20 November 1990 Income Tax Severed Letter

24(1)
                                        5-903036
                                        D.S. Delorey
                                        (613) 957-3494
          19(1)

November 20, 1990

Dear Sirs:

          24(1)

Your letter of September 20, 1990 addressed to the Registered Plans Division has been referred to this Division for reply.

Your particular concern relates

          24(1)

We note that your enquiry relates to a specific proposed transaction. As indicated in Information Circular 70-6R2 (copy enclosed), we do not provide written opinions on such transactions other than in reply to an advance ruling request submitted in the manner set out in that bulletin. The following comments are therefore of a general nature only.

Real property is not a qualified investment for an RRSP trust. Where an RRSP trust acquires real property,

     (a)  subsection 146(10) of the Income Tax Act (the "Act") provides that
          the fair market value ("FMV") of that property is to be included
          in the annuitant's income, and

     (b)  for each month that it holds the property, subsection 207.1(1)
          provides that the trust shall pay a tax of 1% of the FMV of the
          property, other than property the FMV of which was included in the
          annuitant's income under subsection 146(10).

However, the Department is prepared not to apply the provisions of either subsection 146(10) or 207.1(1) of the Act provided that

     (c)  the original mortgage investment of the RRSP trust was a qualified
          investment,

     (d)  the foreclosure was necessary to protect the mortgage investment
          of the trust and was a result of actions or default of actions on
          the part of the mortgagor, and

     (e)  the RRSP trustee holds the real property in the trust for the sole
          purpose of disposing of it and in fact does dispose of it within a
          reasonable period. A "reasonable period" is usually a year from
          the time of foreclosure but may extend beyond a year provided any
          delays can be justified having regard to the facts of the
          particular case.

Where an RRSP trust is required to make first mortgage payments and the annuitant funds those payments, such funding would be considered to be contributions to the trust by the annuitant and the deductibility limits set out in subsection 146(5) of the Act would apply.

Where an RRSP trust rents out real property that it has acquired, the net rental income would be taxed in the trust by virtue of subsection 146(10.1) of the Act. Where the annuitant is the tenant, the rent paid to the trust normally would not represent a contribution to the trust. In the year that the trust disposes of the real property, the annuitant is allowed a deduction under subsection 146(6) of the Act equal to the lesser of

     (a)  the amount included in his income under subsection 146(10) of the
          Act, and

(b) the proceeds of disposition.

The above comments are an expression of opinion only and not binding on the Department, as explained in paragraph 21 of the enclosed Information Circular 70-6R2. We trust however that they are of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate