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 can unrecoverable or zero value mortgages be removed from registered retirement savings plans ("RRSP").
Position: Through disposition.
Reasons: The mortgage cannot be written-off but if legally discharged (through foreclosure or power of sale) the value will be written down and the amount of the proceeds received (which may be nil) will be entered; and if disposed of for fmv same result. If disposition to non-arm's length party and sold for less or more than fair market value, tax consequences to annuitant.
XXXXXXXXXX 991819
M. P. Baldwin
Attention: XXXXXXXXXX
November 10, 1999
Dear Sirs:
Re: Arm's Length Mortgages
This is reply to your letter of June 24, 1999 requesting an opinion on removing "unrecoverable or zero value" mortgages from a registered retirement savings plan ("RRSP).
The Canada Customs and Revenue Agency ("CCRA" - formerly Revenue Canada) cannot provide an approval with respect to the write-off or removal of investments held in an RRSP. How such investments 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 (the "Act") which may be of assistance to you.
With respect to a mortgage that is in default, the first factor to consider 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.
A mortgage may be removed from an RRSP trust when the trustee disposes of it to another party. In this respect, where the property is sold to a person who deals with the RRSP trust and its annuitant at arm's length, the property is simply removed from the RRSP records and the agreed-upon proceeds would be 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 trust or its annuitant 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 to the annuitant for less than its fair market value, 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 to the annuitant 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 on over-contributions to deferred income plans.
Where the RRSP trust simply disposes of a mortgage to the annuitant for nil proceeds, an amount equal to the fair market value of the property at that time must be included in the annuitant's income.
With respect to non-arm's length transactions, the RRSP trustee should be in a position to substantiate the fair market value of a particular property if called upon to do so.
The above 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 income tax rulings and, accordingly, are not binding on the CCRA.
We trust the above comments will be of assistance to you.
P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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