7 July 1991 Income Tax Severed Letter - Application of section 79 and subsection 50(1) in a particular situation

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.

Dear Sirs:

Re: Request for Technical Interpretation
Section 79 and subsection 50(1) of the Income Tax Act (the "Act")

We are writing in response to your letter, dated November 9, 1990, in which you asked for our views on the application of the above-noted provisions of the Act to the hypothetical situation described in your letter. We apologize for our delay in responding to your letter.

Situation

An individual taxpayer disposes of a capital property in year 1 and realizes a capital gain. A mortgage is taken back by the taxpayer on the sale and a reserve claimed in year 1 in respect of proceeds not due, pursuant to subparagraph 40(1)(a)(iii) of the Act.

During year 2, very little is collected on the mortgage and the taxpayer initiates foreclosure proceedings during that year. The final order of foreclosure is granted by the courts in year 3.

You asked whether the provisions of section 79 of the Act could be applied in year 2 to prevent the inclusion of the year 1 reserve in income, or alternatively, whether the application of subsection 50(1) of the Act in year 2 would result in a capital loss on the deemed disposition of the mortgage (which capital loss would offset the gain that would result from the inclusion of the year 1 reserve).

Our position

It is our view that section 79 of the Act can only be applied in the year in which the taxpayer has acquired or reacquired the beneficial ownership of the property in question, as required by that section. When a taxpayer can be considered to have acquired or reacquired beneficial ownership of property is a question of law which can only be determined based upon a complete review of all the relevant circumstances of a particular situation. However, it would appear that in the situation you described, the reacquisition would occur in year 3.

Further, it is our position that subsection 50(1) would probably have no application in year 2 in the situation you described since the mortgage would not have been established to have become a bad debt during year 2. As outlined in paragraph 10 of Interpretation Bulletin IT-159R3, it is the Department's general position that a debt will be considered uncollectible only when the creditor has exhausted all legal means of collecting it. Since the taxpayer, in year 2, would still have security (the property subject to the mortgage) and would not have exhausted all legal means of collection, the debt would not ordinarily be considered to have been established to be a bad debt in year 2.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.