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 a change in the terms of a debt obligation would result in the disposition of original obligation and the creation of a new one.
Position: Question of fact
Reasons: The determination of whether a change in the terms of a debt obligation is a substitution of a debt obligation for another should be made in accordance with the law of the relevant jurisdiction. In the common law jurisdictions, a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms so as to substitute a new obligation in its place, which is entirely inconsistent with the old obligation or if not entirely inconsistent, inconsistent with it to an extent that goes to the very root of it.
XXXXXXXXXX 2000-005025
N. L. Storry
Attention: XXXXXXXXXX
December 18, 2000
Dear Sirs:
Re: Change in Terms of Convertible Debt Obligations
This is in reply to your letter dated October 5, 2000, wherein you requested our views as to whether a change in the terms of a debt obligation would result in a disposition of the existing obligation and the substitution of a new obligation in its place.
The particular circumstance in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.
It is our position that if a debt obligation is renegotiated otherwise than as provided for in its original terms, the determination of whether a change in its terms is a substitution of a debt obligation for another should be made in accordance with the law of the relevant jurisdiction. If, in accordance with the relevant contract law in Quebec, the changes in the terms of the original debt obligation have resulted in a novation (where the original debt obligation is discharged and substituted by a new obligation), it is appropriate to view the original obligation as having been disposed of for income tax purposes. In the other provinces, a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms so as to substitute a new obligation in its place, which is entirely inconsistent with the old obligation or if not entirely inconsistent, inconsistent with it to an extent that goes to the very root of it. In such a case, it is appropriate to view the original obligation as having been disposed of for income tax purposes. Determinations of this nature can only be made after a review of the relevant documentation and consideration of the law of the appropriate jurisdiction.
We trust these comments will be of assistance.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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