Credit Bids and CRA Landmines: Getting the Adjusted Cost Base Right

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When a secured lender “credit bids” and takes title to collateral through a CCAA vesting order, two tax questions matter immediately:

  1. What is the lender’s adjusted cost base (ACB) of the real property it now owns?
  2. How is the remaining unpaid debt (the deficiency) treated for tax purposes?

The short answer

  • ACB = the amount of the credit bid applied to extinguish the debt, not the full face amount of the mortgage. This flows from the creditor-seizure rules in ITA s. 79.1, which deem the creditor’s cost of seized property to equal the amount determined under s. 79.1(6), and is reflected in CRA technical interpretations on creditor seizures.
  • The balance of the mortgage not covered by the credit bid is not added to ACB. It is dealt with separately: lenders in a lending business generally use bad-debt deductions; non-lending investors generally use a s. 50(1) election to crystallize a capital loss (and sometimes an ABIL if the debtor is an SBC).

In the Balboa CCAA, for example, the court approved credit-bid vesting orders on multiple properties — the archetypal fact pattern for this tax treatment.

Why the ACB is the credit-bid amount (not the whole mortgage)

The creditor-seizure code in ITA s. 79.1

Section 79.1 governs what happens when a creditor seizes property “in respect of a debt.” It deems the creditor to dispose of the debt and to acquire the seized property with a deemed cost computed under s. 79.1(6). In plain terms, the creditor’s cost of the property is tied to the amount of debt applied in the seizure — i.e., the credit-bid consideration — not the entire outstanding mortgage.

CRA’s administrative view

CRA technical interpretations confirm this point: where a creditor seizes property in satisfaction of a debt, s. 79.1(6) deems the creditor’s cost of the property by formula, aligning with the amount of debt applied.

Does a CCAA vesting order count as a “seizure”?

Although a CCAA credit-bid + vesting order is court-supervised rather than a traditional foreclosure, tax commentators and CRA have long treated these transactions as economically equivalent to a creditor seizure, and the credit bid as the purchase price for ACB purposes.

Bottom line: When lenders take title via credit bid, use the credit-bid amount (plus acquisition costs like land transfer tax and legal fees) as ACB.

How lenders claim the “rest of the loss” (the unpaid deficiency)

Once title is acquired, any remaining mortgage balance is a separate asset (the deficiency claim) — it does not inflate ACB. Tax treatment depends on who the lender is and the nature of the debt.

1) Lenders in the ordinary business of lending

  • Bad-debt deduction – s. 20(1)(p)(ii): allows a write-off for the uncollectible portion of a loan held in the course of a lending business.
  • Doubtful-debt reserve – s. 20(1)(l): allows a reserve for doubtful accounts/loans, added back to income the following year under s. 12(1)(d).

2) Non-lending investors (debt on capital account)

  • Use the s. 50(1)(a) election to deem a disposition at nil when the debt becomes bad, generating a capital loss (or a business investment loss (ABIL) if the debtor is an SBC).

Does it matter if the lender is incorporated or not?

Yes — the ACB rule (credit bid only) applies equally, but the tax treatment of the deficiency differs depending on whether the lender is a corporation or an individual.

  • Corporate money-lenders: ordinary deductions under s. 20(1)(p)(ii) or reserves under s. 20(1)(l).
  • Corporate non-lenders: capital loss or ABIL.
  • Individual lenders in business: same as corporations in lending — ordinary deductions.
  • Individual investors: capital loss or ABIL through a s. 50(1) election.

Worked example

  • Mortgage face amount: $10,000,000
  • Credit bid at vesting: $7,500,000 → ACB = $7,500,000 (plus closing costs).
  • Balance ($2,500,000) remains as a deficiency claim.
    • Business lenders (corporate or individual): deductible as bad debt under 20(1)(p)(ii).
    • Non-business lenders (corporate or individual): crystallize loss under s. 50(1); may be an ABIL if borrower is an SBC.

When the lender later sells the property, the capital gain/loss is simply:
Sale Proceeds – ACB (credit bid) – selling costs.

How Rabideau Law Can Help

If you’ve acquired property through a credit bid in a CCAA or foreclosure process, the tax consequences can be as important as the court order itself. The rules in ITA s. 79.1, s. 20, and s. 50 can change your recovery depending on whether you are incorporated, acting as an investor, or operating as a professional lender.

At Rabideau Law, we:

  • Confirm the proper ACB for property acquired by credit bid.
  • Structure deficiency claims so you get the best possible tax treatment (ordinary deduction vs. capital loss vs. ABIL).
  • Work with your accountants to ensure reporting is audit-proof.
  • Guide you through property dispositions so your gain/loss is reported correctly and supported with documentation.

If you are a lender or investor dealing with distressed mortgages, Rabideau Law can help you turn a complex process into a clear and defensible tax outcome.

Contact us today to review your credit bid or deficiency claim and protect your position both legally and financially.