CRA indicates that GAAR applies to an avoidance of the debt forgiveness rules

In the same ruling referred to below, CRA indicated that the general anti-avoidance rule applied where a purchase by "ProfitCo" of the equity of "LossCo" from an arm's length vendor was structured so as to avoid the application of the debt forgiveness rules to some subordinated debt owing by LossCo to an affiliate of the vendor.  Before the sale, ProfitCo lent money to the vendor who invested that money in shares of LossCo, which then paid off the the sub debt.  The loan by ProfitCo to the vendor was then repaid by way of set-off against the purchase price for the vendor's shares of LossCo.  The effect of the transactions was that the vendor group received the sale proceeds mostly in the form of repayament of the sub debt (so that there was no debt forgiveness) rather than as equity sale proceeds.

CRA stated that these "transactions are essentially the same as transactions that the GAAR committee previously determined resulted in an abuse of section 80."

Neal Armstrong.  Summary of 2011 Ruling 2011-0392171R3 under s. 245(4).