23 October 1995 External T.I. 9524575 - PARKED DEBT - IMPLICATIONS TO CREDITOR

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Gain on settlement of parked obligation - are deemed proceeds of settlement also applicable to the creditor?

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

Paragraph 80(2)(h) is only for the purpose of section 80 - no effect on the creditor for any other part of the Act.

						952457
XXXXXXXXXX					J.P. Dunn

Attention: XXXXXXXXXX

October 23, 1995

Dear Sirs:

Re: Section 80 of the Income Tax Act

We are writing in response to your correspondence of September 8, 1995 with respect to the application of section 80 of the Income Tax Act (the "Act").

More particularly, the situation contemplated in your letter is such that the provisions of subsection 80(2) of the Act have applied to a corporate debtor with respect to an interest bearing commercial debt obligation of that debtor which had become a "parked obligation" within the meaning of that term in subsection 80.01(7) of the Act. Subsequently, that obligation (the "prior obligation") is converted by the debtor to a non-interest bearing commercial debt obligation (the "new obligation") having an identical principal amount. Accordingly, pursuant to the provisions of paragraph 80(2)(h) of the Act, the debtor is deemed to have paid to the creditor upon the conversion and in satisfaction of the principal amount of the prior obligation, an amount equal to the principal amount of the new obligation.

With respect to the debtor, the payment deemed to have been made by the debtor pursuant to paragraph 80(2)(h) of the Act will be considered to be a payment, as contemplated by subsection 80.01(10), made by the debtor in satisfaction of the principal amount of the prior obligation and the debtor may be entitled to a deduction from income in accordance with the provisions of that subsection. We would also caution that subsection 80.01(10) of the Act provides that no deduction is available pursuant to that provision if it can reasonably be considered that one of the reasons that the obligation became a "parked obligation" was to have the subsection apply to the payment.

With respect to the creditor, we would note that the provisions of subsection 80(2) are, by virtue of the preamble thereof, limited in application to section 80 of the Act. Consequently, the payment deemed by paragraph 80(2)(h) of the Act to have been made by the debtor is solely for the purposes of section 80 and is not considered to be an amount received by the creditor for any other purpose of the Act.

We trust that this is the information which you require.

Section Chief
Leasing and Finance Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch