16 February 1999 Internal T.I. 9833287 - SUBSEQUENT PAYMENT BY DEBTOR

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: Are subsequent payments by a debtor deductible

Position: a capital loss when paid

Reasons: Position prior to amendment of section 79

		February 16, 1999

	XXXXXXXXXX  TSO	HEADQUARTERS
	Client Services Division	C. Tremblay
		957-2139
	Attention: XXXXXXXXXX
		983328

Subsequent Payments by Debtor

This is in reply to your memorandum of December 17, 1998, wherein you seek our opinion as to the treatment of payments made from 1994 to 1998 by a former owner of a rental building to pay for repairs to the building.

The facts as we understand them are as follows:

A taxpayer purchased a rental building in late 1991 which was rented out until sometime in 1992, when it was repossessed. We assume the taxpayer disposed of the property to the mortgagor by way of a foreclosure and was subject to the rules of section 79 of the Act in 1992. The mortgagor who took back the property sued for damages which consisted of repairs and renovations that were required pursuant to the mortgage terms, totalling $13,000. This was awarded by the courts in 1994, and the taxpayer has made payments from 1994 until 1998, to pay off the debt. The taxpayer has made enquiries about the tax treatment of the $13,000 in payments made during that time.

Our Comments

Our comments are general in nature because we have not been given any material facts as to the nature of the repossession, nor do we know the manner in which the debtor accounted for the transaction in 1992. We also were not given any copies of any documents and were not informed of the actual date of the court order or the repossession date.

It is our general view that the provisions of section 79 of the Act may apply, but in order for those provisions to apply, the payments in question must relate to a debt that can reasonably be considered to have been included in the amount determined under section 79 of the Act in respect of a property surrendered before that time. This is a question of fact. If the payments do not relate to such a debt, it is our view that there is no authority to deduct the payments.

Had the property been reacquired after February 21, 1994, the provisions of paragraph 79(4)(d) of the Act may have been applicable and a deduction pursuant to paragraph 20(1)(hh) of the Act for the payments on that debt would have been available.

However, since the property was reacquired prior to February 22, 1994, the provisions of former paragraph 79(d) of the Act may be applicable. The loss incurred is of the same nature as the property disposed of as a consequence of the foreclosure. Accordingly, since the property appears to have been held on capital account by the debtor, the payments paid to the former owner of the property after his reacquisition, in satisfaction of his mortgagor’s claim is a loss which is considered to be a capital loss in the year it is paid.

J. F. Oulton, CA
Manager,
Business, Property and Employment Section III
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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