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: 1) Where an RRSP invests in a non-arm's length mortgage and the annuitant uses the mortgage proceeds to invest in GICs, will the mortgage set-up costs be deductible by the annuitant as carrying charges? 2) Where mortgage interest costs exceed the income earned from GICs acquired with the mortgage proceeds, will the interest on the mortgage be deductible by the annuitant?
Position: 1) No. 2) No.
Reasons: 1) The mortgage set-up costs are incurred by the RRSP to acquire the qualified investment. Since the costs are incurred by the RRSP and not the annuitant, they may not be claimed by the annuitant as an expense. If the annuitant pays such expenses then the costs will be considered premiums paid by the annuitant. 2) The interest will not be deductible because there will not be any income earned from a business or property.
October 17, 2000
SAINT JOHN TSO HEADQUARTERS Mike Langille M.P. Sarazin Acting Director (613) 824-5441
Attention: Debbie Ferguson 2000-004737
Deductibility of RRSP Mortgage Costs
We are writing to you in response to your Round Trip Memorandum of September 12, 2000, requesting our comments regarding the deductibility of a non-arm's length mortgage set-up costs where the mortgage is held by a self-directed registered retirement savings plan ("RRSP") and the annuitant of the RRSP uses the mortgage proceeds to invest in a guaranteed investment certificate ("GIC").
A taxpayer owns a home that is mortgage-free and he has $XXXXXXXXXX in his RRSP. The RRSP will invest in a mortgage on the taxpayer's home and the taxpayer will use the mortgage proceeds to invest in a GIC. In the first year, it is anticipated that the taxpayer will pay approximately $XXXXXXXXXX in interest on the mortgage held in his RRSP and he will earn approximately $XXXXXXXXXX in interest from his GIC. The taxpayer is of the view that the amount of interest expense that he may claim will be restricted to the amount of the interest that is earned on the GIC. He has asked you to confirm that the mortgage set-up costs (application fee, mortgage insurance, appraisal fee, legal fees and annual administration fees) are deductible as carrying costs.
Comments
The taxpayer should be advised that opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance tax rulings, the taxpayer should refer to Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "Agency"). The taxpayer can obtain copies of information circulars and interpretation bulletins from your office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Consequently, you should only be providing general comments to the taxpayer.
Expenses related to a mortgage investment acquired by an RRSP represent expenses incurred by the RRSP and not expenses incurred by the RRSP annuitant. This would apply to mortgage set-up costs incurred to establish a mortgage that will be acquired by an RRSP. Since an RRSP annuitant has not incurred the expenses, the expenses may not be claimed as carrying charges by the RRSP annuitant. We also note that the CCRA has taken the general position that any amounts paid by an annuitant of an RRSP on behalf of the RRSP will be considered premiums as defined in subsection 146(1) of the Income Tax Act. In summary, RRSP mortgage set-up costs are not deductible by the RRSP annuitant and mortgage set-up costs paid by an annuitant on behalf of an RRSP will be considered premiums paid by the annuitant.
The taxpayer should also be advised that none of the interest paid on the mortgage will be deductible because the money borrowed is not being used to earn income from a business or property. This conclusion is supported by the fact that it will cost the taxpayer $XXXXXXXXXX in interest expenses to earn GIC interest income of approximately $XXXXXXXXXX.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove the client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
We trust these comments will be helpful.
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate