B. Fioravanti (613)957-8962
March 3, 1988
Dear Sirs:
Re: Self-directed Registered Retirement Savings Plans (the"Plans")
This is in reply to your letter of February 1, 1988, requesting a ruling with respect to the establishment of the Plan for the employees and owners of XXXX.
It is proposed the plan will then loan a predetermined amount (secured by a mortgage) to(XXXX) which will, in turn, use the proceeds to purchase a building for its business. The predetermined amount will be established by mutual agreement between the participants in advance of the transaction.
As we understand it, you are requesting our opinion as to whether the mortgages would be qualified investments by virtue of subsection 4900(4) of the Income Tax Regulations (the"Regulations") which reads, in part:
"For purposes of subparagraph 146(l)(g)(iv)---, a. mortgage secured by real property situated in Canada, or an interest therein, is a qualified investment for a registered retirement savings plan--- unless the mortgagor is the annuitant under the plan or fund, as the case may be, or is a person with whom the annuitant does not deal at arm's length."
Subsection 251(1) of the Income Tax Act (the "Act") defines "arm's length" and, more particularly, paragraph (b) thereof states "it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length." In this regard, we are enclosing a copy of Interpretation Bulletin IT-419 entitled "Meaning of Arm's Length" for your perusal and would refer you to paragraphs 10 to 14 which sets out some general guidelines.
Based on the limited information available, it is our opinion that the authority or influence that may be exerted by the employer-mortgagor over the employee-mortgagee or vice versa could constitute a form of de facto control and bring the parties into a non-arm's length relationship. As noted in paragraph 13 of IT-419 "It is important to note that this advantage etc. need not be exercised to be a factor; the mere ability to do so is sufficient."
We trust that the foregoing will be of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate