15 October 1993 External T.I. 9319245 F - Mortgage 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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sir/Madam:

RE:  Paragraph 79(f) of the Income Tax Act (the "Act")

This is in response to your facsimile of July 5, 1993, wherein you requested a technical interpretation concerning paragraph 79(f) of the Act.

In the situation outlined in your facsimile you indicated that control of a corporation in the business of lending money was acquired by a group of persons. Pursuant to subsection 111(5.3) of the Act, the corporation was required to deduct as bad debts those portions of various loans for which it could otherwise have claimed a reserve for doubtful debts under paragraph 20(1)(l). The corporation expects to foreclose on property on which it holds a mortgage as security for one of those loans it had advanced. You have asked us to confirm that for the purpose of determining the cost at that time of the taxpayer's claim under paragraph 79(f) of the Act, the full amount of the principal advanced by the corporation to the mortgagor will be included and that it will not be affected by the previous deduction of part of that principal as a bad debt pursuant to subsection 111(5.3) of the Act.

Our Comments:

The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70- 6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.

The Department's general views on mortgage foreclosures and bad debts are outlined in Interpretation Bulletins IT-505 and IT-442R, respectively.

For purposes of section 79 of the Act, as indicated in paragraph 4 of IT-505, a "taxpayer's claim" will be the amount owing at any time by a debtor to a creditor in respect of a defaulted obligation. Where the defaulted obligation is a mortgage or similar obligation, the taxpayer's claim will be the aggregate of the balance of principal owing by the debtor at that time and the interest accrued and unpaid at that time. However, as indicated in paragraph 6 of IT-505, the "principal amount of the taxpayer's claim" will be the taxpayer's claim less any interest or carrying charges included therein. Therefore, where the creditor is the original lender, as indicated in paragraph 7 of IT-505 the "cost at that time of the taxpayer's claim" would include the principal amount of the taxpayer's claim, and in our view the amount deducted as a bad debt in respect of the obligation under paragraph 20(1)(p) by virtue of subsection 111(5.3) will not effect the cost at that time of the taxpayer's claim.

Although not specifically referred to in your question, it is also our view that by virtue of the definition of the word "amount" in subsection 248(1) of the Act, the fair market value of the property that has been acquired in the circumstances described in section 79 of the Act to the extent of the amount deducted under paragraph 20(1)(p) by virtue of subsection 111(5.3) would be included in computing the taxpayer's income under paragraph 12(1)(i) of the Act in the year the property is acquired. In our view, the fair market value of the property would represent an amount "received" for the purposes of paragraph 12(1)(i) of the Act.

We trust that these comments will be of assistance.

Yours truly,

R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch