XXXX M. Shea-DesRosiers (613)957-8953
September 19, 1988
Dear Sirs:
Re: Non-Qualified Mortgages in a Self-Directed Registered Retirement Savings Plan ("RRSP")
This is in reply to your letter of July 7, 1988 addressed to the Calgary District Office which was forwarded to us for reply.
You describe the following situation:
1. A mortgage was set up on XXXX 1982 as an asset of two of your RRSPS, with a wife and husband each holding a 50% interest. The total market value of the mortgage when it was acquired was XXXX with each RRSP holding a XXXX interest.
2. The first mortgage payment was due on XXXX, 1983. The mortgage was registered at the Land Titles Office on XXXX 1983.
3. As no mortgage payments were made, your clients foreclosed and the title to the property was transferred to their respective RRSP's and registered at the Land titles Office on XXXX 1983.
You ask the following questions:
1. Is the special tax of 1% calculated from the date the asset became unqualified (i.e. XXXX 1983) or from the date the three year "grace period" expired (i.e. XXXX 1986)?
2. The exact amount of special tax owing by each of your clients.
3. As this unqualified investment is the only asset of one of the two subject RRSP's, and there is no cash in this account, you inquire as to whether you should issue a T4RSP and then resign as trustee and assume the client will declare the value of the non-qualified investment as income on their T1 Return.
4. Can the annuitant purchase his/her non-qualified investment?
5. Any other action you should be taking to place these plans in good standing and the most "tax sheltered" method of doing so.
Our comments
Our answers are based on our understanding that the wife and husband each have one(1) RRSP and each RRSP holds a 50% interest in the mortgage.
1. Subsection 207.1(1) of the Income Tax Act (the "Act") applies to qualified investments that become non-qualified subsequent to the date of acquisition and are held by the trust after becoming non-qualified. It is our opinion that the two RRSP trusts in question would be subject to the 1% per month penalty tax under subsection 207.1(1) of the Act since the month of August 1983.
The RRSP trusts will also be subject to tax under Part I for the taxation year or years where the trust held a non-qualified investment. The taxable income of the trusts for the year or years involved will be their income from non-qualified investments and capital gains realized on non-qualified investments as provided in subsection 146(10.1) of the Act.
The tax under subsection 207.1(1) of the Act does not apply if the fair market value of the property at the time of acquisition was included in computing the annuitants' income under subsection 146(10) of the Act. In such a case, should the RRSP trusts subsequently dispose of the non-qualified investment, the annuitants would be entitled to deduct pursuant to subsection 146(6) of the Act, the lesser of the cost of the investments or their proceeds of disposition. This disposition would, in turn, reduce the amount of the respective RRSP premium deductible under subsection 146(5) of the Act, in a particular taxation year.
As for the "grace period", the Department has a policy not to apply the provisions of subsection 146(10) of the Act if the original mortgage investment was a qualified investment and if
(a) foreclosure was necessary to protect the investment of the RRSP and was a result of actions or default of actions on the part of the mortgagor; and
(b) the RRSP trust held the real property for the sole purpose of disposing of it and did dispose of it with a reasonable period.
A "reasonable period" may extend beyond the year of foreclosure provided that the delay can be justified having regard to the facts of the particular case. However we are of the opinion, in the situation you describe, that a three year delay would not likely be considered reasonable.
2. The Rulings Directorate does not make the calculation of the amount owing. This should be done by the trustee of the Registered Retirement Saving Plans.
Should you need further information on the method of calculation, the district office where the annuitants file their T1 return should be consulted.
3. A T4RSP should have been issued to the annuitants for 1983 when the non-qualifying investment was acquired. A T4RSP should also be issued to the annuitants in the year the non-qualified investment is disposed of.
As for the question of whether you should resign as trustee, since this is not a matter concerning the interpretation of the Act, we are not in a position to advise you.
4. The annuitant can purchase his/her non-qualified investment at fair market value.
5. The Department does not provide tax planning assistance since this would come into conflict with the Department's role of interpreting and applying the law.
We trust the above comments will be of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate