CRA rules on the avoidance of s. 80 on extinguishing intercompany debt of an insolvent company

CRA has ruled on a technique for avoiding the debt forgiveness rules on the conversion into preferred shares of intercompany debt owing by an under-water company (Opco).

The affiliated creditors transfer their Opco debt (with principal of $100 and a value of $1) to a Newco subsidiary of Opco (Subco) in exchange for pref of Subco having a value of $1.  As the debt so acquired by Subco is deemed by ss. 40(2)(e.1) and 53(1)(f.11) to have an adjusted cost base of $100, that debt can then be extinguished, on winding-up Subco into Opco, without the debt forgiveness rules applying (per the s. 80.01(4) rule).

Neal Armstrong.  Summary of 2012 Ruling 2011-0426051R3 under s. 80.01(4).