10 May 1990 Income Tax Severed Letter AC59619 - Mortgage Investment and RRSP

24(1)

                                5-9619
                                W.C. Harding
                                (613) 957-3496

Attention: 19(1)

May 10, 1990

Dear Sirs:

This is in reply to your letter of February 19, 1990, wherein you requested our opinion as to whether a proposed mortgage will constitute a qualified investment for registered retirement savings plans ("RRSP") and whether the investment by an RRSP in the proposed mortgage will result in an advantage being extended to the annuitant of the RRSP under paragraph 146(2)(c.4) of the Income Tax Act (the "Act").

As noted in Information Circular 70-6R, we do not give opinions in respect of proposed transactions other than as a reply to an advance income tax ruling request. However, we will offer the following general comments.

Firstly, we note that the provisions under subsection 4900(4) and paragraph 4900(1)(j) of the Income Tax Regulations operate independently such that if one provision is satisfied we need not be concerned with the other.

It is our understanding that the proposed mortgage has no fixed maturity date and that the principal is due upon the sale of the property or the refinancing of the mortgage. Furthermore, the interest on the mortgage is deferred until the date the principal is due and will be equal to the lesser of the interest at the prevailing mortgage rates and the prorata increase in the value of the underlying real property.

As discussed by telephone 19(1) Douglas), the determination of whether the proposed mortgage results in an equity interest in the real property as well as the determination of whether the deferral and calculation of interest payments is an advantage for purposes of paragraph 146(2)(c.4) of the Act are questions of fact which can only be made after a detailed examination of the relevant documentation in each specific case. In addition, it is the Department's view that in order to meet the requirements set out in paragraph 4900(1)(j) of the regulations, a non-arm's length mortgage must not contain terms and conditions that are substantially different from those that would be found in an arm's length mortgage in the same circumstances. In our view it is unlikely that an individual would cause his RRSP to loan money in an arm's length situation where the loan did not have fixed repayment terms and did not carry a minimum amount of interest.

We trust the above comments will be of assistance to you.

Yours truly, for Director Financial Industries Division Rulings Directorate