Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether the Debt Forgiveness Rules can apply on the Winding-up of a corporation under subsection 88(2).
Position: General Comments.
Reasons: Question of fact and not enough information provided.
XXXXXXXXXX 1999-001458
B. Kerr
Attention: XXXXXXXXXX
February 23, 2000
Dear Sirs:
Re: Debt Forgiveness
This is in response to your letter of December 2, 1999, wherein you requested our views on whether the winding-up of a corporation under subsection 88(2) of the of the Income Tax Act (the "Act") would result in the forgiveness of debt.
You described a situation involving a corporation that has minimal cash as its only asset and a significant liability to its sole shareholder. The shareholder, an individual, wants to wind-up the company.
The situation outlined in your letter involves an actual fact situation relating to a proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC-70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.
The debt forgiveness rules generally apply when a commercial obligation of a debtor is settled for an amount which is less than the lesser of the principal amount of the obligation and the amount for which it was issued. It is a question of fact whether any particular debt is a commercial obligation within the meaning of subsection 80(1) of the Act or whether a debt has been settled.
Under the provisions of subsections 80(3) to 80(12), the "forgiven amount" is applied to reduce various tax accounts of the debtor, including non-capital losses, net-capital losses, and capital cost of depreciable assets. Three-quarters of the remaining forgiven amount after the application of these provisions is included in the debtor's income by virtue of subsection 80(13) of the Act.
Section 61.3 of the Act provides a deduction for certain insolvent corporations to offset the income inclusion under subsection 80(13) of the Act. The amount of the deduction is dependent on the net-assets of the corporation.
We trust that these comments will be of assistance.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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