19 October 1989 Ruling 74351 F - Mortgage Foreclosures and Conditional Sales

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.

SUBJECT: RG-18 Mortgage Foreclosures and Conditional Sales Repossessions - Section 79 of the Income Tax Act

As requested, we have reviewed the above-mentioned training material and propose the following changes.

1.     In the opening paragraph of the first page, we suggest adding after the word "property" the words "by means of a foreclosure order obtained through a court, a repossession under a conditional sales agreement or a quit claim".  This will conform with paragraph 2 of IT-505.

2.     The second paragraph is not quite right. If the creditor holds a second or third mortgage and forecloses on the debtor, the debtor's loss as calculated on the deemed proceeds of disposition is the total payments made to all the mortgage holders less the expenses assumed by the creditor on the foreclosure.  The example in IT-SOS illustrates this.

3.     The third paragraph on page 1 is also not quite right. Although the creditor may have claimed a reserve this does not mean that he has paid any tax, as other calculations on the T2S(1) may reduce the income to nil. You should probably refer to "amounts previously included in income".

4.     Key Words beneficial ownership:The term "beneficial ownership" also means the equity of redemption of the property, which is the interest in the property that a mortgagor (debtor) retains.  Upon acquiring the mortgage, the mortgagee (creditor) acquires the legal title to the property but as security only, subject to the equity of right of redemption of the mortgagor or successor in title.  The essence of a final order of foreclosure is that the mortgagor (debtor) is absolutely debarred and foreclosed of and from, all right, title and equity of redemption of, in and to the property.

     The term "beneficial ownership" as used in the Income Tax Act describes the ownership of a taxpayer who is entitled to the use and benefit of the property whether or not he has concurrent legal ownership.  The Department will look at such factors as the right to possession, the right to collect rents the right to call for the mortgaging of property, the right to transfer title by sale or will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations.

5.     You may wish to add in your commentaries when discussing paragraph 79(c) that the "principal amount" of a taxpayer's claim does not include any accrued but unpaid interest on the defaulted obligation.  However, the principal amount could include interest payments made by the creditor (on behalf of the debtor) to a third party to forestall foreclosure or repossession by the third party.

6.     You may also wish to add to your commentaries when discussing paragraph 79(f) that "cost at that time of the taxpayer's claim" can include realty taxes, insurance premiums, utility payments, and maintenance and repair costs.  This is assuming that the expense in question was made in respect of an amount that was due and payable before the time at which the creditor acquired or reacquired beneficial ownership of the property and is required to be included in the debtor's proceeds of disposition of the property by virtue of paragraph 79(c).

7.     It may be useful to mention that section 79 applies as well to partnerships.

We trust our comments are helpful

A.G. CockellDirectorTechnical Interpretations DivisionLegislative and IntergovernmentalAffairs Branch