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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Can we provide an RRSP trust with a ruling or opinion allowing it to write-off a mortgage held by an RRSP?
Position: No.
Reasons:
Outlined possible tax consequences and noted that we do not provide opinions or rules on valuations.
XXXXXXXXXX 2003-018224
February 27, 2003
Dear XXXXXXXXXX:
Re: Write-Off Mortgage Held in Self-Directed Registered Retirement Savings Plan
This is in response to your letter of October 28, 2002, which was forwarded to us on January 9, 2003, wherein you requested the Canada Customs and Revenue Agency's ("CCRA") authorization to write-off a mortgage held in your self-directed registered retirement savings plan ("RRSP").
You indicate in your letter that the financial institution that holds your RRSP has advised you that they require a ruling from CCRA which authorizes them to write-off the mortgage.
The CCRA cannot 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 (the "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 tax under Part X.1 of the Act on over-contributions to RRSPs.
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 the CCRA.
The above opinions are our best interpretation of the law as it generally applies. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, written opinions are not advance income tax rulings and, accordingly, are not binding on the CCRA.
We hope these comments will be of assistance to you.
Yours truly,
Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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