| November 10, 1989 | |
| VICTORIA DISTRICT OFFICE | Specialty Rulings |
| Bruce Donaldson | Glen Thornley |
| Chief of Audit | (613) 957-2101 |
| Brenda O'Regan | |
| Section 143-1-1 | File No. 7-4157 |
Subject: Section 79 Of the Income Tax Act (the "Act")
This is in reply to your memorandum of July 10, 1989, which was referred to us from Audit Applications for our reply. You have asked for our opinion on the application of section 79 of the Act 24(1)
You ask in closing if it is our policy where applying the provisions of paragraph 79(1)(c) of the Act in cases of foreclosure under a 24(1) to consider the entire principal amount of the debt as having been extinguished at the date of foreclosure?
Our Comments
It is the Department's position that where property is held by a corporation in trust, as agent of a shareholder or investor that a bare trust exits. The corporation in these instances is looked upon as merely an agent for the shareholder or investor, who will be considered to be the beneficial owner of the property. Where this is the case all the normal consequences of ownership of property will flow from the above arrangement. Any income or loss arising in respect of property, including any recaptured capital cost allowances or terminal losses will be considered to be the income or loss of the beneficial owner. See Interpretation Bulletin IT-216 and IT-437 (paragraphs 2 and 4). See also Income Tax Ruling 1. Of additional interest to you in this regard may be the Brookview Investments case, 63 DTC 1205. In that case the appellants were entitled to deduct from other income their respective proportions of the loss incurred in a real estate transaction conducted on their behalf through the interposition of a private company. The private company held no beneficial interest in the land or the transaction; the interest in the land was held by the private company as bare trustee for the group and subject to the obligation to convey it at the direction of the group.
Thus in our view based on the facts of your case, `paragraph 79(c) requires the investor to include in computing the proceeds of disposition of his property the aggregate of
(a) the principal amount of the taxpayer's claim, that is; the balance of principal owing by the investor under the mortgage on his property, and
(b) the principal amount of any other debt owing by the investor to the mortgage company or to a third party to the extent that it has been extinguished by virtue of the foreclosure of the property by the mortgage company.
See paragraph 13 and 14 of Interpretation Bulletin IT-SOS. "File mortgage company, on the other hand, is deemed to have acquired one property at an amount that is "the principal amount of the taxpayer's claim" less any prior years reserves plus any third party liens on the property that it assumed and any outlays made to protect its interest in the property. - See paragraphs 6 and 7 of IT-505.
Any payments made by the investor to the mortgage company subsequent to the foreclosure, such as deficiency payments/will by virtue of paragraph 79(d) of the Act, be deemed to be a loss of the investor. Such loss will be either a trading loss or a capital loss depending on the investor's circumstances. See paragraph 15 of IT-SOS. Payments received by the mortgage company in these circumstances will be treated as a capital gain or income gain as outlined in paragraph 9 of IT-505.
We point out in closing that in the present instance section 79 24(1) This is so because "extinguished" is not legally the same as "not collectible". We would recommend a second referral in the latter case.
We trust our comments will prove helpful in resolving this issue.
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch