Foreign affiliate debt forgivenesses are not always benign

The main distinctions between the ordinary and FAPI debt forgiveness regimes is that, under the former, an income inclusion can arise where the debtor does not have sufficient attributes to grind in the year, whereas under the latter, if the debtor has insufficient attributes in the year the debt is forgiven, the excess will be carried forward indefinitely to reduce future attributes rather than generating FAPI.

Although this sounds comforting, taxpayers should be cautious respecting forgiveness of shareholder loans owing by a foreign affiliate, as the s. 15 rule trumps the FAPI debt forgiveness rules.

Taxpayers have a preference to apply forgiven amounts to reduce FAPLs rather than FACLs.

The definition of foreign accrual tax requires that the relevant foreign income tax reasonably be regarded as applicable to the subsection 91(1) amount. It is not obvious whether this condition could be met if foreign tax is paid on a forgiven amount that reduces the debtor's FAPLs or FACLs in a particular year and the debtor realizes FAPI in a future year as a result.

Neal Armstrong. Summaries of Mark Coleman, Daniel A. Bellefontaine, "Forgiveness, Foreign Affiliates and FAPI: a Framework," Resource Sector Taxation (Federated Press), Vol. X, No. 1, 2015, p.694 under s. 95(2)(g.1), s. 95(1) – foreign accrual property income, s. 15(1.2), and s. 95(1) – foreign accrual tax.