19 April 1990 Income Tax Severed Letter ACC9157 - Self-directed RRSP - Mortgage as Qualified Investment

19(1)                                      900259
                                           M. Shea-DesRosiers
                                           (613) 957-8953

April 19, 1990

Dear Sirs:

Re: Registered Retirement Savings Plan ("RRSP") Subsection 146(1)(g) of the Income Tax Act (the "Act") Paragraph 4900(1)(j) and subsection 4900(4) of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of March 27, 1990 concerning the above-mentioned subject.

The situations you described are as follows:

An individual is the sole shareholder of a corporation which is in the home construction business. Under certain circumstances, in the course of selling the homes, the corporation will take back a second mortgage from its customer. The second mortgage is interest-free and is due and payable in three years.

The corporation will then sell the second mortgage to the self-directed RRSP, under which the shareholder of the corporation is the annuitant, for an amount discounted at the normal commercial rates for second mortgages.

You enquire as to whether the second mortgage would bee considered a qualified investment for the RRSP under subsection 146(1)(G) of the Act in the following cases:

1) assuming that the mortgagor deals at arm's length with the corporation and its shareholder;

2) assuming that the mortgagor does not deal ar arm's length with the corporation or its shareholder.

Our Comments

1) As long as the mortgagor is neither the annuitant under the plan nor a person with whom the annuitant does not deal at arm's length, as provided in paragraph 4900(4) of the Regulations, it is our opinion that the second mortgage secured by real property situated in canada would be a qualified investment for the purposes of subparagraph 146(1)(g)(iv) of the Act.

2) In this case, the second mortgage would be a qualified investment pursuant to paragraph 4900(1)(j) of the Regulations provided it is in respect of real property situated in Canada, is insured either under the National Housing Act or by a Corporation offering its services to the public in Canada as an insurer of mortgages, and is administered by an approved lender under the Act. As outlined in paragraph 8 of Interpretation bulletin IT-320R , (Special Release dated May 25, 1984) other requirements to be met include

         - the amount of the mortgage interest rate and other terms 
           must reflect normal commercial practice, and

         - the mortgage must be administered as if it were on
           property owned by a stranger.

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

Yours truly,

for Director Financial Industries Division Rulings Directorate

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