CRA finds that s. 143.4(4) caused an immediate income inclusion of prior years’ interest that was to be forgiven at a later date under an approved Plan of Compromise

In Year 1 a Plan was approved which entailed a forgiveness of unpaid interest that had accrued in prior years. However, the Plan’s implementation did not occur until Year 2, when the stipulated conditions precedent were satisfied. Rather than s. 80 applying to the forgiven interest in Year 2, its amount was in CRA’s view included in the debtor’s income in Year 1 under s. 143.4(4). CRA found that:

[T]he Taxpayer’s right to reduce the Interest Debt … falls within the definition of a “right to reduce” in subsection 143.4(1) because it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable [i.e., that the conditions precedent would be thereafter satisfied].

CRA did not discuss whether there still would have been an s. 143.4(4) income inclusion, rather than an application of the debt forgiveness rules, if the Plan had been implemented in the same year. There is possibly a concern that CRA would consider that the debt forgiveness rules can never apply to the forgiveness of interest that accrued in a prior year unless there is no gap of time between the agreement to settle (whether or not subject to conditions) and the actual settlement.

Neal Armstrong. Summaries of 26 May 2016 Internal T.I. 2016-0628741I7 under s. 143.4(1) – right to reduce, s. 80(2)(a) and s. 20(1)(c)(i).