13 December 1989 External T.I. 58765 F - Loss on Disposition of a Mortgage Receivable

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.

December 13, 1989

Dear Sirs:

This is in reply to your letter of September 18, 1989 concerning thew nature of a loss incurred on the disposition of a mortgage receivable.

You have outlined the following hypothetical situation:

1.     Opco is a Canadian corporation, the shares of which are owned 100% by non-residents of Canada.

2.     Opco owns several revenue producing real properties which provide rental income to the company.  The rental income comprises the main source of Opco's income.

3.     Opco sells a parcel of land and realizes a gain on the sale.  As partial consideration for the sale, Opco took back a mortgage receivable from the purchaser ("Purchaseco").

4.     Approximately one year later, Purchaseco offers to purchase the mortgage receivable from Opco at a discount from face value.

5.     The original vendor take back mortgage had a face value of $6,000,000.   The price to be paid by Purchaseco for the mortgage is 5,600.000.

6.     The mortgage is an interest only mortgage, bearing interest at 9% per annum payable quarterly.  The principal amount of $6,000,000. becomes due in July, 1994.

With respect to the above situation, you asked us for our views on the nature of the loss if the land sold was capital, or in the alternative, if the land was sold in respect of an adventure in the nature of trade.

As the information you have provided to us indicates that it relates to a specific proposed transaction, we are unable to comment thereon pursuant to paragraph 23 of Information Circular 70-6R.  However, we are providing you with the following general comments.

Where a mortgage receivable, which bears interest at less than the fair market rate at the time of execution, was given by a purchaser in respect of the sale of capital property (land), the fact that the land was a capital asset to the vendor is a strong indication that a loss on the subsequent disposition of the mortgage would be on account of capital.

In the event that the sale of the land in the preceding paragraph were to be treated as an adventure in the nature of trade, the facts that a trading asset was involved and the mortgage, at the time of execution, had an interest rate below the fair market rate are indications that a loss on the subsequent disposition of the mortgage would be on account of income.  However, in any given case, there could be other factors present which may result in such a loss being on account of capital.  You may also refer to the Milford developments Ltd. case (85 DTC 248) and the Universal Industries Ltd. case (62 DTC 317) which illustrate the approach of the courts in making such a determination.

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1878, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch