8 May 2001 External T.I. 2001-0072325 - CAPITAL LOSSES

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 Department.

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

Principal Issues: An individual has asked whether a disposition of a debt gives rise to a capital loss.

Position: General comments were provided

Reasons: The available information was limited.

XXXXXXXXXX 2001-007232
M. Eisner, CA
May 8, 2001

Dear XXXXXXXXXX:

Re: Capital Loss – Sale of Mortgage

This is in reply to your letter of February 23, 2001, concerning the above- noted subject.

You indicated that you may sell your lodging house (the “House”). Currently, 5/6 of the House is rented and you occupy the other 1/6 of the House as your residence. You indicate that the sale of the rented portion of the House will give rise to a capital gain. For the purposes of this reply, we assume that the gain on the 1/6 of the House which you occupy will be fully sheltered by the principal residence exemption, although we were not provided with sufficient information to make this determination (see enclosed Interpretation Bulletin IT-120R5 “Principal Residence” for information on the principal residence exemption).

In order to pay a part of the selling price of the House, the person who may purchase the House will make a down-payment and you will be provided with the proceeds of a first mortgage held by a financial institution. The purchaser will provide you with a second mortgage with respect to the remaining part of the selling price. You have suggested that if you were to proceed with the sale of the House (at a gain) and then, subsequently, sell the second mortgage, you may sustain a loss on the mortgage. You have asked whether the loss may be treated as a “capital loss” for income tax purposes.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4. However, we are prepared to provide the following general comments.

In general terms, subparagraph 40(2)(g)(iii) of the Income Tax Act (the “Act”) does not allow a deduction for a loss from a disposition of a “personal-use property”. In this regard, section 54 of the Act defines that term, in part, as a property owned by a taxpayer that is used primarily for the personal use or enjoyment of the taxpayer and/or persons related to the taxpayer (such as a principal residence), as well as a debt owing to the taxpayer in respect of the disposition of personal-use property. Accordingly, as a general rule, to the extent that a portion of a debt can be considered to be owing as a result of the sale of a principal residence, a loss (to the extent that it relates to that portion) that occurs on the disposition of the debt, cannot be treated as a capital loss. We have enclosed a copy of Interpretation Bulletin IT-159R3 “Capital debts established to be bad debts” and Interpretation Bulletin IT-332R “Personal-use property”, which provide additional information on these rules.

In addition, under subparagraph 40(2)(g)(ii) of the Act, a taxpayer’s loss arising from the disposition of a debt is nil (and therefore cannot result in a capital loss) unless (i) the debt had been acquired by the taxpayer for the purpose of gaining or producing income from a business or property; or (ii) acquired as consideration from the disposition of capital property in an arm’s length transaction. In accordance with the comments in paragraph 5 of Interpretation Bulletin IT-239R2 (enclosed), if a debt bears interest at a reasonable rate, the debt will generally be considered to be acquired for the purpose of gaining or producing income.

We note that the tax treatment of a taxpayer’s loss can only be determined following a review of all the relevant facts and documentation and that there are also other provisions in the Act that may deem a taxpayer’s loss to be nil, in particular, if the disposition of the House or the second mortgage is to a related party.

If you need further assistance, you may contact your local Tax Services Office.

We trust that our comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings
Policy and Legislation Branch

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