16 October 2008 External T.I. 2007-0262931E5 - Mortgage fees

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.

Principal Issues: Timing of reporting of mortgage fees.

Position: General comments provided.

Reasons: Factual determination.

XXXXXXXXXX 								2007-026293

October 16, 2008

Dear XXXXXXXXXX :

Re: Mortgage Fees

We are writing in response to your letter dated December 17, 2007 in which you requested our views concerning the timing of the reporting of mortgage fees for income tax purposes.

In your letter, you described a situation where a taxpayer operates a business that offers a zero down mortgage to clients and the clients pay interest plus a set fee for the mortgage. The fee is paid at the end of the current one year term when the mortgage is refinanced or when the home is sold. If the mortgage is in default, the fee may never be collected. The taxpayer currently recognizes 100% of the fee collectible in the current year as revenue. Your question is whether the mortgage fee should be included in income in the year when it is collectible or when it is received.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer and completed transactions. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the appropriate Tax Services Office. However, we are prepared to provide you with the following general comments.

Income (or loss) from a business is computed under the rules set out in subdivision b of Division B of the Income Tax Act (the "Act"). Section 9 of the Act states that, subject to the specific rules contained in Part I, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit therefrom for the year. Under paragraph 12(1)(b) of the Act, a taxpayer is required to include in income "amounts receivable" in respect of property sold or services rendered in the course of a business in a particular taxation year, even though the amount is not due until a subsequent taxation year. In this regard, an amount is deemed to have become receivable on the earlier of the day the account for the services are rendered, or the day on which the account for the services would have been rendered if there were no undue delay in rendering the account for the services.

In the situation described, a review of the contract between the taxpayer and the taxpayer's client is required in order to determine the appropriate tax treatment of the mortgage fee. If, based on the terms of the contract, the mortgage fee is compensation for services rendered and the service to which the mortgage fee relates can be considered to be rendered at the time the mortgage funds are advanced, paragraph 12(1)(b) of the Act would appear to have application at that time. However, absent a review of all relevant information and documentation, it is difficult to provide any definitive comments.

You raised a concern with respect to the collectibility of the mortgage fee. We note that subparagraph 20(1)(p)(i) of the Act permits a deduction for a bad debt if the following requirements are met:

(a) the debt was owing to the taxpayer at the end of the taxation year,
(b) the debt became bad during the taxation year, and
(c) the debt was included or is deemed to have been included in the taxpayer's income for that taxation year or a previous taxation year.

As indicated in paragraph 6 of Interpretation Bulletin IT-442R, "Bad Debts and Reserves for Doubtful Debts," there are no specific conditions that must be met before a debt may be classed as a bad debt. Such a decision should be made only after determined efforts to collect the debt have been unsuccessful or there is clear evidence to indicate that the debt has in fact become uncollectible. If a debt is merely doubtful of collection, it should not be claimed as a bad debt but should be considered for purposes of a reserve for doubtful debts under subparagraph 20(1)(l)(i) of the Act. The requirements for a reserve for doubtful debts are the same as for bad debts except as to the degree of doubt concerning the collectibility of the debts. That is, it is sufficient that there is reasonable doubt about the collectibility of a debt for it to be included in a reserve for doubtful debts. We refer you to paragraphs 22 to 27 of IT-442R for additional details on the reserve for doubtful debts.

We hope these comments are of some assistance.

Yours truly,

Jenie Leigh
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch