Seizures and Repossessions

From: Canada Revenue Agency

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-102

DATE OF ISSUE

November 11, 1993

SUBJECT

Seizures and repossessions.

LEGISLATIVE REFERENCE(S)

Section 183 of the Excise Tax Act

NATIONAL CODING SYSTEM FILE NUMBER(S)

11585-0

EFFECTIVE DATE

Varies depending upon the nature of the remedy chosen by the debtor and the creditor.

TEXT

What constitutes seizure and repossession for the purposes of section 183?

Issue and Decision:

Since the provisions of section 183 depend upon whether or not there is a seizure or repossession, it is important to determine what constitutes a seizure or repossession and when a seizure or repossession occurs. Note that given the amendments to section 266 of the ETA thereby reducing the scope of section 183, it is possible that actions and remedies used by creditors fall within the provisions of section 266 instead of section 183. Furthermore, note that the Civil Code of Lower Canada used in Québec has been repealed and replaced by the Québec Civil Code effective January 1, 1994, and that some of the remedies used prior to January 1, 1994 by the creditors in Québec may not be available after December 31, 1993.

Seizure is defined in Black's Law Dictionary as

"The act of taking possession of property, e.g., for a violation of law or by virtue of an execution. Term implies a taking or removal of something from the possession, actual or constructive, of another person or persons."

For purposes of section 183, seizure and repossession occurs in the following circumstances:

"Seizure or repossession has occurred at that point in the execution process when the creditor, who has lawful authority to deprive the debtor of control of the property and sufficient lawful authority over the property to transfer rights in the property to a third party, has taken sufficient actions to exercise control over such property, whether real or personal, thereby depriving the debtor of such control."

SAMPLE RULINGS

Example No. 1

STATEMENT OF FACTS

Pursuant to the terms of a mortgage on a commercial property, which is occupied by tenants, the mortgagee exercises rights of attornment of rent contained in the mortgage document. The tenants begin paying rent directly to the mortgagee.

RULING REQUESTED

Do the acts of the mortgagee constitute seizure or repossession within the meaning of Section 183?

RULING GIVEN

Seizure or repossession has not occurred because these specific actions do not give the mortgagee control of the property since the creditor does not have the authority to transfer rights in the property to a third party.

Example No. 2

STATEMENT OF FACTS

A mortgagee exercises rights of attornment of rent contained in the mortgage document and applies the rent money not only to payment of outstanding principal and interest but also to payment of taxes and utilities.

RULING REQUESTED

Do the acts of the mortgagee constitute seizure or repossession within the meaning of Section 183?

RULING GIVEN

Seizure or repossession has not occurred because these specific actions do not give the mortgagee control of the property sufficient to deprive the debtor of the control of the property since the creditor does not have the authority to transfer rights in the property to a third party.

Example No. 3

STATEMENT OF FACTS

A mortgagee has commenced Power of Sale proceedings by sending out the required Notice of Sale. The debtor remains in possession of the property and collects rent, pays taxes and utility bills and manages the property. At the expiration of the notice period, the debtor continues to manage the property and the mortgagee lists the property for sale by executing a Listing Agreement with a real estate agent.

RULING REQUESTED

Does listing the property for sale by the mortgagee constitute seizure or repossession within the meaning of Section 183 when the debtor continues to manage of the property ?

RULING GIVEN

Seizure or repossession has not occurred because listing the property for sale does not give the mortgagee control of the property sufficient to constitute seizure or repossession nor does entering into an agreement to list the property for sale constitute the transfer of rights in the property to the real estate agent.

Example No. 4

STATEMENT OF FACTS

A mortgagee has commenced Power of Sale proceedings by sending out the required Notice of Sale. The debtor remains in possession of the property and collects rent, pays taxes and utility bills, and manages the property. At the expiration of the notice period, the debtor continues to manage the property and the mortgagee lists the property for sale by executing a Listing Agreement with a real estate agent. After six weeks the mortgagee receives an offer to purchase the property from a bona fide purchaser, which the mortgagee accepts.

RULING REQUESTED

Does receiving an offer to purchase constitute a seizure or repossession within the meaning of Section 183 when the debtor continues to have control of the property?

Does the signing of an agreement of purchase and sale constitute seizure and repossession?

RULING GIVEN

Seizure or repossession has not occurred when the property is listed for sale Although the mortgagee does have the lawful authority to transfer rights in the property to a third party, in these circumstances the mortgagor continues to have control of the property. Furthermore, entering into an agreement to list the property for sale does not constitute the transfer of rights in the property.

When he makes an offer to purchase, the purchaser does not obtain rights in the property from the creditor. However, a bona fide purchaser obtains rights to the subject property upon entering into a binding Agreement of Purchase and Sale with the mortgagee. At that time, a seizure or repossession has occurred.

Example No. 5

STATEMENT OF FACTS

A mortgagee has commenced Power of Sale proceedings by sending a Notice of Power of Sale to the mortgagor. After the expiration of the notice period, the mortgagee attorns the rents and begins paying taxes and utilities. In addition, the mortgagee has appointed a property manager who acts on the instructions of the mortgagee. The mortgagee enters into enforceable leases of the property with third parties.

RULING REQUESTED

Do the acts of the mortgagee constitute seizure or repossession within the meaning of Section 183?

RULING GIVEN

In these circumstances, the mortgagee is a mortgagee in possession who has taken control of the property to the exclusion of the debtor and has the lawful authority to transfer rights in the property to a third party. Therefore, seizure and repossession has occurred.

Section 183 would apply when the property manager is appointed prior to 1993. In the event where the property manager was appointed after 1992, section 266 would apply.

RATIONALE:

With the new definition of receiver, which is applicable to receivers appointed or vested with authority after 1992, a property manager who is appointed to manage or operate a property under a debenture, a bond, or other debt security, would meet the new definition of a receiver found in section 266.

New subsection 183(11) which is effective as of January 1, 1993 provides that section 266, not section 183, will apply when the creditor or the person acting on the creditor's behalf is a receiver as defined in subsection 266(1). Since the property manager come within the definition of receiver in subsection 266(1) and the property is being seized for the purposes of satisfying in whole or in part a debt, new subsection 183(11) provides that section 266, and not section 183 applies.

Therefore, if a property manager is appointed by a creditor after 1992, in order to manage or operate a property, even though he may have control of the property, new section 266 will apply.

Example No. 6

STATEMENT OF FACTS

Following the default on the part of the mortgagor, the mortgagee has attorned rent and is paying taxes and utilities. In addition, the mortgagee has appointed a property manager who acts on the instructions of the mortgagee. The mortgagee-appointed manager enters into leases with third parties regarding the property.

RULING REQUESTED

Do the acts of the mortgagee constitute seizure or repossession within the meaning of Section 183?

RULING GIVEN

In these circumstances, the mortgagee-appointed manager has taken control of the property to the exclusion of the debtor and has the lawful authority to transfer rights in the property to a third party. Therefore, seizure and repossession has occurred

Section 183 would apply when the property manager is appointed prior to 1993. In the event where the property manager was appointed after 1992, section 266 would apply

RATIONALE:

With the new definition of receiver, which is applicable to receivers appointed or vested with authority after 1992, a property manager who is appointed to manage or operate a property under a debenture, a bond, or other debt security, would meet the new definition of a receiver found in section 266.

New subsection 183(11) which is effective as of January 1, 1993 provides that section 266, not section 183, will apply when the creditor or the person acting on the creditor's behalf is a receiver as defined in subsection 266(1). Since the property manager comes within the definition of receiver in subsection 266(1) and the property is being seized for the purposes of satisfying in whole or in part a debt, new subsection 183(11) provides that section 266, and not section 183 applies.

Therefore, if a property manager is appointed by a creditor after 1992, in order to manage or operate a property, even though he may have control of the property, new section 266 will apply.

Example No. 7

STATEMENT OF FACTS

A mortgagee commences a foreclosure action and obtains a Final Order of Foreclosure dated January 5, 1991. The mortgagee registers the Final Order of Foreclosure on title on April 5, 1991, thereby effecting transfer of registered title to the property to the mortgagee.

RULING REQUESTED

Does the registration of the Final Order of Foreclosure constitute seizure and repossession within the meaning of Section 183?

RULING GIVEN

Seizure or repossession has occurred on January 5, 1991, that is the date of the Final Order of Foreclosure, even though the mortgagee has delayed registering the Final Order of Foreclosure.

There may be facts which would indicate that seizure or repossession has occurred at an earlier date if the creditor has the lawful authority to take control of the property and to transfer rights in the property to a third party and has taken action to exercise control over the property sufficient to deprive the debtor of control of the property

Example No. 8

STATEMENT OF FACTS

A mortgagee commences a foreclosure action and obtains an Interim Order. In accordance with the terms of the Interim Order the mortgagor is granted a 90 day redemption period and the mortgagee is granted possession of the property during the 90 day redemption period. However, the mortgagee does not avail himself of this right. Rents are paid to the mortgagor, the tenants continue to deal with the mortgagor, leases are executed by the mortgagor. The mortgagee asserts that a seizure or repossession has occurred at the time of the interim order granting him possession of the property.

RULING REQUESTED

Does the Interim Order constitute seizure and repossession within the meaning of Section 183?

RULING GIVEN

Seizure or repossession did not occur at the time the Interim order of possession was issued. The mortgagee had the potential to seize the property due to the fact that the court ordered that he have possession of the property. Nevertheless, the mortgagee did not take action to take control the property to the exclusion of the mortgagor.

Example No. 9

STATEMENT OF FACTS

A mortgagor cannot meet the mortgage payments and other financial obligations associated with his farmland. He cannot afford a lawyer and there is no possibility of his putting the mortgage in good standing. On December 1, 1991, he voluntarily transfers all his rights and title in the land to the mortgagee by Quitclaim Deed and the mortgagee becomes the registered owner, subject to all encumbrances.

RULING REQUESTED

Does a quitclaim constitute seizure and repossession within the meaning of Section 183? If so, when has the seizure occurred?

RULING GIVEN

After November 4, 1991, quitclaims and all other voluntary transfers are considered to be seizures and repossessions if they meet the requirements set out in Section 183. If the voluntary transfer was executed before November 5, 1991, it would not constitute a seizure and repossession within the meaning of Section 183.

The date the quitclaim deed was executed by the debtor for real property will be used to determine if a quitclaim occurred after November 4, 1991. For personal property, voluntary transfers occur at the time when the property is physically handed over to the creditor or signs an agreement relinquishing all rights in the property.

Example No. 10

STATEMENT OF FACTS

In the province of Quebec, a retailer purchases from a vendor $500,000 plus GST of inventory on credit on January 23, 1992. The merchandise has a retail value of $1,000,000. For reasons known only to the retailer, the merchandise is then discounted and will only sell for $100,000. The vendor who is also aware of the precarious financial situation of the retailer requires a bailiff to execute a seizure before judgment so as to protect his security interest in the inventory.

RULING REQUESTED

Does section 183 apply to the seizure before judgment?

RULING GIVEN

A seizure before judgment (saisie avant jugement) in the province of Quebec does not qualify as a seizure or repossession for purposes of section 183 of the Act. The seizure before judgment is simply a protective measure to stop the retailer in this example, from reducing the creditor' chances to get paid. The seizure before judgment does not entitle the vendor to force the sale of the inventory but simply stops the retailer from selling the inventory.

Example No. 11

STATEMENT OF FACTS

In the province of Quebec, a debtor grants a bank a hypothec on his commercial property as well as a dation en paiement in March of 1990. The debtor is subsequently in default of payment. The bank chooses to use the hypothecary and seeks to force the sale of the property. The property is seized on March 10, 1991 and sold on March 20, 1991.

RULING REQUESTED

Does section 183 apply to the sale of the property?

RULING GIVEN

The seizure for the purpose of section 183 will occur on the date of the execution of the judgment of the hypothecary action (which is on the date of the sale March 20, 1991) as the creditor, eventhough he has the authority pursuant to the judgment of the court on March 10, 1991 to deprive the debtor of this control of the property, does not deprive him of such control until that date. Therefore, until such date, the creditor has not taken sufficient actions to deprive the debtor of the control of the property.

RATIONALE

In order to understand better this ruling, one should comprehend the differences between a hypothecary action and an "action en dation en paiement"

In the case of a hypothecary action, the recourse of the creditor is to force the sale of the immovable property and to be paid in accordance with the rank of his claim. If the forced sale of the immovable property does not satisfy the amount of the obligation owed to the creditor, the creditor retains a personal (and unsecured) recourse on the other assets of the debtor.

In an action for a dation en paiement, the creditor wants to be declared owner of the property. In return, the creditor abandons any claim arising from the default of payment on the part of the debtor. In this ruling where a hypothecary action is taken, a judgment will first be obtained and then registered so as to be opposable to third parties. The sale will be executed shortly thereafter by a sheriff. Even if the creditor or the bailiff takes possession of the property before the date of the sale, the seizure only occurs on the day the immediate conclusion sought by the creditor, i.e. to force the sale of the property, is executed.

Example No. 12

STATEMENT OF FACTS

A creditor agrees to lend money to a merchant in the province of Quebec, provided the latter grants him a commercial pledge on his equipment. In 1992, the merchant is in default of payment on the loan. The creditor, in accordance with subsection 1979(i) of the Civil Code, gives notice to the debtor (merchant) to return the pledged assets so that the creditor may realize his security.

RULING REQUESTED

Does section 183 apply if the debtor voluntarily returns the assets? What if the debtor refuses to return the pledged assets?

RULING GIVEN

Where the debtor voluntarily returns the pledged assets, a the seizure under section 183 occurs at the time of the sale of the pledged assets. Where the debtor does not voluntarily return the assets, a seizure will occur on the date of the execution of the seizure, i.e., when the creditor obtains a court judgment and the pledges are actually seized and sold by a sheriff.

RATIONALE

In case of a commercial pledge where the debtor voluntarily returns the pledged assets to the creditor, it is the creditor who triggers the process by giving the notice that he will force the sale of the pledged assets. The result, therefore, is in substance a seizure and section 183 would therefore apply.

In the event where the debtor keeps his assets after being notified to return them to the creditor, the creditor will have no other option but to ask the court for permission to seize and sell the goods. The sale would qualify as a seizure for purposes of section 183.

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