Leonard – Federal Court of Appeal finds that a mortgage securing a loan cannot be treated as a property separate from that loan

The taxpayer acquired, from a US bank, a mortgage loan of a US debtor who was in default, for a purchase price of around $1.3 million. Two years later, after the completion of foreclosure proceedings, the taxpayer purchased the property, as the only bidder under the resulting auction, for $500,000.

The Tax Court had found that 99.9% of the amount paid by the taxpayer to acquire the mortgage and debt should be allocated to the mortgage, and only 0.1% to the debt., and concluded that the first amount could be deducted by the taxpayer in computing his income for 2011 as a result of the cancellation in 2011 of the mortgage.

In reversing this finding, Webb JA indicated that the Tax Court had “erred in treating the mortgage as a separate property for the purposes of the Act.” In this regard, he noted that Royal Trust Co. v. New Brunswick (Secretary Treasurer), [1925] S.C.R. 94 had “confirmed that a mortgage cannot effectively be separated from the debt it secures.”

Neal Armstrong. Summaries of Leonard v. Canada, 2022 FCA 195 under s. 20(1)(p)(ii) and s. 10(1.01).