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:
Mortgages as qualified investment for RRSPs.
Position:
Routine letter provided
Reasons:
Standard reply
XXXXXXXXXX 5-963508
Attention: XXXXXXXXXX
October 31, 1996
Dear Sirs:
Re: Mortgages held in RRSPs
This is in reply to your letter of October 10, 1996 regarding the above noted topic.
The Department's position on the holding of mortgages in an RRSP is discussed in Interpretation Bulletin IT-320R2. A mortgage secured by real property situated in Canada may be held as a qualified investment of the RRSP if the mortgagor is not the annuitant of the RRSP or is a person dealing at arm's length with both the RRSP and the annuitant of the RRSP. An RRSP may also hold a mortgage secured by real property situated in Canada where the mortgagor is the annuitant of the RRSP or a person not dealing at arm's length with the annuitant, if the mortgage:
(a) is administered by an approved lender under the National Housing Act;
(b) is insured under the National Housing Act or by a corporation offering its services to the public as an insurer of mortgages;
(c) has an interest rate and other terms that reflect normal commercial terms and practices; and
(d) is administered as if it were a mortgage on property owned by a stranger.
Generally the trustee of the RRSP will act as the administrator of the mortgage. However, the Act does not require this and the mortgage may be administered by some other approved lender. In either case we normally expect a mortgage will be administered in accordance with the usual business practices that the administrator would apply in similar arm's length transactions when conducting its own affairs. Accordingly, if the mortgage goes into default, we would expect the administrator to take any necessary steps to secure the investment. This could include foreclosure or a sale of the property if such action is warranted and the making of claims against the insurance.
Section 54 of the Act defines "disposition" to include the cancellation of a mortgage. If a mortgage is discharged and the mortgagor and RRSP annuitant are not dealing with each other at arm's length at the time, no action by the RRSP trustee will be required simply as a consequence of the discharge of the mortgage as long as the RRSP trust receives sale proceeds and insurance proceeds, if any, equal to the fair market value of the mortgage. However, if a mortgage is discharged and no proceeds are received or the proceeds are less than the fair market value of the mortgage, subsection 146(9) of the Act will require the annuitant of the RRSP to include an amount equal to the difference in income. Furthermore, subsection 214(2) of the Regulations will require the trustee of the RRSP to report this amount on an information return and subsection 153(1) of the Act, section 100 of the Regulations and paragraph 103(6)(c) of the Regulations may apply to require withholding by the trustee in respect of the amount to be reported as income to the annuitant. As a matter of interest, section 80 of the Act could also have application to a debtor in such cases to have any gain from the settlement of the debt applied to reduce the debtor's available losses or the ACB of the debtor's capital property.
If a non-arm's length mortgage that was a qualified property on its acquisition by an RRSP ceases to be properly administered or is no longer insured as required, it is our opinion that the property will cease to be a qualified investment at that time. In this case subsection 146(10.1) of the Act provides that the RRSP will be subject to taxation on the interest earned by the mortgage as long as the mortgage continues to be a non-qualified investment. In addition, the provisions of Part XI.1 of the Income Tax Act will generally apply and the RRSP trust will be subject to a tax of 1% of the fair market value of the mortgage at the time it was acquired, for each month the property is held as a non-qualified investment. If part XI.1 tax is applicable, an RRSP trustee must file a return under Part XI.1 of the Act and pay the amount of the tax payable for the months ending in the year within 90 days after the end of the year. Furthermore, in accordance with subsection 207.2(2) of the Act the trustee of the RRSP will be personally liable for the payment of the tax and any penalties or interest applicable thereto.
The Act does not provide for the transfer of a non-arm's length mortgage and the issuance of a corresponding T4RSP should the mortgage go into default or otherwise become a non-qualified investment. However, such a transfer may be required under the terms of the specific RRSP, under the terms of any trust agreement entered into by the trustee and the annuitant, or under the terms of any administration agreement entered into.
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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