18 December 1992 Income Tax Severed Letter 9223827 - Mortgage Penalties

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.

                                              December 18, 1992

      Halifax District Office                 Head Office
      Chief of Audit Review                   Financial Industries
                                                Division
      Attention:  Kevin McGuigan              Michael Cooke
                                              (613) 957-4170

                                              922382
      Mortgage Pay-out Penalties

This is in reply to your memorandum of June 26, 1992, requesting our opinion on the application of section 18(9.1) of the Act, as it applies to a particular taxpayer's fact situation described as follows:

The taxpayer disposed of a property in 1986 which was subject to two mortgages in favour of XXXXXXXXXX. The disposition resulted in the early repayment of the mortgages, and in the payment of two pay-out penalties of $XXXXXXXXXX and $XXXXXXXXXX respectively. There was no time lag between the time of disposition, and the payment of the penalties and mortgage balances. The net sale proceeds resulting from the sale of the property, if any, were not used to acquire any substituted property.

Subsection 18(9.1) of the Act, only allows a deduction for these penalties, as interest, in future taxation years, if the property or substituted property is used by the taxpayer, in those years, for a qualifying purpose. We understand that there was no substituted property in this situation, consequently, the mortgage penalties, in this case, are not deductible.

We trust our comments in this matter are helpful.

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch