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? Information on writing off or disposing of a non-performing investment held in an RRSP.
2. How is any subsequent income on the mortgage taxed?
Position:
1. Outlined possible tax consequences and noted we do not provide opinions or rule on the valuation or propriety of such transactions.
2. If the mortgage was removed from the RRSP at fair market value any subsequent income would be taxed in the annuitant's hands.
Reasons:
Explained options available to the RRSP and annuitant in these circumstances.
XXXXXXXXXX 2003-004710
M.P. Baldwin, CA
November 13, 2003
Dear XXXXXXXXXX:
This is reply to your enquiry to the Barrie Tax Services Office on July 25, 2002, which was forwarded to our Directorate on November 4, 2003, in which you request that we provide information with respect to the tax implications of taking out a mortgage held in a self-directed registered retirement savings plan ("RRSP").
The Canada Customs and Revenue Agency (the "Agency") cannot provide rulings or approval with respect to the write-off of investments held in an RRSP. How such properties are treated is dependent on the facts pertaining to the investment and the terms of the trust agreement that governs the RRSP. We also cannot provide rulings dealing with the valuation of property held in an RRSP. However, we can provide the following general comments with respect to the valuation of a mortgage investment for purposes of the Income Tax Act (the "Act"), which may be of assistance to you.
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 than the fair market value of the property to the annuitant or to a person who is not dealing with the RRSP at arm's length, 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 by an annuitant 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.
How the fair market value of an asset is determined or substantiated for this purpose has never been specifically set out by the Agency. The determination of the fair market value of any property is a question of fact. In determining the fair market value of a mortgage, a valuator would consider all of the underlying facts related to the particular mortgage including whether any income could be subsequently received from the mortgage.
As noted above, if the mortgage was removed from the RRSP by the annuitant for proceeds equal to the mortgage's fair market value, it is our view that any subsequent income received on the mortgage would be income of the annuitant.
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
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