10 March 1992 Income Tax Severed Letter 9202965 - Reserves - Extention of Due Date and Foreclosure

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.

Subject: RESERVES-EXTENSION OF DUE DATE AND FORECLOSURE Section(s): 79(1), 40(1)(a)(iii)]

XXX 920296 Glen Thornley (613) 957-2101

Attention: XXX

March 10, 1992

Dear Sirs:

Re: Reserve under Subparagraph 40(1)(a)(iii) of the Income Tax Act

This is in reply to your letter of January 24, 1992 concerning the availability of a mortgage reserve where the original due date of the mortgage has been extended.

The Department's position with respect to reserves arising from the disposition of capital property is contained in Interpretation Bulletin IT-236R3. Comments in this regard are also contained in IT-436R, Reserves-Where Promissory Notes are Included in Disposal Proceeds. This bulletin may also apply where a mortgage is accepted by the vendor as part of the sales proceeds. Former IT-436 contains comments in paragraphs 9 & 10 which, although not included in IT-436R due to the introduction of new 5 year time limit restrictions, are still considered relevant in some situations. In essence the former bulletin states that there are situations where a vendor who has taken back a promissory note (mortgage) may, in conjunction with the person who acquired the property, agree to extend the original due date of the note (mortgage). The extension may occur before the original due date and before the end of the vendor's taxation year for which the reserve is being considered or even after the original due date but before the end of the vendor's taxation year for which the reserve is being considered. In these and similar situations the Department's practise is to permit a vendor to continue claiming a reserve if the debt instrument, originally taken back on a disposition is extended within the time limits indicated and the renewed instrument (as conditional payment) is accepted as a continuing evidence of the original debt.

As discussed in paragraph 2 of Interpretation Bulletin IT-505, section 79 of the Income Tax Act applies where there has been an acquisition or reacquisition of property by a creditor and this action has taken place by means of

• a) a foreclosure order obtained through a court, b) repossession under a conditional sales agreement, or c) a quit claim.

As you indicate, it is not always necessary to initiate formal legal foreclosure to satisfy the requirement that a mortgagee has reacquired ownership of the property. As noted above a quit claim may be used, however, section 79 would then apply but as stated in paragraph 3 of IT-505 section 79 will not apply where the creditor purchases the property (presumably at a negotiated price) 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. Thus in our view where there is a negotiated transfer of property back to the mortgagee by a mortgagor/purchaser in satisfaction of the outstanding mortgage/agreement for sale after default, section 79 does not apply and the mortgagor/purchaser will have proceeds of disposition equal to the agreed upon settlement. The mortgagee on the other hand will be required to take into income the reserve claimed in the previous year.

Where, however, foreclosure or repossession proceedings are underway, and as a consequence thereof a taxpayer offers or is induced to sign a quit claim, section 79 applies and the comments in paragraph 3 of IT-505 will have not application.

We trust our comments will be of assistance to you.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch