17 February 1999 Internal T.I. 9900057 - AMENDED MORTGAGE. NEW AGREEMENT?

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: Whether an amended mortgage agreement results in the disposition of the original mortgage.

Position: No.

Reasons: The determination of whether a change in the terms of a security is a substitution of a debt obligation for another should be made in accordance with the law of the relevant jurisdiction. In the common law jurisdictions, a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms as to substitute a new obligation in its place, which is entirely inconsistent with the old, or if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it.

		February 17, 1999

	Belleville Tax Services Office	HEADQUARTERS
	Audit Division	J. Gibbons
(613) 957-8953
	Attention:  T.H. Law
		7-990005

Writedown of a mortgage

This is in response to your memorandum of December 21, 1998, concerning a claim by a taxpayer for a loss on the disposition of his mortgage. The issue is whether there was an actual disposition of the mortgage and the creation of a new debt as a result of the signing of an amended mortgage agreement changing some of the terms of the initial mortgage agreement.

Briefly, the facts, as we understand, them are as follows.

XXXXXXXXXX

Taxpayer’s Views

It is the taxpayer’s view that the amendment of XXXXXXXXXX, resulted in the disposition of his mortgage and the creation of a new debt. The taxpayer bases his view on our position in paragraph 7 of Interpretation Bulletin IT-448, “Dispositions - Changes in Terms of Securities", which indicates, among other things, that a change in repayment schedule or maturity date or an increase or decrease in the principal amount “almost invariably precipitates a disposition".

Our Views

In answer to question 41 of the 1993 Canadian Tax Foundation Roundtable, and at other conferences after that, we indicated that the settlement, extinguishment, or disposition of a debt obligation was primarily a matter of law and that we were reviewing our position in IT-448. We have completed our review and also clarified our position in IT-448. As discussed in “Technical News No. 14” dated December 9, 1998, if a debt obligation is renegotiated, otherwise than as provided for in its original terms, the determination of whether a change in its terms is a substitution of a debt obligation for another should be made in accordance with the law of the relevant jurisdiction. In the common law jurisdictions, a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms as to substitute a new obligation in its place, which is entirely inconsistent with the old, or if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it. In such a case, we indicated that it is appropriate to view the original obligation as having been disposed of for income tax purposes.

In XXXXXXXXXX case, we are of the view that neither of the two agreements amending his original mortgage can be viewed as effecting such an alteration of the original mortgage terms as to substitute a new mortgage agreement in its place. Therefore, we would not consider that there was a disposition of XXXXXXXXXX mortgage as a result of these agreements.

Since we are of the view that there was no disposition of XXXXXXXXXX mortgage on XXXXXXXXXX, we did not address the issue of the fair market value of the mortgage on this date. Accordingly, we are of the view that no capital loss may be claimed as a result of the amended mortgage agreements.

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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