CRA rules that the debt forgiveness rules do not apply to the transfer of a loan to the debtor on a redemption of its shares

In a simple loss-shift transaction, "Lossco" (a subsidiary) will make interest-bearing loans to its profitable Parent, and Parent will subscribe for prefs of Lossco. The subsequent unwinding transactions simply provide that Lossco will redeem the prefs by delivering those loans to Parent.

CRA ruled that this delivery of loans to the debtor would not give rise to a forgiven amount. This suggests that it is unnecessary in situations such as this to have a separate set-off agreement in which a previously created obligation to the shareholder for the redemption amount is then set-off against the loan owing by the shareholder.

As in the ruling summarized in the previous post, there was no borrowing-capacity rep.

Neal Armstrong. Summary of 2013 Ruling 2013-0498551R3 under s. 80(1) – forgiven amount.