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: The TSO requested our review of certain documents an
determination whether Former Section 79 (Pre-1994) would
apply in the situation 79 (Pre-1994)described.
Position: Former Section 79 would not apply
Reasons: In the case at hand, there was no evidence to indicate that there was a
failure to pay, foreclosure proceedings, repossession, or a quitclaim.
July 8, 2002
XXXXXXXXXX Income Tax Rulings
Verification & Enforcement Division Directorate
XXXXXXXXXX Bob Naufal
(613) 957-2744
2002-014164
XXXXXXXXXX
This is in response to your memo dated May 14, 2002, wherein you requested our comments as to whether Pre-1994 Section 79 ("Former Section 79") or Section 80 ("Former Section 80") would apply to the above-mentioned Taxpayer. The facts are conveyed in the memo, the Taxpayer's Amended Statement of Claim against the Province (the "Claim") and the XXXXXXXXXX Court of Appeal Judgement (the "Judgement") that was provided by the TSO as supporting documentation.
Briefly, XXXXXXXXXX owned a commercial property (the "Property"), which it leased to the Province of XXXXXXXXXX (the "Province"). A lease was signed in XXXXXXXXXX, renewable every XXXXXXXXXX years. The lease was renewed in XXXXXXXXXX and was set to expire in XXXXXXXXXX. In XXXXXXXXXX, the Province notified XXXXXXXXXX of its intention to renew the lease for a further XXXXXXXXXX years commencing in XXXXXXXXXX. In XXXXXXXXXX, the Department of Municipal Affairs informed XXXXXXXXXX of its approval to a further XXXXXXXXXX -year term, and was awaiting provincial Cabinet approval. XXXXXXXXXX continued to receive rents from the Province from the period XXXXXXXXXX to XXXXXXXXXX even though the lease renewal was not signed by the Province.
According to the facts provided in XXXXXXXXXX's Claim and related Judgement, XXXXXXXXXX 's first mortgage in favour of XXXXXXXXXX was scheduled to become due on XXXXXXXXXX, but was extended on a month to month basis pending the arrangement of long term financing. In XXXXXXXXXX, XXXXXXXXXX offered to give XXXXXXXXXX an XXXXXXXXXX extension on the mortgage on the condition XXXXXXXXXX pay $XXXXXXXXXX on the principal and deposit $XXXXXXXXXX in trust, representing advance payment of XXXXXXXXXX mortgage payments. This offer was accepted by XXXXXXXXXX in XXXXXXXXXX. In XXXXXXXXXX, the existing lender, XXXXXXXXXX, decided not to renew the first mortgage and demanded to be repaid. Unable to find alternative financing to generate the funds needed to pay off XXXXXXXXXX, XXXXXXXXXX defaulted on the first mortgage and agreed to convey title to the Property for the benefit of the to the holder of the 2nd mortgage on the Property, XXXXXXXXXX, in settlement of its obligations. There is no evidence to indicate that XXXXXXXXXX was in default of the second mortgage to XXXXXXXXXX. The related legal documentation shows that the Property was sold to XXXXXXXXXX ("Subco"), a XXXXXXXXXX subsidiary company. XXXXXXXXXX used Former Section 80 to compute the debt forgiveness with respect to the settlement of its debts, which resulted in no income reported.
Taxpayer Position
It is the taxpayer's position that the Property was conveyed to XXXXXXXXXX in anticipation of their default and therefore not subject to Former Section 79. The taxpayer makes reference to the Agency's interpretation of the application of Former Section 79 as described in Paragraph 3 of Interpretation Bulletin, IT-505, Mortgage Foreclosures and Conditional Sales Repossessions.
TSO Position
It is the TSO's position that the property was not sold in anticipation of default, but that XXXXXXXXXX had already defaulted on the second mortgage before the sale of the property to Subco. It is the TSO's position that the Agreement between XXXXXXXXXX and XXXXXXXXXX represents a quit claim which is subject to the rules of Former Section 79, by virtue of Paragraph 2 of Interpretation Bulletin, IT-505. The TSO is considering assessing the settlement under Former Section 79, which will result in a capital gain of approximately $XXXXXXXXXX and recapture of approximately $XXXXXXXXXX.
Generally, Former Section 79 applied where a mortgagee or similar creditor acquires beneficial ownership of a property in consequence of the failure of a mortgagor or other debtor, to pay all or any part of an amount owed to the creditor. A "creditor" includes a person who is an assignee of creditor.
As discussed in Interpretation Bulletin IT-505, Former Section 79 would apply where there is an acquisition or reacquisition of property by a creditor by means of:
a) a foreclosure order obtained through a court,
b) repossession under a conditional sales agreement, or
c) a quitclaim.
Where foreclosure or repossession proceedings are underway, and as a consequence thereof a taxpayer offers or is induced to sign a quitclaim, Former Section 79 applies.
Black's Law Dictionary, (7th Edition, 1999) describes a "quitclaim" as a "formal release of one's claim or right". Black's describes a "quitclaim deed" as "a deed that conveys a grantor's complete interest or claim in certain real property but that neither warrants nor professes that the title is valid..."
A debtor who is faced with an action for foreclosure or a power of sale may decide to expedite matters and execute a quitclaim in favour of the mortgagee. A quitclaim will vest or transfer the property in the hands of the mortgagee. The registration of a quitclaim deed conveys the property to the mortgagee with the mortgagor voluntarily giving up his or her equity of redemption. This action by the mortgagor extinguishes the equity of redemption and terminates the mortgagor's beneficial ownership rights which, from that point, vest in the mortgagee.
In the situation described in your memo and our review of the related supporting documentation submitted therein, there is no clear evidence to indicate that XXXXXXXXXX was in default of its mortgage to XXXXXXXXXX or that any formal foreclosure or repossession proceedings were underway. According to the facts provided in the Judgement, XXXXXXXXXX was faced with the prospect of having the premises sold by way of power of sale proceedings, which was acknowledged in Page 5 of the memo.
Where a power of sale is exercised, the order for the sale will generally provide that the mortgaged property is to be sold to a third party, usually by public auction, private contract or tender, or through an independent real estate agent. A sale under a power of sale is generally quicker and simpler than foreclosure and is usually the preferable route for mortgagees such as banks and other financial institutions. Under a power of sale, the creditor never acquires the property but rather the title becomes directly vested in the ultimate purchaser. The creditor merely has the right to sell the property and collect proceeds on account of the debt still owing under the mortgage. A mortgage document ordinarily gives a mortgagee the right to require the sale of the property on default. Where a mortgagee exercises a power of sale pursuant to the terms of the mortgage, a court order or the provisions of the relevant Mortgage Act, title passes directly from the mortgagor to the third party purchaser.
Paragraph 3 of IT-505 states that Former Section 79 will not apply where the creditor purchases property from the debtor merely in anticipation of the debtor's default or where the debtor's property is disposed of to a third party pursuant to a power of sale.
The documents provided as Attachment #4 appear to indicate a purchase and sale agreement between XXXXXXXXXX and Subco, and not a "quitclaim".
We are therefore of the opinion that, on the basis of the review of the information submitted, Former Section 79 would not apply in this particular situation.
We hope that the foregoing will be of assistance to you. If there is anything you wish to discuss, please feel free to contact us at the above number.
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002