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.
Principal Issues: Whether interest on mortgage deductible after mortgage is transferred to RRSP
Position: Depends on facts
Reasons: Must satisfy 20(1)(c) criteria
2005-012276
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
April 20, 2005
Dear XXXXXXXXXX:
Re: Mortgages Held in Registered Retirement Savings Plans ("RRSP")
We are writing in response to your letter dated March 18, 2005, wherein you requested our opinions on income tax consequences relating to mortgages held in RRSPs. In particular, you have requested our comments on the following scenarios.
Situation 1
A taxpayer contributes a $60,000 mortgage to his RRSP and withdraws $60,000 in cash from his RRSP. He purchases $60,000 worth of Government of Canada bonds with the cash.
Situation 2
A taxpayer contributes a $60,000 mortgage to his RRSP and withdraws $60,000 in cash from his RRSP. He invests a portion of the $60,000 in shares of a large Canadian bank that will pay annual dividends, but where the main return on the investment is expected to come from the capital appreciation of the shares.
Situation 3
A taxpayer has qualified investments in an RRSP. He withdraws the qualified investments from the RRSP and in return he contributes to the RRSP a mortgage in an amount that is equal to the fair market value of the qualified investments at the time when they were withdrawn from the RRSP.
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Nonetheless, we shall provide some comments of a general nature.
In order for interest payments - including interest paid on a loan (such as a mortgage) that is held by the payer's RRSP - to be deductible, the loan must be used for the purposes of earning income from a business or property. For example, if the mortgage loan were used to purchase a personal residence, the interest paid would not be deductible; if however, the mortgage loan was used to purchase a building, which is used to earn income from a business, the interest paid may be deductible.
If money is borrowed to invest in a property, such as a share, that can only provide capital gains (that is, a share on which dividends cannot be paid), the interest paid on the money borrowed to acquire that property is not deductible; however, interest may be deductible on money borrowed to acquire a property such as a common share, on the basis that there is a reasonable expectation, at the time the share was acquired, that the shareholder will receive dividends.
A person may make certain contributions in kind to, or withdrawals in kind from, his RRSP. Where a contribution to or withdrawal from an RRSP is made in kind, the amount contributed or withdrawn is equal to the fair market value of the property at that time.
You may wish to refer to Interpretation Bulletin IT-533, Interest Deductibility and Related Issues, and Interpretation Bulletin IT-124R6, Contributions to Registered Retirement Savings Plans, Interpretation Bulletin IT-320R3, Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds. They can be found on our website, www.cra.gc.ca, under Forms and Publications/Document Type/Income Tax Interpretation Bulletins.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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