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:
How a mortgage is written off in an RRSP. Does Revenue Canada have to approve the write off?
Position:
Noted the income tax consequences under several fact scenarios. Revenue Canada does not give its approval.
Reasons:
An RRSP must conduct its affairs at fair market value when dealing with someone not at arm's length.
XXXXXXXXXX 9732765
Franklyn S. Gillman, LL.L., C.A.
February 13, 1998
Dear XXXXXXXXXX:
Re: Mortgage in a Registered Retirement Savings Plan ("RRSP")
We are responding to a request you made at the Vancouver Tax Services Office on December 1, 1998 wherein you requested information on how to deal with a non performing mortgage in an RRSP trust.
As discussed during our recent telephone conversation (XXXXXXXXXX/Gillman), Revenue Canada can not provide an 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. 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.
A mortgage may 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 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 them were attributable to Revenue Canada.
The comment in the letter alluding that Revenue Canada requires “... an appraisal from a recognized appraiser along with three comparable listings within the same area indicating that the value of the property...”, when writing off a mortgage is not correct. 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. Proof of the fair market value of the property should be available when this is done, 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.
These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of Information Circular 70-6R3 written opinions are not advance rulings and, accordingly, are not binding on the Department.
We trust this information will be satisfactory to your needs.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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