2014-0560961E5 TREATMENT OF CREDITOR THAT HAS SEIZED PROPERTY

Principal Issues: 1) How is the cost of seized property determined? 2) Is a gain arising on the disposition of seized property by a creditor on income or capital account?

Position: 1) If applicable, subsection 79.1(6) determines cost. 2) Depends on facts and circumstances of a particular situation.

Reasons: Application of the law.

Author: Friedlander, Lara G.
Section: 79(1), 79.1(1), 79.1(6)

XXXXXXXXXX

2014-056096

January 20, 2015

Dear XXXXXXXXXX:

Re: Creditor seizing property

This is in response to your letter of December 8, 2014 concerning the tax treatment of a gain arising on the disposition of a property where a creditor has seized the property.

In particular, you describe a situation in which a taxpayer loaned $XXXXXXXXXX on an interest-free basis to an arm’s length third party with a first rank lien on a property (a single dwelling home). The borrower does not repay the loan and so the lender realizes on the lien and seizes the property. The fair market value of the property at the time of the seizure is $XXXXXXXXXX. The taxpayer wishes to sell the property. You have asked how the adjusted cost base or cost of the seized property to the taxpayer would be determined, and whether any gain on the disposition of the property would be on income or on capital account.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R6, Advance Income Tax Rulings, dated August 29, 2014. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we have provided some general comments below.

Our Comments

Adjusted Cost Base

Generally, where property is seized at any time by a person in respect of a debt, beneficial ownership of the property is acquired or reacquired at that time by the person and if the acquisition or reacquisition of the property is in consequence of another person’s failure to pay to the person all or part of the principal or unpaid accrued interest on the debt, then subsection 79.1(6) of the Income Tax Act (the “Act”) applies. Subsection 79.1(6) governs the determination of the cost to the person of the property acquired or reacquired. Whether the requirements for the application of subsection 79.1(6) of the Act are met in any particular situation must be determined in accordance with the relevant facts.

Subsection 79.1(6) provides that where a particular property is seized at any time in a taxation year by a creditor in accordance with the conditions set out in respect of one or more debts, the cost to the creditor of the particular property is deemed to be an amount equal to the amount calculated in the formula in that provision.

Capital or Income

Section 79.1 does not contain any rules to determine whether a property seized by a creditor is held on income or on capital account to the creditor. Whether any gain arising on the disposition of seized property by a creditor is on income or on capital account will depend on the relevant facts and circumstances in a particular situation.

We trust that these comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015