7-4282
M. Shea-DesRosiers
(613) 957-895319(1)
September 22, 1989
Dear Sirs:
This is in response to your letter of August 1, 1989 to our Winnipeg District which was forwarded to us for our reply.
You describe the following situation:
A company called Smith and Jones has four shareholder, each with 25% interest. None of the four shareholders are related.
Smith and Jones has recently completed a commercial building for its own use valued at $500,000 with a mortgage of $198,000.
Mr. Jones wishes to use his Self-Directed Registered Retirement Savings Plan to place a second mortgage on the building in the amount of $40,000. You enquire as to whether such a mortgage would be a qualified investment. Furthermore, you ask if Mr. Jones splits the mortgage with his spouse in the amount of $5000 would that affect the answer to the first question.
Pursuant to subsection 4900(4) of the Income Tax Regulations, a mortgage secured by real property situated in Canada, or an investment therein, is a qualified investment for a registered retirement savings plan unless the mortgagor is the annuitant under the plan or is a person with whom the annuitant does not deal at arm's length.
In the situation described above we would expect that the mortgage would be a qualified investment for the purposes of subparagraph 146(1)(g)(iv) of the Income Tax Act since the mortgagor is neither the annuitant under the plan nor apparently a person with whom the annuitant deals at non-arms's length.
It is to be noted, however, that it is a question of fact whether persons not related to each other were dealing with each other at arm's length.
As for the question of splitting the mortgage, the part held by Mrs. Jones will have to meet the same conditions noted above to be considered a qualified investment for the purposes of subparagraph 146(1)(g)(iv) of the Income Tax Act.
We trust the above comments will be of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate