2 January 1998 External T.I. 9732155 - MORTGAGE POWER OF SALE

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 RRSP holds a mortgage on a property that is sold under a power of sale. There are no proceeds available for the RRSP. However, the annuitant obtains a judgment and is collecting $500 per month.

Position:

It is impossible to discuss the file without knowing all of the facts. Details should be provided to the TSO for their consideration and referral to us should that be necessary. General information can be provided.

Reasons:

We are not aware of how the annuitant could obtain a judgment in respect of a mortgage held by an RRSP. The exercise of a power of sale does not result in the extinguishing of a mortgage debt.

973215
XXXXXXXXXX W.C. Harding

Attention: XXXXXXXXXX

January 2, 1998

Dear Sirs:

Re: Mortgages held in Registered Retirement
Savings Plans (“RRSPs”)

This is in reply to your letter of November 4, 1997, in which you requested our comments with respect to the proper treatment of a mortgage for tax purposes in a specific situation.

In your circumstances, an RRSP holds a mortgage secured by a property that was sold under a power of sale. However, the RRSP did not receive any proceeds from the sale of the property and you concluded that the mortgage was worthless, was no longer a qualified investment to the RRSP and no longer existed. Nevertheless, the annuitant of the RRSP has, on his own, obtained a judgment on the borrower with respect to the mortgage and is presently collecting $500.00 per month under the judgment. You wish to know if these payments should be applied to the RRSP even though the mortgage no longer exists.

Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate when the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Questions concerning existing situations must, however, be directed to your local tax services office. Accordingly, since your situation deals with a factual situation, we can not provide any specific answers to your enquiry at this time. We can, however, provide the following general comments which are not binding on the Department but may be of some assistance.

A power of sale will not, of itself, result in the discharge of a mortgage. In general terms, under a power of sale, a mortgage holder has the right to force the sale of a mortgaged property if the mortgage is in default. The mortgage holder may then use the proceeds to pay off the mortgage. However, if the proceeds of the sale are insufficient to extinguish the mortgage, the mortgage holder may also seek further payment of the obligation from the debtor.

Where a trust governed by an RRSP holds a debt obligation secured by a mortgage on a property that has been sold as a result of a power of sale, the RRSP will continue to hold the obligation as a property of the RRSP until such time as the obligation is legally extinguished, or until the trust otherwise disposes of the property. If the mortgage is no longer secured by the real property as a consequence of its sale, the obligation will no longer be a qualified investment of an RRSP (unless it is otherwise secured by real property situated in Canada). In this case the provisions of Part XI.1 of the Income Tax Act (the "Act") could apply and the RRSP may be subject to a tax equal to 1% of the fair market value of the mortgage at the time it was acquired by the trust.

In general, we would expect any judgment in respect of a property owned by a trust governed by an RRSP to be issued to the trustee of an RRSP or to an annuitant of the RRSP acting as an agent for the trust. Accordingly, unless the mortgage was previously transferred to the annuitant in your situation, we are uncertain how the annuitant could obtain a judgment with respect to the mortgage. In any event, we can not provide any general comments on the matter at this time and suggest you clarify this information in any submission made to your local tax services office.

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