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.
Principal Issues:
Mortgage foreclosure
Position TAKEN:
General comments
Reasons FOR POSITION TAKEN:
XXXXXXXXXX 941492
July 11, 1994
Dear Sir:
Re: Mortgage Modification or Foreclosure
We are writing in response to your letter of June 3, 1994 in which you requested a ruling with respect to the tax implications of foreclosing on an existing mortgage or modifying the terms of such mortgage.
In order to provide written confirmation of the tax implications inherent in particular transactions, in the form of an advance income tax ruling, such proposed transactions must be submitted in the manner set out in Information Circular 70-6R2 dated September 28, 1990 ("IC-70-6R2")(copy attached) which does not provide for alternative courses of action.
However, we offer the following general comments to your inquiry based on the assumption that the property in question was capital property and not land inventory.
Where at any time a creditor acquires or reaquires the beneficial ownership of property that was subject to a mortgage, section 79 of the Income Tax Act (the "Act") applies as follows. The amount of any reserve deducted in computing the income of the creditor for the immediately preceding year in respect of that property will be deemed to be nil. As such, no amount in respect of the prior year's reserve will be included in income in the year that the property is reaquired. The creditor is deemed to have reacquired the property at the amount by which the creditor's claim for an amount owing for the particular property exceeds the amount of any reserve deducted by the creditor in the immediately preceeding year in respect of the property.
If the property is subsequently resold the cost of the reaquired property will be used to determine whether a capital gain or capital loss results. Where a taxpayer incurs a capital loss in a taxation year, this may result in a net capital loss which is available for a carryforward to a preceding year pursuant to paragraph 111(1)(b) of the Act. Such application to a previous taxation year may result in a refund of taxes previously paid in respect of the capital gain reported in that year.
In the event that the terms of an existing mortgage are amended we offer the following comments.
Where a debt is owing to a taxpayer at the end of a taxation year (ie: accrued interest) is established to have become a bad debt in the year, the taxpayer shall be deemed to have disposed of the debt at the end of the taxation year for proceeds equal to nil and to have reaquired the debt immediately thereafter at a cost equal to nil.
Such a bad debt will be deductible in that taxation year pursuant to paragraph 20(1)(p) of the Act to the extent that such amounts have been included in computing the taxpayer's income for the year or a preceding year.
As described in pragraph 7 of Interpretation Bulletin IT-448 (copy attached), an increase or decrease in the principal amount of a debt obligation will almost invariably result in a disposition of that debt obligation. Where such a disposition results in a capital loss, our comments above, regarding the carryback to previous taxation years would apply.
Unfortunately, we are unable to comment on how you should arrange your affairs or as to the quantum of the amounts involved, however, we trust the above comments will be of some assistence to you.
Your deposit will be returned under separate cover.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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