A US debtor (Mr. Anderson) had defaulted on a mortgage debt owing by him to a US bank, which had commenced foreclosure proceedings under the mortgage held on a Hawaii property of Mr. Anderson. The taxpayer (Mr. Leonard) acquired that debt and the mortgage for $1.3 million in 2009. After completion of the foreclosure proceedings, the taxpayer was the only bidder under the resulting auction held in 2011, with a bid of $500,000, and he also obtained a deficiency judgment for $1.47 million.
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 found 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 (at para. 50) 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 (at para. 52) 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.” Furthermore, “[e]ven if a mortgage could be treated as a different property than the debt it secures, no portion of the amount paid by Mr. Leonard to the bank for the debt and the mortgage could reasonably be allocated to the mortgage” given that if the taxpayer had purchased the mortgage separately (with the bank still retaining the debt), “no amount would be payable to Mr. Leonard as the ‘mortgage holder’.” (para. 56).