19 October 1989 Income Tax Severed Letter AC74351 - Mortgage Foreclosures and Conditional Sales

Centre for Career Development         Technical
         Audit and Investigations              Interpretations
         Training Programs Division              Division

         Vince Renda, Manager                  7-4351

SUBJECT: RG-l8 Mortgage foreclosures and Conditional Sales
         Repossessions - Section 79 of the Income Tax Act
As requested, we have reviewed the above-mentioned training
material and propose the following changes.

1.       In the opening paragraph of the first page, we suggest
         adding after the word "property" the words "by means of
         a foreclosure order obtained through a court, a
         repossession under a conditional sales agreement or a
         quit claim".  This will conform with paragraph 2 of
          IT-505
.

2.       The second paragraph is not quite right. If the creditor
         holds a second or third mortgage and forecloses on the
         debtor, the debtor's loss as calculated on the deemed
         proceeds of disposition is the total payments made to
         all the mortgage holders less the expenses assumed by
         the creditor on the foreclosure.  The example in IT-SOS
         illustrates this.

3.       The third paragraph on page 1 is also not quite right.
         Although the creditor may have claimed a reserve this
         does not mean that he has paid any tax, as other
         calculations on the T2S(1) may reduce the income to nil.
         You should probably refer to "amounts previously
         included in income".

4.       Key Words 
         beneficial ownership:
         The term "beneficial ownership" also means the equity of
         redemption of the property, which is the interest in the
         property that a mortgagor (debtor) retains.  Upon
         acquiring the mortgage, the mortgagee (creditor)
         acquires the legal title to the property but as security
         only, subject to the equity of right of redemption of the
         mortgagor or successor in title.  The essence of a final
         order of foreclosure is that the mortgagor (debtor) is
         absolutely debarred and foreclosed of and from, all
         right, title and equity of redemption of, in and to the
         property.

         The term "beneficial ownership" as used in the Income
         Tax Act describes the ownership of a taxpayer who is
         entitled to the use and benefit of the property whether
         or not he has concurrent legal ownership.  The
         Department will look at such factors as the right to
         possession, the right to collect rents the right to call
         for the mortgaging of property, the right to transfer
         title by sale or will, the obligation to repair, the
         obligation to pay property taxes and other relevant
         rights and obligations.  

5.       You may wish to add in your commentaries when discussing
         paragraph 79(c) that the "principal amount" of a
         taxpayer's claim does not include any accrued but unpaid
         interest on the defaulted obligation.  However, the
         principal amount could include interest payments made by
         the creditor (on behalf of the debtor) to a third party
         to forestall foreclosure or repossession by the third
         party.

6.       You may also wish to add to your commentaries when
         discussing paragraph 79(f) that "cost at that time of
         the taxpayer's claim" can include realty taxes,
         insurance premiums, utility payments, and maintenance
         and repair costs.  This is assuming that the expense in
         question was made in respect of an amount that was due
         and payable before the time at which the creditor
         acquired or reacquired beneficial ownership of the
         property and is required to be included in the debtor's
         proceeds of disposition of the property by virtue of
         paragraph 79(c).

7.       It may be useful to mention that section 79 applies as 
         well to partnerships.

We trust our comments are helpful

Director Technical Interpretations Division Legislative and Intergovernmental Affairs Branch