16 June 1994 External T.I. 9410985 - MORTGAGE INVESTMENT CORPORATION & CAVEAT

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

WHETHER A CAVEAT REGISTERED AGAINST A RESIDENTIAL PROPERTY CONSTITUTES A DEBT "OWING...SECURED ON RESIDENTIAL PROPERTY..." FOR PURPOSES OF SUBPARAGRAPH 130.1(6)(f)(i).

Position TAKEN:

NO. A CAVEAT DOES NOT CONSTITUTE A SECURED DEBT FOR 	PURPOSES OF SUBPARAGRAPH 130.1(6)(f)(i). A CAVEAT IS 	SIMPLY A WARNING TO OTHER PARTIES THAT MAY SUBSEQUENTLY 	DEAL WITH A PARTICULAR PROPERTY THAT A CLAIM MAY EXIST 	AGAINST THAT PROPERTY BY THE CAVEATOR (one who files a 	caveat). IT DOES NOT HOWEVER ESTABLISH OR CREATE ANY NEW 	RIGHTS. WHETHER OR NOT A PROPERTY IS SECURITY AGAINST A 	DEBT WILL ULTIMATELY BE A FACTUAL DETERMINATION BASED 	UPON THE TERMS OF THE ORIGINAL AGREEMENT.

Reasons FOR POSITION TAKEN:

LEGAL DEFINITION OF A "CAVEAT" AND RELATED JURISPRUDENCE.

		941098
XXXXXXXXXX	G.Donell

Attention: XXXXXXXXXX

June 16, 1994

Re: "Are promissory notes supported by caveats secured
debts?" - Mortgage Investment Corporations;
subparagraph 130.1(6)(f)(i)

This is in reply to your letter of April 25, 1994 in which you have requested our view as to whether a debt evidenced by a promissory note supported by the registration of a caveat in a residential property would constitute a debt for purposes of subparagraph 130.1(6)(f)(i) of the Income Tax Act, S.C.1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").

Black's Law dictionary defines "Caveat" as "a warning to be careful", and "A formal notice or warning given by a party interested...". In the context of "Land Titles" legislation a caveat serves as a notice or warning to other parties, with regard to a specific property, that the caveator may have an interest in the particular property that they may wish to consider before extending credit or otherwise encumbering the specific property. In isolation, the caveat does not create or establish property rights that were not already established by the terms of a particular agreement and therefore cannot be said to secure a debt with respect to that property for purposes of subparagraph 130.1(6)(f)(i) of the Act.

The phrase "debts owing to the corporation that were secured on residential property", within the meaning of subparagraph 130.1(6)(f)(i) of the Act, contemplates a debtor providing to a creditor as security for the debt a mortgage, hypothec, or other lien against residential property. It is our view that, provided that the rights and obligations created by the promissory note, irrespective of the caveat, are such that the creditor corporation has direct recourse to the residential property, the debt could constitute a debt secured on residential property for the purpose of subparagraph 130.1(6)(f)(i) of the Act.

While we trust that our comments are of assistance to you , we would advise that they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of any particular situation.

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