24 May 1995 External T.I. 9501345 - SECTION 116 - POWER OF SALE

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:

Section 116 when property sold under a power of sale where mortgagor is a non-resident and mortgagee and third party purchaser are residents.

Position TAKEN:

Section 116 will apply to purchaser. Although Section 116 will not apply to mortgagee, unless such person was the purchaser, we are not prepared to confirm that any proceeds recovered by mortgagee over and above monies owing can be forwarded by mortgagee to non-resident mortgagor without any liability under the Act.

Reasons FOR POSITION TAKEN:

First issue addressed in question #6 at 1988 CTF Roundtable. Given the purpose of the section, the second issue should only be looked at on a case by case basis when all of the facts are known.

		950134
XXXXXXXXXX	David R. Senécal

Attention: XXXXXXXXXX

May 24, 1995

Dear Sirs:

Re: Section 116 of the Income Tax Act (the "ACT")

This is in reply to your letter of January 18, 1995, wherein you request our views on the application of section 116 of the Act in a situation where a Canadian chartered bank sells a taxable Canadian property by a power of sale in circumstances where the mortgagor is a non-resident. We apologize for the delay in responding to your enquiry.

As your request would appear to deal with a factual and, possibly completed transaction rather than a hypothetical situation, we are unable to provide our views with respect to the specific transaction which is the subject of your request. Further to paragraph 21 of Information Circular 70-6R2, interpretation requests relating to proposed transaction should be submitted in the form of an advance ruling request, while requests for a written opinion on a completed transaction should be addressed to the appropriate Tax Services Office of Revenue Canada. Nevertheless, we are prepared to make the following comments which may or may not apply to your situation.

It is our understanding that, where a mortgagee exercises a power of sale pursuant to the terms of the mortgage, a court order or the provisions of the relevant Mortgage Act, title passes directly from the mortgagor to the third party purchaser. Therefore, as stated in our reply to question #6 at the 1988 Canadian Tax Foundation Annual Conference Revenue Canada Roundtable, provided the creditor does not obtain title to the property, liability for tax under subsection 116(5) or 116(5.3) does not extend to a mortgagee where the property is sold pursuant to a power of sale. However, subsection 116(5) or 116(5.3) will apply to the purchaser. When the Department's Information Circular 72-17R4 next comes up for revision, paragraph 48 thereof will be amended to reflect this position.

We are not prepared to deal on a hypothetical basis with the question of whether or not, in the above-mentioned situation, the mortgagee may forward the surplus proceeds, if any, to a non-resident mortgagor without any liability under the Act. Given the purpose of section 116 of the Act, we would wish to ascertain the relationship between the parties, whether the mortgagee is also the purchaser, and whether or not the mortgagee had taken any steps to ensure that a third party purchaser was aware that the mortgagor was a non-resident and/or whether the mortgagee had any reason to believe that such purchaser had failed to comply with the provisions of that section.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch