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:
(1)Whether a capital loss arises when second mortgage holder determines mortgage is uncollectible. (2) Forgiveness of $XXXXXXXXXX owed on a 1st mortgage of $XXXXXXXXXX or, alternatively, the $XXXXXXXXXX mortgage was settled for a new mortgage of $XXXXXXXXXX
Position:
(1)Establishing the 2nd mortgage to be uncollectible would entitle the taxpayer to elect under subsection 50(1) and, therefore, have a capital loss in the year the debt was determined to have become a bad debt. (2) The $XXXXXXXXXX reduction in the 1st mortgage would also result in a capital loss.
Reasons:
(1)Section 50(1) applies in the year a debt is established to have become bad. (2) Should the original mortgage be replaced by a new first mortgage there would be a disposition of the old mortgage for proceeds equal to the new mortgage. If the old mortgage is merely reduced, there would be a partial disposition to which subsection 43(1) would apply, to allocate the adjusted cost base, resulting in a similar loss.
963068
XXXXXXXXXX A.M. Brake
Attention: XXXXXXXXXX
October 1, 1996
Dear Sirs:
Re: Advance Income Tax Ruling Request
This is in reply to your letter of September 3, 1996 requesting an advance income tax ruling on behalf of XXXXXXXXXX (the "Vendor") who sold property to XXXXXXXXXX (the "Mortgagor"), taking back interest bearing 1st and 2nd mortgages of $XXXXXXXXXX and $XXXXXXXXXX, respectively. The Mortgagor is experiencing financial difficulty and it has been determined that the $XXXXXXXXXX 2nd mortgage has become uncollectible. In addition, $XXXXXXXXXX of the 1st mortgage will be forgiven in order to assist the Mortgagor to meet the payments on the reduced or new 1st mortgage of $XXXXXXXXXX
Advance income tax rulings can only be given in respect of contemplated transactions and since your request relates to a completed transaction, we are unable to rule. We will, however, provide the following comments.
It would seem that the Vendor suffered a capital loss in 1996 as a result of the $XXXXXXXXXX debt having been established by the Vendor to have become a bad debt in the year. This would be a debt to which subsection 50(1) would apply if "the taxpayer elects in the taxpayer's return of income for the year to have this subsection apply in respect of the debt." As a result, "the taxpayer shall be deemed to have disposed of the debt for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost of nil."
With regard to the $XXXXXXXXXX reduction in the $XXXXXXXXXX originally owing, it could be, depending on the circumstances, if the debt was merely reduced, that one-eighth of the property was disposed of for proceeds of nil. The adjusted cost base of the partial disposition would be $XXXXXXXXXX by virtue of the allocation described in subsection 43(1) relating to partial dispositions of property. Alternatively, if the $XXXXXXXXXX mortgage was settled by replacing it for a new $XXXXXXXXXX 1st mortgage, the original mortgage, with an adjusted cost base of $XXXXXXXXXX, will have been disposed of for proceeds of $XXXXXXXXXX. Either way, a capital loss of $XXXXXXXXXX results.
It might be noted that where the debt that has given rise to a capital loss is a debt owing to a taxpayer by a small business corporation, as defined in subsection 248(1) of the Act, and either the debt has been disposed of to a person with whom the taxpayer was dealing at arm's length or subsection 50(1) of the Act applies to the disposition of the debt, the capital loss may qualify as a business investment loss, as defined in paragraph 39(1)(c) of the Act. However, we refer you to paragraph 10 of IT-159R3, entitled "Capital Debts Established to be Bad Debts", which states that "a debt is considered bad for purposes of section 50 only when the whole amount is uncollectible or when a portion of it has been settled and the remainder is uncollectible".
The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
We trust our comments will be of assistance to you. Your deposit will be refunded under separate cover.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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