[opie]

I have a corporate client who sold a piece of property in fiscal 2007 and as a part of the transaction took back a mortgage of 1,750,000. Consequently, we bookked a reserve as far as claiming the capital gain on an ongoing basis.

The debtor has defaulted on the mortgage and the property has gone into power of sale proceedings.

How would I handle this on the tax return? It would not seem to be appropriate to show the ending reserve as = to the beginning reserve. Whould I just insert an amount in the Reserve for Doubtful Debt section of the schedule instead?

Any thoughts or direction would be greatly appreciated.

[Gordon Wiber]

Subsections 79.1(3) and (4) generally provide that reserve amounts claimed in the taxation year preceding the year in which the creditor reacquires the seized property are not added back in computing the creditor's income for the year of the seizure. Rather, the creditor's cost of the seized property is reduced under subsection 79.1(6). If a prior year's reserve exceeds the cost to the creditor of the seized property (determined under subsection 79.1(6) without reference to the reserve), the excess is added back in computing the income of the creditor for the year of the seizure. Would recommend that you perform a through review of subsections 79 & 79.1.