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: If the insurance conditions were never satisfied, would a non-arm's length mortgage be a qualified investment?
Position: No.
Reasons: 4900(1)(1) not satisfied. Since this occurred in 1991, the application of 146(10) to the annuitants is likely statute-barred. However, the RRSPs can be subjected to taxes under Part XI. 1 given the wording in subsection 207.1(1). Also, the reporting requirements of subsection 214(2) of the Regulations have not been complied with and penalties may apply to the trustee on this basis.
June 28, 1999
Toronto Centre TSO Income Tax Ruling and Verification & Enforcement Division Interpretations Directorate Section 444-12 Fouad Daaboul (613) 957-2087
Attention: Naomi Tsuji 990787
Non-Qualified Investment Acquired by an RRSP
This is in reply to your facsimile submission of March 24, 1999, wherein you asked us to address additional questions regarding the transactions described in our memorandum to your office (our document number E9524767) dated October 31, 1995
FACTS
1 Two RRSPs (governed by trusts) were originally opened in XXXXXXXXXX under which the trustee was XXXXXXXXXX. The annuitant under one RRSP is XXXXXXXXXX ("XXXXXXXXXX RRSP") and the other RRSP is XXXXXXXXXX ("XXXXXXXXXX RRSP") (hereinafter collectively referred to as the "RRSPs").
2. In XXXXXXXXXX, the RRSPs lent a total of $XXXXXXXXXX through a second mortgage to XXXXXXXXXX. Both annuitants and XXXXXXXXXX did not deal with each other at arm's length. The annuitants sought and acquired mortgage insurance in respect of a mortgage of $XXXXXXXXXX. However, the insurance was granted in respect of a mortgage to XXXXXXXXXX (not XXXXXXXXXX) and on the condition that XXXXXXXXXX provide personal guarantees in respect of the mortgage.
3. In XXXXXXXXXX, a certificate of mortgage insurance was issued by XXXXXXXXXX in respect of the XXXXXXXXXX mortgage.
4. XXXXXXXXXX became the trustee of the RRSPs in XXXXXXXXXX.
5. XXXXXXXXXX defaulted on its mortgages in XXXXXXXXXX and power of sale proceedings had been initiated by the first mortgagee, XXXXXXXXXX in XXXXXXXXXX. At that time, the balance of the first mortgage was $XXXXXXXXXX
6. The appraised value of the property is $XXXXXXXXXX , the listed price is $XXXXXXXXXX and the highest offer received has been $XXXXXXXXXX. The property remains unsold.
7. As of XXXXXXXXXX, the balance of the mortgage held by XXXXXXXXXX RRSP was $XXXXXXXXXX and the balance of the mortgage held by XXXXXXXXXX RRSP was $XXXXXXXXXX. The interest in the second mortgage was withdrawn from each of the RRSPs in XXXXXXXXXX for its fair market value of nil.
OUR COMMENTS
Under paragraph 4900(1)(j) of the Income Tax Regulations, a non-arm's length mortgage in respect of real property situated in Canada will be a qualified investment if the mortgage is insured under the National Housing Act or by a corporation offering its services to the public as an insurer of mortgages. Until this condition is satisfied, a non-arm's length mortgage will not be a qualified investment. The determination of whether a mortgage is insured is a question of fact which can only be determined after a review of all of the facts.
In your case, it is clear that, under the terms of the insurance contract, the mortgage issued to XXXXXXXXXX was not insured. This conclusion is supported by the certificate of insurance, the insurer's commitment letter to the XXXXXXXXXX, and the insurer's refusal to pay under the contract. Consequently, the interest in the second mortgage acquired by each of the RRSPs did not constitute a qualified investment because the non-arm's length mortgage was not insured
Since the RRSPs acquired a non-qualified investment in XXXXXXXXXX, the provisions of subsection 146(10) should have applied to include the fair market value of the second mortgage interest acquired by the RRSPs in XXXXXXXXXX income. No such income inclusion was reported by either XXXXXXXXXX. Although we presume that XXXXXXXXXX income tax returns are statute barred, you may wish to review this fact and also consider the facts of this situation to determine whether the exception in subparagraph 152(4)(a)(i) of the Income Tax Act (the "Act") could apply to allow XXXXXXXXXX income tax returns to be reassessed.
We also note that Part XI. 1 of the Act would apply to the RRSP trusts if the income inclusion to the annuitants under subsection 146(10) of the Act as described above did or does not occur. If the fair market value of the non-qualified investment was not included in computing the income, for any year, of the annuitant of the RRSP (i.e. XXXXXXXXXX), the exclusion to the application of subsection 207.1(1), contained in paragraph (a) thereof is not applicable. Thus, the RRSP trust is subject to a tax of 1% of the fair market value of the non-qualified investment at the time it was acquired by the trust for each month that it holds the non-qualified investment (i.e. until XXXXXXXXXX). We also note that, under subsection 207.2(2) of the Act, the trustee of an RRSP is personally liable for any taxes owing and not paid by the RRSP trust under Part XI. 1 of the Act and the trustee is entitled to recover from the RRSP trust any amounts it pays on behalf of the trust.
We further note that subsection 146(4) of the Act generally exempts a trust governed by an RRSP from Part I tax until the end of the year after the death of the last annuitant. However, where an RRSP holds a non-qualified investment that was acquired by the RRSP trust after October 31,1985, subsection 146(10.1) of the Act will apply to tax the income earned by the RRSP trust from the non-qualified investment.
Finally, we note that, pursuant to subsection 214(2) of the Income Tax Regulations, the trustee of the RRSP was required to file a T3R-IND, Registered Retirement Savings Plan, Individual Information and Income Tax Return, within 90 days from the end of the taxation year in which the RRSP acquired the non-qualified investment. We presume that this return was in fact not filed, and thus the trustee would be subject to penalties for failure to file this return. Interest would also be charged on any amounts owing.
We trust our comments will be of assistance to you.
Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch