30 May 1996 External T.I. 9609585 - CAPITAL LOSS ON MORTGAGE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Capital gain reported on the disposition of land. Proceeds consisted of cash and taking back a mortgage. The mortgage was settled for $XXXXXXXXXX less than the balance owing. Taxpayer asked if the two transactions can be combined as the net-capital loss on the mortgage may never get to be applied.

Position:

Two separate transactions on account of capital. The capital gain on the disposition of the land stands and the capital loss on the mortgage can only be applied as permitted by the loss application rules.

Reasons:

The law is specific.

		960958
XXXXXXXXXX	A.M. Brake

Attention: XXXXXXXXXX

May 30, 1996

Dear Sirs:

Re: Application of Net Capital Loss

This is in reply to your undated letter received March 14, 1996 and will confirm the information given in a recent telephone conversation (XXXXXXXXXX/Brake) regarding the application of a loss in a situation which can be summarized as follows:

1.In 1989, a taxpayer sold land for $XXXXXXXXXX with $XXXXXXXXXX in cash received and a mortgage of $XXXXXXXXXX being taken back by the taxpayer from the purchaser.

2.A capital gain of $XXXXXXXXXX was realized on the sale of the land and was taxed in the 1989 to 1993 years.

3.There were never any payments made on the mortgage and, in 1995, the outstanding $XXXXXXXXXX mortgage was settled for $XXXXXXXXXX cash resulting in a $XXXXXXXXXX loss.

You have asked if there is any way that the gain on the sale and the loss on the mortgage can be combined to recalculate the net gain on the combined transactions for tax purposes. In your view, this would be equitable because it was the former that gave rise to the latter and the taxpayer may never get the benefit of applying the loss on the mortgage against taxable capital gains in future years.

Our Comments

Capital gains resulting from the disposition of the land must be reported in the year of sale. However, the reserve mechanism set out in subparagraph 40(1)(a)(ii) provides for a deferral of the gain, where a portion of the proceeds is still owed to the taxpayer, to permit the gain to be spread over the year of sale and up to 4 subsequent years, depending on the circumstances, as was the case in the situation at hand.

At the time the taxpayer took back the mortgage, there was, in fact, another property acquired and its disposition occurred in 1995 resulting in a $XXXXXXXXXX capital loss. To the extent that allowable capital losses are not offset against taxable capital gains in the year, the excess becomes net capital losses which may be applied against taxable capital gains reported in the three preceding years (in this case 1992, 1993 and 1994) and against capital gains in future years.

In the situation at hand, the loss, as you have correctly stated, cannot be applied back beyond the 1992 year. The result being that most of the reported gain on the land will remain taxed while the greater portion of the loss on the mortgage remains unapplied and may never all be applied should there not be sufficient capital gains in future years to absorb the balance.

With regard to the purchaser, our only comment, in the absence of detailed information relative to his entire income tax position, is that section 80 of the Act will have application to the forgiven debt. The debt will have to be applied in accordance with the ordering contained in that provision.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch