Debt forgiveness rules did not apply to forgiveness of a guarantee

CRA found that the debt forgiveness rules did not apply to the forgiveness of the obligations of an insolvent corporation (Canco) arising from its guarantee of the obligations of its non-resident subsidiary (Forco).  This guarantee obligation was not a "commercial debt obligation" as it (i) was not for borrowed money and (ii) was not payable to acquire property for the purpose of producing income.

Respecting the second point, Canco apparently would not have acquired through subrogation the debt owing by Forco even if it had paid on its guarantee and, in any event, debt owing by an insolvent company might not have satisfied the income-producing purpose test in s. 20(1)(c)(ii) (see Cal-Gas, cf. Lewisport).

Neal Armstrong.  Summary of 9 April 2014 Memo 2014-0519231I7 under s. 80(1) – commercial debt obligation.