2) of the Income Tax 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 reduction of the debt applied to reduce his or her available losses or the adjusted cost base of his or her capital property.
We trust the above comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c. Halifax Tax Services Office
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