CRA reverses its position that forgiveness of an old trade debt generally will be on capital account
We have provided English-language summaries of the questions posed at the November 2, 2023 APFF Roundtable and commenced to translate the written answers (one at a time), which we should finish in about a week – after which we will turn to the APFF Financial Strategies and Instruments Roundtable held on Friday, November 3.
Q.1 concerned IT-293R, para. 25, which indicates that where the forgiveness of a trade debt (i.e., a debt incurred for a deductible expense) occurs in a taxation year subsequent to that in which it was incurred, any portion of the forgiven debt that did not relate to inventory of merchandise on hand at the beginning of that taxation year of forgiveness will not be included in computing income pursuant to s. 9 and instead will be subject to the usual statutory debt-forgiveness rules.
CRA announced that this position will cease to be applicable to debts settled or extinguished on or after November 2, 2023, stating that:
There is no established principle (or rule of law) in Canadian jurisprudence that provides that the nature of a debtor's trade debt or of a debtor's gain from the forgiveness of a trade debt changes automatically merely because of the passage of time in a taxation year or a number of taxation years.
It also referred to Alco Dispensing where Bonner J found that accrued bonuses did not change their character to being on capital account when forgiven and that “it was contrary to common sense … to assert that the passage of a year end effects some sort of a magical conversion of executive compensation operations from current account transactions to capital account transactions.”
This reference to Alco Dispensing suggests that CRA may now generally presume that the forgiveness of a trade debt, irrespective of timing, will result in a s. 9 inclusion, rather than this becoming yet another one of those “question of fact” issues.