18 September 2003 External T.I. 2003-0017295 - WRITE-OFF OF MORTGAGES HELD IN RRSP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. What are the tax implications of taking a mortgage out of an RRSP?

2. Can the annuitant of the RRSP claim the mortgage administration fees personally?

3. Will ATR-24 apply in these circumstances?

4. Can the annuitant claim the legal fees incurred on behalf of the RRSP in a lawsuit regarding damages claimed by the RRSP?

Position:

1. Outlined possible tax consequences and noted we do not provide opinions or rule on the valuation or propriety of such transactions.

2. No, the expenses are expenses of the RRSP.

3. Question of fact
4. No

Reasons:

Explained options available to the RRSP and annuitant in these circumstances.

XXXXXXXXXX 						2003-001729
M. P. Baldwin, CA
September 18, 2003

Dear XXXXXXXXXX:

Re: Write-off of Mortgages held in an RRSP

This is in reply to your letter of April 15, 2003 sent to the Registered Plans Directorate, and forwarded to our Directorate for reply, requesting a ruling on the mortgages held in your self-directed registered retirement savings plan ("RRSP"). In particular, you would like to know what are the tax implications of taking the mortgages out of your RRSP and transferring them to you directly and whether you can reimburse the RRSP for any fees paid on behalf of these mortgages.

Written confirmation of the tax implications inherent in particular transactions are provided by this Directorate only when the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Copies of information circulars and other publications are available at your local Tax Services Offices or on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments that may be of assistance.

With respect to a mortgage that is in default, the first factor that must be determined is whether the investment exists at a particular time. This is a question of law. However, a mortgage will generally continue to exist until such time as it is legally discharged. Where a mortgage no longer exists, it can be freely removed from the records of the RRSP.

Where a mortgage continues to exist, it may only be removed from the RRSP as a withdrawal from the RRSP or by sale to another party. In this respect, where the property is sold to a person dealing with the RRSP at arm's length, the property is simply removed from the RRSP records and the agreed upon proceeds added to the RRSP. However, where the property is sold to the annuitant of the RRSP or to another person who is not dealing with the RRSP at arm's length, it should be ensured that the proceeds of disposal are equal to the fair market value of the mortgage at the time of the disposal or certain unintended consequences may arise.

For example, if a property is sold for less that the fair market value of the property, the difference must be added to the annuitant's income for the year in which the sale is made. On the other hand, if the property is sold for more than it is worth, the excess will be considered to be a gift or a contribution to the RRSP and could be subject to Part X.1 tax.

Where a mortgage is simply withdrawn from an RRSP by the annuitant, an amount equal to the fair market value of the property at that time must be included in the annuitant's income. For example, if the value of the mortgage is nil, the income inclusion in respect of the mortgage would also be nil.

As noted above, a property may be removed from an RRSP at any time and if proceeds equal to the property's fair market value are received, any income inclusions or unintended taxation as described above, will be avoided. However, how the fair market value of an asset is determined or substantiated for this purpose has never been specifically set out by the Canada Customs and Revenue Agency (the "Agency").

Expenses relating to a mortgage investment acquired by an RRSP represent expenses incurred by the RRSP and not expenses incurred by the RRSP annuitant. This would apply to mortgage set-up costs incurred to establish the mortgage as well as the on-going administration expenses of the mortgage that is acquired by the RRSP. Since an RRSP annuitant has not incurred the expenses, the expenses may not be claimed as carrying charges by the RRSP annuitant. We also note that the Agency has taken the general position that any amounts paid by an annuitant of an RRSP on behalf of the RRSP will be considered premiums as defined in subsection 146(1) of the Income Tax Act (the "Act"). In summary, RRSP mortgage set-up and annual administrative costs are not deductible by the RRSP annuitant and the payment of these expenses by the annuitant on behalf of an RRSP will be considered premiums paid by the annuitant.

With respect to a particular situation involving a proposal to settle a dispute regarding damages claimed by the RRSP, we would refer you to Advance Tax Ruling ATR-24. In this case, amounts were paid into the RRSP without being considered premiums or gifts. However, the determination of whether the position in ATR-24 would be applicable to a particular fact situation could only be determined in the context of an advance income tax ruling and a thorough of all the relevant facts of the particular situation.

With respect to your question on whether you can claim the legal fees as a tax deduction, it is our view that the legal fees incurred in this type of legal action would not be deductible in computing taxable income.

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

Yours sincerely,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate