| 5-922378 | |
| 24(1) | D. S. Delorey |
| (613) 957-8953 |
Attention: 19(1)
September 14, 1992
Dear Madam:
This is in reply to your letter of August 4, 1992 concerning the fair market value of a mortgage held as an investment by a trust governed by a registered retirement income fund ("RRIF").
More particularly, where a mortgage investment is held by a self-administered RRIF, you are concerned with the situation where the market value of the mortgaged property has decreased to the extent that the fair market value of the mortgage investment is nil, or where the mortgaged property is held under a power of sale and is not selling.
Revenue Canada does not provide advance rulings on the fair market value of a property nor does it as a general rule predetermine the fair market value of a property in any other context.
Rather, the determination of the fair market value of a property held by a self-administered RRIF is the responsibility of the RRIF trustee and the annuitant. Revenue Canada would become involved only after the fact and only if it considered the value assigned to a property to be unreasonable in the circumstances.
A well accepted definition of "fair market value" is that contained in Black's Law Dictionary, 6th edition, which reads as follows:
"the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts".
If the fair market value of a property held by an RRIF at the beginning of a particular year is in fact nil, there is no need to assign a value to that property for the purposes of computing the minimum amount under paragraph 146.3(1)(b.1) of the Income Tax Act (the "Act").
Revenue Canada considers that an RRIF and its annuitant deal at non-arm's length and the Act provides that transactions between persons dealing at non-arm's length must be conducted at fair market value. Consequently, where property of an RRIF is distributed to the annuitant, the annuitant must include in income the fair market value of the property at the time of the distribution. If the fair market value of the property at that time is nil, it follows that no amount would be included in the annuitant's income as a result of the distribution.
As noted above, the Act simply provides that transactions between non-arm's length parties must be conducted at fair market value. It does not govern when such transactions may take place. Accordingly, Revenue Canada is not in a position to say when transactions between a self-administered RRIF and its annuitant may take place.
Where a mortgage investment is held by a self-administered RRIF and the related real property is held under a power of sale, it is our view that transactions involving the power of sale should be conducted in a manner that reflects normal business practice.
Accordingly, if it is normal business practice to await the outcome of a power of sale, it seems reasonable to expect that such procedure would be followed where an RRIF in involved.
We trust our comments are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate