Two spouses are the equal owners their residence, and each is subject to 50% of the mortgage. Madame sells some of her shares of her corporation, having a fair market value equaling 50% of the mortgage, to Monsieur in consideration for Monsieur assuming the 50% of the mortgage to which Madame had been subject. Assuming that the sale of Madame's shares to Monsieur is not subject to the s. 73(1) rollover, would Monsieur’s assumption of the portion of the mortgage previously borne by Madame satisfy the test in s. 20(1)(c)(ii)? CRA responded:
In order to answer the question, it must be established whether Monsieur, in assuming a portion of Madame's mortgage loan as consideration for the acquisition of the shares, incurred a new debt for which he was not previously liable and whether he had a legal obligation to pay interest that he was not previously legally required to pay. To this end, it is necessary to determine what the respective legal obligations of both spouses were before the transfer of the shares and what their respective legal obligations were after the transfer of the shares.
Whether a taxpayer has a legal obligation to pay interest on an amount payable for property acquired is a question of mixed fact and law that can only be resolved after a review of all the contracts involved.