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: Reserve under Subparagraph 40(1)(a)(iii) of the Income Tax Act
This is in reply to your letter of September 10, 1991 concerning the availability of a mortgage reserve where the original due date of the mortgage has been extended.
The Department's position with respect to reserves arising from the disposition of capital property is contained in Interpretation Bulletin IT-236R3. Comments in this regard are also contained in IT-436R Reserves-Where Promissory Notes are Included in Disposal Proceeds. This bulletin may also apply where a mortgage is accepted by the vendor as part of the sales proceeds. Former IT-436 contains comments in paragraphs 9 & 10 which, although not included in IT-436R due to the introduction of new 5 year time limit restrictions, are still considered relevant in some situations. In essence the former bulletin states that there are situations where a vendor who has taken back a promissory note (mortgage) may, in conjunction with the person who acquired the property, agree to extend the original due date of the note (mortgage). The extension may occur before the original due date and before the end of the vendor's taxation year for which the reserve is being considered or even after the original due date but before the end of the vendor's taxation year for which the reserve is being considered. In these and similar situations the Department's practise is to permit a vendor to continue claiming a reserve if the debt instrument, originally taken back on a disposition is extended within the time limits indicated and the renewed instrument (as conditional payment) is accepted as a continuing evidence of the original debt.
Providing that the other requirements of paragraph 40(1)(a) of the Act are met it would appear that your hypothetical taxpayer would be able to claim a reserve in year two for the portion of proceeds that are not due until year 3. We agree with your observation that the constraint set out in clause 40(1)(a)(iii)(D) is measured from the year of the original disposition. We also note that the statutory scheme is such that the reserve claimed at the end of year 2 could not be longer than the reserve claimed at end of year 1.
We trust our comments will prove helpful, however, please note that the above comments are an only an expression of our opinion based on the limited information provided. As such they are not an advance income tax ruling and our reply could very well change based on an actual review of all the facts of a particular case.
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© Her Majesty the Queen in Right of Canada, 1991
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© Sa Majesté la Reine du Chef du Canada, 1991
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