21 March 2002 External T.I. 2001-0115305 - Debt Forgiveness and Cal. of Safe Income

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Computation of safe income and safe income on hand where section 80 applies.

Position: See response.

Reasons: The law.

XXXXXXXXXX 2001-011530

March 21, 2002

Dear XXXXXXXXXX:

Re: Debt Forgiveness and Calculation of Safe Income on Hand

This is in response to your letter dated December 11, 2001, wherein you requested our opinion on the impact of the debt forgiveness rules of section 80 of the Income Tax Act ("the Act") to a corporation's computation of "safe income on hand" for the purposes of section 55 of the Act.

In your letter, you ask whether a "forgiven amount", as defined in subsection 80(1) of the Act, gives rise to an increase to the amount of safe income on hand of the debtor corporation. You want to know if our response would be affected by the manner in which the forgiven amount is applied against the debtor corporation's tax attributes, such as the reduction of by the debtor corporation's non-capital losses, net-capital losses or capital cost and undepreciated capital cost ("UCC") of depreciable property. Moreover, you ask whether the recent decision of the Tax Court of Canada in Kruco Inc. v. The Queen, 2001 DTC 668 would have any bearing on our response.

Our Comments:

In order for an amount of income "earned or realized by a corporation after 1971" ("safe income") that is computed in accordance with the rules in paragraphs 55(5)(b), (c) or (d), to be considered as contributing to a capital gain on a share for the purposes of subsection 55(2) of the Act, such safe income must actually be on hand at the time and otherwise be available for distribution to the shareholder as a dividend (i.e. this is what is referred to as "safe income on hand").

In a recent roundtable question posed at the 2001 congrès de l'Association de planification fiscale et financière (as yet unpublished) the effect of section 80 on a debtor corporation's computation of safe income on hand was considered. In that response, we stated that, a forgiven amount, which is subject to subsection 80(3) during a given taxation year, affects the calculation of the debtor corporation's "non-capital loss" as defined in subsection 111(8) since it reduces a debtor corporation's non-capital loss that would otherwise be deducted in computing a corporation's safe income on hand if the taxation year in which the non-capital loss was incurred ended before the safe income determination time. We also stated that where a portion of the forgiven amount is included in computing the debtor corporation's income pursuant to subsection 80(13) (and consequently the debtor corporation's safe income), only the portion so included in the debtor corporation's income will increase that corporation's safe income on hand if the taxation year in which the settlement of the debt occurred ended before the safe income determination time.

Similarly, to the extent the application of a forgiven amount under paragraph 80(4)(b) reduces the debtor corporation's "net-capital loss", as defined in subsection 111(8), for a taxation year in which the net-capital loss was incurred and that ended before the safe income determination time, such reduction will also contribute to an increase of the amount of that corporation's safe income on hand.

It is also our view that, the portion of a forgiven amount that reduces the debtor corporation's capital cost and UCC pursuant to subsection 80(5) would indirectly contribute to an increase of the amount of that corporation's safe income on hand where the reduction occurs in a taxation year ending before the safe income determination time.

The above views are not affected by the Tax Court of Canada's recent decision in Kruco, which we are appealing.

Our comments are provided in accordance with the practice described in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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