10 August 1998 External T.I. 9815685 - MORTGAGE WRITE OFF

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:

Information on writing off or disposing of non-performing investments held in an RRSP.

Position:

Outlined possible tax consequences and noted we do not provide opinions or rule on the valuation or propriety of such transactions

Reasons:

To explain options available in these circumstances.

XXXXXXXXXX 		981568
W. C. Harding
August 10, 1998

Dear XXXXXXXXXX:

Re: Write-off of Mortgages Held in an RRSP

This is in reply to your letter of June 10, 1998, in which you request our permission to write off various mortgages, held in RRSPs, that you feel are worthless.

You indicate in your letter that the financial institution that holds these RRSPs has advised you that they require a ruling from Revenue Canada which authorizes them to write off the mortgages.

Revenue Canada cannot 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 cannot 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 generally continue 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. For example, if the value of the mortgage is nil, the income inclusion in respect of the mortgage would also be nil.

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.

We hope these comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch