25 November 1997 Internal T.I. 9719267 - FORECLOSURES, POWER OF SALE ETC.

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

(1)Does a mortgagee acquire an asset that is the mortgaged property for the purpose of paragraph 181.3(1)(a),

(a) where a power of sale remedy is exercised?

(b) where there is a foreclosure?

(c) under the terms of a judicial sale?

(d) where there is an action on the covenant?

(e) where the mortgagor issues a quitclaim?

Position TAKEN:

(a) Almost never.

(b) Generally yes.

(c) Generally no.

(d) Generally no. Other assets are usually acquired.

(e) Yes.

Reasons FOR POSITION TAKEN:

(a) A power of sale results in the conveyance of ownership directly from the mortgagor to a third party purchaser. The mortgagee does not obtain ownership (legal or beneficial) unless the mortgagee acquires the mortgaged property on its own account (i.e. as a participant in an auction etc.) and in the same capacity as a third party purchaser where permitted by the relevant legislation. A validly exercised power of sale extinguishes the mortgagor's equity of redemption and ownership rights (legal and beneficial)

(b) Where a final order of foreclosure is issued and there is no basis upon which the foreclosure can be overturned (i.e. fraudulently obtained). The mortgagor's equity of redemption (and therefore beneficial ownership) is extinguished on a valid final order of foreclosure.

(c) Only if the mortgagee acquires the property on its own account as a third party purchaser. The result is generally the same as under a power of sale except that the authority is one authorized by the court as opposed to a provision of the mortgage agreement.

(d) Other assets of the mortgagor are taken in partial or complete satisfaction of the mortgage obligation. These other assets would be considered acquired by the mortgagee for all purposes of the Act. The mortgaged property remains the property of the mortgagor.

(e) The property is conveyed to the mortgagee with the mortgagor voluntarily giving up his or her equity of redemption. This action by the mortgagor extinguishes the equity of redemption and terminates the mortgagor's ownership rights (both legal and beneficial).

November 27, 1997

NORTH YORK TAX SERVICES OFFICE HEADQUARTERS
Industry Specialist Services G.Donell
(613) 957-3496
Attention: Doug Mitchell
Banking Specialist
7-971926

Repossessed Property & paragraph 181.3(1)(a)

We are writing in reply to your Fax of July 16, 1997 to Mr.Lee Workman, Chief of the Financial Institutions section of the Income Tax Rulings and Interpretations Directorate, and subsequent telephone communications with Mr.Gary Donell in which you have asked us to clarify whether, in the exercise of a power of sale remedy, an amount would be added to the Part I.3 capital tax base, pursuant to paragraph 181.3(1)(a) of the Income Tax Act (the "Act"), of a mortgagee that is a financial institution, within the meaning assigned that expression by subsection 181(1) ("FI") of the Act. We have also provided, as discussed, commentary on the issue of mortgages, remedies available on default and a discussion of some of the tax consequences associated with these remedies particularly as they affect liability for tax under Part I.3.

XXXXXXXXXX

Repossessed Property; a misnomer?

In your correspondence you refer to "repossessed property". The manner in which one repossesses property may, depending upon the particular jurisdiction and remedies available within that jurisdiction, take many forms each of which will be relevant in determining the tax consequences.

The Concise Oxford dictionary defines the verb repossess as follows,

"to regain possession of (esp. property or goods on which repayment of a debt is in arrears)."

Black's Law Dictionary defines "Repossession" as follows;

"to take back - as when a seller repossesses or takes back an item if the buyer misses an instalment payment; to recover goods sold on credit or in instalments when the buyer fails to pay for them. The conditions for repossession are entirely statutory and due process standards must be met as to notice, manner etc."

Both definitions refer to situations in which there are two parties; the vendor who serves a dual function as creditor or mortgagee and a purchaser. An example would be a conditional sales agreement. The key is that the vendor, at one time, had possession of the property. This, we presume, would unlikely be the case with respect to FIs who would generally act as financial intermediary only and in a capacity of mortgagee. Accordingly we will use the expression "property acquired by the FI..." rather than "repossessed property".

Paragraphs 181.3(1)(a)

The taxable capital employed in Canada of a FI for a taxation year is determined pursuant to section 181.3 of the Act. Paragraph 181.3(1)(a) of the Act reads;

"The taxable capital employed in Canada of a FI for a taxation year is the total of

(a)the total of all amounts each of which is the carrying value at the end of the year of an asset of the FI (other than property held by the institution primarily for the purpose of resale that was acquired by the FI, in the year or the preceding taxation year as a consequence of another person's default, or anticipated default, in respect of a debt owed to the institution) that is tangible property used in Canada...

The amounts reflected on the balance sheet, in the case of a FI that is a bank or an insurance corporation, accepted by the Superintendent of Financial Institutions ("OSFI") are to be used, pursuant to subparagraph 181(3)(b)(ii), to determine the carrying value of assets of the FI that are tangible property used in Canada.

Paragraph 181.3(1)(a) requires that FIs' include the carrying value of assets that are tangible property used in Canada in the determination of taxable capital employed in Canada except where those assets have been acquired, in the year or the immediately preceding taxation year, by the FI for the purpose of resale and as a consequence of another person's default or anticipated default in respect of a debt owed to that FI. The term tangible property is not defined in the Act and is accordingly given its everyday meaning as denoting property that has physical existence as opposed to intangible property. In this context the Department considers that fixed assets such as land, buildings, furniture and fixtures of the business are tangible property. Money is not considered to be a tangible property, nor would accounts receivable, notes receivable, loans receivable, deposit certificates, term deposits, T-Bills, bonds, notes, mortgages, shares, debt obligations, patents, trademarks, copyrights, goodwill, license franchises and research and development costs.

The parenthetical exception (hereafter "the exception") to paragraph 181.3(1)(a) is similar to the language employed in subsection 79(2) and 79.1(2). In our view, an acquisition that triggers the application of section 79 and 79.1 would generally result in the acquisition of an asset for the purpose of paragraph 181.3(1)(a), assuming of course that the other conditions of the exception are met. We refer you to the Federal Court of Appeal decision in Richard Brill et al v. The Queen, (96 DTC 6572) (discussed in further detail under the heading "Judicial Sale") for a case where, based on intention and specific facts, the court concluded that section 79 would not have applied although it appears that an acquisition would have occurred for the purpose of paragraph 181.3(1)(a) of the Act. The Department has accepted that decision.

Noteworthy is the fact that paragraph 181.3(1)(a) does not refer to specific remedies such as foreclosure as is the case with the definition of a "Mortgage investment corporation" pursuant to paragraph 130.1(6)(g) or the income rules for deposit insurance corporations in paragraph 137.2(c). The explanatory notes however with respect to the exception to paragraph 181.3(1)(a) reads as follows:

"This amendment to paragraph 181.3(1)(a) provides that a financial institution's tangible property used in Canada will not include any property acquired by the institution, in the year or the preceding taxation year, through foreclosure or otherwise as a result of the default or anticipated default on a debt owed to the institution and held primarily for the purpose of resale."

"an asset...acquired by the FI"

The issue of whether an asset is acquired by a FI is fundamental in determining the effect of various remedies (discussed below) that may be pursued by a FI that is a mortgagee.

Kohler's Dictionary for accountants (5th edition) defines the terms "asset" and "ownership" as follows:

"ASSET: means any owned physical object (tangible) or right (intangible) having economic value to its owner. Asset is to be distinguished from property in that asset means (a) any balance sheet item, (b) usually associated with cost or the portion thereof recognized for balance sheet purposes. Property, having a more restricted application, is more often applied to items transferable between persons, any right to its uses and benefits being safeguarded and governed by a body of law.

"OWNERSHIP: means the right to and enjoyment of services or benefits flowing from an asset, usually evidenced by the possession of legal title or by a beneficial interest in the title."

The accounting definitions clarify that possession of legal title is neither necessary nor determinative. For tax purposes the jurisprudence such as Wardean Drilling, 69 DTC 5194 (Ex.Ct.) and Olympia & York Developments, 80 DTC 6184 (FCTD) make it absolutely clear that a taxpayer does not have to hold legal title in order to be considered to own an asset or property. In this regard the accounting and tax concepts of ownership are generally identical. The determining factor is beneficial interest or ownership the primary attributes of which are possession, use and risk.

The term "beneficial ownership" describes the ownership of a taxpayer entitled to the use and benefit of property whether or not he or she has concurrent legal ownership. Factors to be considered include the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations. In addition a mortgagor's beneficial interest in a property includes an "equity of redemption", being the mortgagor's right to redeem his property from default. While it exists, a mortgagor would have the right to block any action taken by a mortgagee by bringing the mortgage back into good standing, thereby ensuring it has the benefits of ownership. This right would normally exist until foreclosure proceedings are finalized (when a final order of foreclosure is obtained) or the mortgagor otherwise gives up or loses that right, for example, as a result of a quit claim. Whether a mortgagor's equity of redemption in a property is lost or otherwise disposed of is a question of fact. We refer you to Interpretation bulletins 170R and 437R for departmental guidelines on the issue of beneficial and legal ownership as they pertain to the ownership of real property. For a recent case we refer you to the Federal Court of Appeal decision in "William Mack Greenway v. The Queen", 96 DTC 6529.

"CICA Handbook section 3025 - "Impaired Loans"

In 1994 CICA Handbook section 3025 on Impaired Loans came into force. It's purpose was "...to establish standards for the recognition, measurement, presentation and disclosure of impaired loans, restructured loans and foreclosed assets. (CICA 3025.01)"

Foreclosed assets are defined in CICA 3025.02 as meaning "assets acquired in full or partial settlement of a loan through realization of a security interest or repossession of leased property." The realization of a security interest as is explained below can take many forms some of which result in the acquisition of an asset or property (both legal and beneficial) and some which do not.

A "Loan" is also defined in CICA 3025.02 as meaning "A financial asset resulting from the delivery of cash or other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand, usually with interest. Loans include:

(i) ...

(ii) residential mortgages;

(iii) non-personal loans, such as commercial mortgages..."

CICA 3025.38-40 provide recommendations as to the determination of carrying values that are to be used which is relevant for the purpose of Part I.3. CICA 3025 further provides somewhat different accounting treatment depending upon whether assets are acquired for resale or to be held to produce income. In this context CICA 3025 dovetails to some degree with the exception to paragraph 181.3(1)(a) that also refers to the resale of an asset acquired. The question of the extent to which other non-foreclosure remedies such as power of sale are caught by these rules rests on a determination of whether an asset has, for accounting purposes, been acquired. CICA 3025 does not directly refer to these other remedies. In a discussion of CICA 3025.41, which establishes guidelines for the measurement of assets acquired by foreclosure on a loan, OSFI guideline C-1, dated March 1995, clarifies that the CICA measurement rules do not apply to power of sale proceedings in the following statement at page 8 thereof;

"When an entity forecloses on a loan, the lender takes title, directly or indirectly, to the assets, and hence the indebtedness of the borrower would be replaced by title to the assets. A "power of sale" obtained by a lender does not constitute foreclosure since title remains in the name of the borrower."

With the above principles in view we are in a position to assess whether a particular remedy available to a mortgagee or mortgagor will impact upon the liability under Part I.3 particularly paragraph 181.3(1)(a).

Mortgages - General Comments

A "mortgage" in common law means a conveyance or transfer of property as security for the payment of a debt, where the property that is transferred is redeemable upon the payment of the debt. The distinctive feature of the common-law mortgage is that it results in the transfer or vesting of legal title to the property in the mortgagee (the lender). When a party gives a mortgage, or transfers property to another as security for the repayment of a debt, title or ownership is vested in the mortgagee for the term of the mortgage. The mortgagor (the borrower), who remains beneficial owner of the property, is allowed to retain possession of the property as long as the mortgagor is not in default.

Under the common law the mortgagor has an equity of redemption. This is the fundamental right of the person to have the legal or equitable title to the property reconveyed when the debt is paid. This right of the mortgagor prevails until (1) the property is sold pursuant to the exercise of a power of sale, or (2) it is terminated pursuant to a declaratory judgement. Generally, in the absence of any statutory provision, the common law provides that a mortgagor is only entitled to redeem the mortgage when the mortgage becomes due and not before. At that time the mortgagor, upon paying any principal and interest that are owing on the mortgage, may redeem the mortgage. One of the exceptions to the due date rule is that the mortgagor is entitled to repay the debt and redeem the mortgage before the due date if the mortgagee has taken certain steps to compel payment. This includes (1) a demand for payment because of an alleged breach of the agreement, (2) a demand for payment pursuant to an acceleration clause in the agreement (in certain jurisdictions only), (3) the exercise of a power of sale and (4) foreclosure proceedings.

As noted the right to redeem by the mortgagor is considered conditional on payment being made on the due date. The failure to make payment on that date would, under the common law, result in the loss of the encumbered property. However under equity this result would be modified. The mortgagor's right of redemption would continue after the due date until a final order of foreclosure would be obtained by the mortgagee. The mortgagee will apply to the court to initiate an action for foreclosure. The mortgagor is then allowed time to indicate its intention to redeem and exercise that right. The mortgagee may then obtain a final order of foreclosure if this right is not exercised. A court may in limited cases revoke the final order of foreclosure, however it is noted that the right to redeem cannot be exercised after a validly exercised power of sale.

In certain provinces, it is possible to find in existence two kinds of security interests in real property, namely the charge and the mortgage. While the mortgage is a creation of the common law and modified by equity, the charge, or what is sometimes referred to as the "statutory mortgage", is a creation of statute. In the jurisdictions that have adopted the Land Titles system of registering property namely, Alberta, British Columbia, Manitoba, New Brunswick, the Northwest Territories, Ontario, Saskatchewan, and the Yukon, a security interest in property takes the form of a charge which is different from that of a mortgage. A charge does not involve a conveyance of title or a transfer of property to the chargee. However all the provincial statutes that create the device of a charge, whether under the Land Titles or Torrens system of registering property, vest in the chargee the same benefits as a mortgagee of property in the common law. Thus a chargee, pursuant to the provisions of the relevant land titles statute, is (1) able to take possession of the property upon default and (2) able to enforce the charge by foreclosure or sale in the same manner as the common law mortgagee. The Torrens or Land titles system of registration and the registry system are also relevant in the determination of priority of mortgages where there are two or more mortgages on the same property.

A creditor's rights in the event of default are determined by the relevant mortgage and provincial legislation setting out mortgagor's and mortgagees' rights. An assessment of the tax consequences of the default requires a determination of the nature of the remedy provided and the action taken by the mortgagor and mortgagee.

Mortgages - Remedies

The various provinces provide several remedies to allow a mortgagee to enforce its security under the terms of a mortgage agreement where there is a breach of condition by the mortgagor (for example, default in payment of the money secured by the mortgage). Some of these remedies include foreclosure and sale, judicial sale, extra-judicial sale, action on the covenant, and quitclaim.

A. FORECLOSURE: Foreclosure is a term used to describe the judicial action that extinguishes the right of redemption (an interest in property) of the mortgagor. Foreclosure is a device created by the courts as a compromise between the equitable redemption right of the mortgagor that exists in perpetuity and the right of the mortgagee to sell the property upon a default at the due date. The term is used in different provinces to refer to a variety of actions that a lender may take to enforce its security. Foreclosure is a remedy that is unavailable in certain jurisdictions such as Nova Scotia.

Under an order of foreclosure, the mortgagee acquires beneficial title to the mortgaged property. Therefore, attention must be given to the application of provincial legislation imposing tax on land transfers since the acquisition of the land by the mortgagee under the foreclosure results in a transfer of the land. At common law, a mortgagee holds the legal title to the mortgaged property therefore, it could be argued that under a foreclosure, there is no transfer of that property. As discussed above however, this argument is largely academic for property transfer purposes in Canada, since most provinces have legislation providing that mortgages on land are mere charges or liens; this means that, prior to the foreclosure, the mortgagor is the legal owner of the mortgaged property.

The legal consequences of a foreclosure can be different however depending on the province we are dealing with. In some provinces a foreclosure may have the effect of extinguishing all the debts secured by the property. In other provinces, a foreclosure may have in certain circumstances no effect on the existence of the debt. For instance, in Quebec, foreclosure can be either voluntary (i.e. no need to go to court because the mortgagor agrees to the foreclosure), in which case the property foreclosed will still guarantee the debt owed to a second mortgagee or it can be a forced foreclosure, in which case the civil law in Quebec provides that the foreclosure clears all the mortgages on the property. The fact that the concept of foreclosure may be different from jurisdiction to jurisdiction is all the more reason to exercise caution in the development of general guidelines.

The mortgagor's equity of redemption (and therefore beneficial ownership) is extinguished when a final order of foreclosure is issued and there is no basis upon which the foreclosure can be overturned (i.e. fraudulently obtained). At this point the mortgagee FI can be considered to have acquired an asset that is tangible property the carrying value of which would likely be determined in accordance with CICA Handbook section 3025. The carrying value of such property would be excluded from the capital tax base only where the exception is met. The onus is upon the FI to identify tangible property that meets the exception and to support such contention.

B. JUDICIAL SALE: This is the primary remedy available in Alberta, British Columbia, Manitoba, Nova Scotia and Saskatchewan. A judicial sale is not a power of sale that is exercised pursuant to a provision of a mortgage agreement. It is exercised under the authority of the court. Procedurally the mortgagee, upon default, will apply to the court for an order to sell the property. The court will grant the mortgagor a certain period of time to exercise the right of redemption. When that period lapses without the mortgagor having exercised that right then the mortgagee, under the authority of the court, will sell the property.

We refer you to the Federal Court of Appeal case of "James Brill v. The Queen" (96 DTC 6572), which discusses, at length, various issues, in the province of Alberta, related to one type of judicial sale called a "Rice Order". The Rice Order is derived from the decision in Trusts & Guar. Co. v. Rice, 20 Alta. L.R. 444, (1924) 2 W.W.R. 691, (1924) 3 D.L.R. 352 (Alta C.A.) and involves, as the first step, the offer of the land for sale and the invitation of tenders. The mortgagee either is not permitted to bid or does not bid. If no tender is received or if the tenders are not accepted, the mortgagee then makes a proposal to the court to acquire the property at a specified price based on an appraisal it has presented. The court, if it considers the proposal to be reasonable, accepts it subject to the condition that the other parties to the litigation be given a period of time within which to produce a better offer. If no better offer is produced, the proposal is accepted. In this case the mortgagor was considered to have disposed of and the mortgagee to have acquired the mortgaged property at a specific amount determined by the mortgagee's accepted proposal. The court concluded, in the following statement, that section 79 would not apply in such a situation;

"I am not persuaded by Counsel for the Crown who contends that paragraph 79(c) should be used to determine the amount of the disposition, that is, the amount of the debt still owing at the time of the disposition. In my view, this would be a needless exercise in abstraction, not necessary in a case such as this, where there has been a judicial sale at a fixed price. It would not be consistent with the commercial reality of the situation. Normally, the Income Tax Act taxes someone on the basis of what has actually been received, not on the basis of some theoretical formula.

The situations meant to be covered by paragraph 79(c) are acquisitions by the lenders in a context where no fixed price is paid, and where it might take some time to ascertain the true value of what has been disposed of. Paragraph 79(c) provides a useful code for the fair and consistent treatment of dispositions where no definite figure is involved. Such situations include foreclosures and repossessions, where lenders may be forced to keep the property for some time before disposing of it and where different parties may calculate the value of the disposition differently."

The judicial sale is essentially a court ordered power of sale. The ownership of the property is generally conveyed directly from the mortgagor to a third party purchaser without the mortgagee acquiring the property at any time during the process unless, of course as was the case in the Brill decision referred to above, the mortgagee acquires the property on its own account under the authority provided by the applicable legislation and approved by the relevant court. If the mortgagee does not acquire the secured property on its own account then the mortgagee will not be considered to have acquired an asset for the purpose of paragraph 181.3(1)(a). If the mortgagee acquires the mortgaged property on its own account, under the auspices of the court authority, an asset will be considered to have been acquired for the purpose of the Income Tax Act including paragraph 181.3(1)(a).

C. EXTRA-JUDICIAL SALE (Power of Sale): The power of sale is the only remedy available to mortgagees in New Brunswick and the primary remedy of mortgagees in P.E.I., Newfoundland and Ontario. In Manitoba, a power of sale is possible where it is authorized by the court and conducted by the registrar. The power of sale is typically exercised pursuant to the terms of the mortgage agreement which provides the mortgagee with the power to sell the property upon default. It may also be authorized under extra-judicial sale provisions of various relevant statutes (See for example the Mortgages Act, R.S.O. 1990, c.M.40,s.24). A validly exercised power of sale will extinguish the equity of redemption of the mortgagor.

Generally, upon default in payment of the money secured by a mortgage, the mortgagee is entitled to sue for foreclosure or alternatively for the sale of the mortgaged property (i.e. a judicial sale). Where a power of sale is exercised, the order for the sale will generally provide that the mortgaged property is to be sold to a third party, usually by public auction, private contract or tender, or through an independent real estate agent. A sale under a power of sale is generally quicker and simpler than foreclosure and is usually the preferable route for mortgagees such as banks and other financial institutions. Under a power of sale, the creditor never acquires the property but rather the title becomes directly vested in the ultimate purchaser. The creditor merely has the right to sell the property and collect proceeds on account of the debt still owing under the mortgage. A mortgage document ordinarily gives a mortgagee the right to require the sale of the property on default. In some provinces, the mortgagor has a statutory right to convert a mortgagee's foreclosure action into a power of sale.

The Department is on record as having acknowledged 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. At the 1988 Canadian Tax Foundation Annual Conference Revenue Canada Roundtable (Q.6), the Department, in response to a concern about liability for tax under subsections 116(5) or (5.3) with respect to property acquired under a power of sale responded that as long as the mortgagee 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, it was concluded that subsection 116(5) or 116(5.3) would apply to the purchaser.

Further support can be found in paragraph 3 of IT-505, "Mortgage foreclosures and conditional sales repossessions", dated December 22, 1986 reads as follows;

3. Section 79 will not apply where the creditor purchases property from the debtor merely in anticipation of the debtor's default or where the debtor's property is disposed of to a third party pursuant to a power of sale.

Reference to the disposition of property to a third party purchaser recognizes that the mortgagee would not acquire beneficial ownership of the property, and, depending upon the provincial jurisdiction, may not acquire legal ownership of the property. In conclusion a mortgagee would not be considered to have acquired an asset for the purpose of the Act including either of paragraphs 181.3(1)(a) or (b) unless the property was acquired on the mortgagee's own account. We also refer you to "James T.Dunne et al v. The Queen", 96 DTC 6400, "Federal Business Development Bank v. Gaslard & Gaslard" (1983) 44 Nfld and P.E.I.R. 89 and "Trader's Group Ltd. v. Mason & Mason" (1974) 10 N.S.R. (2nd) 115.

D. ACTION ON THE COVENANT: This action derives from the mortgagor's covenant in the mortgage contract to pay the mortgage. A default on the mortgage allows the mortgagee to take action. The action permits the mortgagee to claim other assets in satisfaction of the mortgage debt. This action is unavailable to a mortgagee in Alberta, British Columbia, Manitoba and Saskatchewan when an order for final foreclosure has been given.

The consequences of an action on the covenant is that assets other than the mortgaged property may be conveyed or transferred to the mortgagee in full or partial settlement of the mortgage obligation, however the beneficial ownership of the mortgaged property remains that of the mortgagor. Accordingly no amount with respect to that mortgaged property would be considered as a tangible asset acquired by an FI for the purpose of paragraphs 181.3(1)(a) although the mortgagor's assets (other than the mortgaged property) transferred in full or partial settlement of the mortgage obligation will be considered to have been disposed of by the mortgagor and acquired by the mortgagee for all purposes of the Act.

E. QUITCLAIM: A quitclaim is defined in Black's Law Dictionary as;

"In conveyancing, to release or relinquish a claim; to execute a deed of quitclaim."

Black's further defines a "quitclaim deed" as;

"A deed of conveyance operating by way of release; that is, intended to pass any title, interest, or claim which the grantor may have in the premises, but not professing that such title is valid, nor containing any warranty or covenants for title."

A debtor who is faced with an action for foreclosure or a power of sale may decide to expedite matters and execute a quitclaim in favour of the mortgagee. A quitclaim will vest or transfer the property in the hands of the mortgagee. The Department is on record, with respect to the application of section 79, as stating that a quit claim is generally an acquisition or reacquisition of property by the mortgagee (See paragraph 2(c) of IT-505).

The registration of a quit claim deed conveys the property to the mortgagee with the mortgagor voluntarily giving up his or her equity of redemption. This action by the mortgagor extinguishes the equity of redemption and terminates the mortgagor's beneficial ownership rights which, from that point, vest in the mortgagee. In this regard the mortgagee will, for the purpose of paragraph 181.3(1)(a) be considered to have acquired an asset which would only be excluded if the conditions for the exception have been met.

CONCLUSION

With respect to the mortgage remedies considered in this memorandum we provide the following general conclusions, in response to the question of whether a mortgagee acquires an asset for the purpose of paragraph 181.3(1)(a);

A.POWER OF SALE: No asset is acquired. A power of sale results in the conveyance of ownership directly from the mortgagor to a third party purchaser. The mortgagee does not obtain beneficial ownership unless the mortgagee acquires the mortgaged property on its own account (i.e. as a participant in an auction etc.) and in the same capacity as a third party purchaser where permitted by the relevant legislation. A sale under a validly exercised power of sale extinguishes the mortgagor's equity of redemption and beneficial ownership rights.

B.FORECLOSURE: An asset is generally acquired when a final order of foreclosure is issued and there is no basis upon which the foreclosure can be overturned (i.e. fraudulently obtained). The mortgagor's equity of redemption (and therefore beneficial ownership) are extinguished on a valid final order of foreclosure.

C.JUDICIAL SALE: An asset is generally not acquired for the same reasons as under a power of sale. If the mortgagee acquires the property on its own account as a third party purchaser then the mortgagee will be considered to have acquired an asset.

D.ACTION ON THE COVENANT: The mortgaged asset is not acquired. Other assets of the mortgagor are taken in partial or complete satisfaction of the mortgage obligation. The mortgaged property remains the property of the mortgagor therefore the mortgagee does not acquire the mortgaged asset.

E.QUIT CLAIM: An asset is acquired. The property is conveyed to the mortgagee with the mortgagor voluntarily giving up his or her equity of redemption. This action by the mortgagor extinguishing the equity of redemption terminates the mortgagor's beneficial ownership rights.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch