NOV 23 1988
Specialty Rulings Directorate C. Tremblay (613) 957-2103
SUBJECT: XXXX
This is in reply to your memorandum of August 18, 1988, requesting our comments as to whether section 79 of the Income Tax Act (the "Act") applies on the appointment of a Receiver-Manager in the situation you described.
Our understanding of the facts is as follows:
XXXX
Taxpayers' Position
The taxpayers' representatives have submitted their arguments and have concluded that the appointment of receiver in the foreclosure action commenced by XXXX did not have the effect of causing the beneficial ownership of XXXX in the XXXX Property to be acquired by any other person. In their opinion, the nature of a mortgage is such that, once made, the mortgagor's beneficial interest in the subject property exists in the form of an "equity of redemption". The mortgagor does not lose or otherwise dispose of that equity of redemption except upon the grant by a court of a final order of foreclosure or an order approving a sale of the subject property or upon the transfer by the mortgagor of his equity of redemption to a purchaser or assignee. No title to or estate in property of a debtor vests in a court-appointed receiver. The receiver is merely an officer of the court (in a court-appointed receivership) charged with the responsibility of preserving and protecting the property subject to the court proceedings.
District Office Position
After reviewing Interpretation Bulletin IT 437, IT 505, and Black's Law Dictionary, you have determined that beneficial ownership is relevant to the application of section 79 of the Act. A proposed schedule of adjustments has been prepared assuming that beneficial ownership passes to the mortgagee/creditor upon the appointment of a receiver, thus triggering a disposition by the mortgagor/debtor for the purposes of C.C.A., capital gains and future expenses.
Our Comments
In our opinion, determining who has beneficial ownership of the XXXX will resolve whether or not there has been a disposal, and whether or not section 79 of the Act can apply. 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 property whether or not he has concurrent legal ownership. The Department will look to such factors as the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations.
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 or 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.
Where the mortgagee forecloses on the property, it is clear that the mortgagee acquires both legal and beneficial ownership of the property upon the granting of the final order of foreclosure; as a result section 79 is clearly applicable in the case of a foreclosure.
When a receiver and manager is appointed however, there could be some doubt about the relationship of the receiver and the mortgagor in law. However, the duties and responsibilities of the receiver will normally be described in the court order under which he is appointed. The receiver takes possession of and administers the assets of the business for the benefit of those ultimately entitled thereto. As title to the assets does not change upon the appointment of the receiver, and any amounts paid to creditors reduce the taxpayers' liability to them and are thus for their benefit, the receiver may be regarded as carrying out his duties as the agent of the present owners or in this case the joint venturers.
It should be noted that in order for section 79 to apply, it is necessary that the mortgagee acquire or reacquire 'beneficial ownership' of property and unless the facts indicate that the receiver is acting on behalf of the mortgagee, there is no disposition for the purposes of Capital Cost Allowances, recaptured CCA, and capital gains at the date of appointment of a receiver.
Based on the information attached to your submission, the appointment of the receiver appears to have been of a routine nature with no evidence that beneficial ownership passed at that time, nor is there any evidence to suggest that it has passed or will pass at any time prior to a final order of foreclosure being issued by the court.
ORIGINAL SIGNED BY Wm R. McColm
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch