2 September 1999 External T.I. 9923215 - COLLATERAL MORTGAGES AS QUALIFIED INVESTMENTS

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:

A mortgage that is secured by real property situated in Canada is a qualified investment for registered plans under Regulation 4900. Will such a mortgage be a qualified investment if it is also secured by other forms of property such as chattels?

Position:

A mortgage will be a qualified investment if it is secured by real property situated in Canada. The addition of other ("collateral") security is acceptable if those properties relate directly to the real property.

Reasons:

This opinion has been provided to clarify our position expressed in file 9621995 dated July 8, 1996.

Mortgages that are secured by property other than real property are not qualified investments under Regulation 4900. Our file 9621995 was intended to address situations where an interest in a real property might be combined with other property in order to qualify a mortgage that could not be viewed as a mortgage "in respect of" or "secured by" real property. It was not intended to deny qualification to mortgages that were adequately secured by real property situated in Canada where greater security was provided through a charge on other property that was incidental to and related to the real property.

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W. C. Harding

Attention: xxxxxxxxxx

September 2, 1999

Dear Sirs:

Re: Subsection 4900(4) of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of August 23 1999, in which you requested clarification of the Department's position on mortgages as qualified investments as provided under subsection 4900(4) and paragraph 4900(1)(j) of the Income Tax Regulations (the "Regulations") and is further to our numerous telephone conversations and our meeting of August 24, 1999 (XXXXXXXXXX Brian Darling and Wayne Harding).

In a letter dated July 8 1996, (our file 9621995) we indicated that a collateral mortgage on personal property would not be a qualified investment for an RRSP even though it may secure the same debt obligation that is secured by a mortgage on real property situated in Canada. We also advised that a collateral security that is part of a real property mortgage could taint the status of the real property mortgage as a qualified investment. In other words, if a mortgage was secured in whole or in part by chattels or other forms of security, it would not meet the definition.

As discussed, we intended that this position be read as a general rule for the application of subsection 4900(4) and paragraph 4900(1)(j) of the Regulations subject to modification in specific situations if warranted. However, it appears the position can be read as specifically denying the qualification of all mortgages where collateral security is obtained as part of a mortgage secured by real property. This was not intended.

In our opinion the Regulations require a mortgage to be secured by real property and that, in general, the amount of the loan should not exceed the value of the real property. However, this does not necessarily preclude a mortgage issued pursuant to a bona fide real estate financing with collateral security from qualifying where the collateral security relates to the real property (including cash flows therefrom and any mortgage advances).

We trust this clarifies our position

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch