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:
Does Section 80 apply in a situation where a parent company makes a contribution of capital consisting of cash to its subsidiary which is then used by the subsidiary to repay a debt to a non-resident sister corporation. The Taxpayer also asked for comments with respect to GAAR.
Position:
Section 80 not likely to apply. General comments were provided with respect to GAAR. Following a meeting with the Policy Review Committee, it was decided that any existing technical interpretations discussing GAAR will be withdrawn
Reasons:
The amount is repaid in full by cash.
XXXXXXXXXX 2002-014100
Bob Naufal, CMA
September 9, 2002
Dear XXXXXXXXXX:
RE: Technical Interpretation - Section 80 and 245
This is in reply to your letter dated May 15, 2002 wherein you requested the Canada Customs and Revenue Agency's (the "CCRA") views on the application of Sections 80 and 245 of the Income Tax Act (the "Act"), with respect to a hypothetical situation described therein.
To briefly summarize the situation, a non-resident company owns 100% of the outstanding shares of a Canadian company ("Canco"). Canco is indebted ("NRO debt") to a non-arm's length non-resident-owned investment corporation ("NRO"). The principal amount of the NRO debt is greater than the value of the assets of Canco and the adjusted cost base of the NRO debt to NRO. An arm's length third party wishes to acquire the shares of Canco for an aggregate purchase price of approximately $10 - $15 million. As a precondition to the closing of the sale, the NRO debt must be repaid in full. Consequently, USco 2 is contemplating making a capital contribution to Canco equal to the NRO debt, and Canco in turn will pay the same amount to NRO, to repay and settle the debt.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Furthermore, it is the CCRA's practice to comment on the application of subsection 245(2) of the Act only after reviewing all the facts and circumstances of a transaction and after receiving a request for an advance ruling. As stated in paragraph 22 of Information Circular 70-6R5, written opinions are not advance tax rulings and, accordingly not binding on the Agency. The following comments are, therefore, of a general nature only.
The debt forgiveness rules of Section 80 apply when a commercial obligation of a debtor is settled without payment or by payment of an amount that is less than the lesser of the principal amount of the obligation and the amount for which it was issued. Commercial obligations are generally debt obligations incurred for the purpose of earning income from a business or property, and distress preferred shares.
In the situation described in your letter, Section 80 would not appear to apply, since the total debt will be repaid in cash.
Your concern regarding the potential application of the GAAR relates to a previous technical interpretation (No. 9518785) that described a situation whereby a subsidiary corporation ("subco") was indebted to its parent ("parentco"). To avoid the application of Section 80, parentco or a subsidiary of parentco would subscribe for shares in subco, who would use the funds to repay the debt owing. The technical interpretation concluded by stating that the transaction described therein would be an avoidance transaction and subsection 245(2) would apply. As stated earlier, it is the CCRA's practice to comment on the application of subsection 245(2) only after reviewing all the facts and circumstances of a transaction in the context of an advance tax ruling and that technical interpretations should not be provided in respect of the GAAR. Accordingly we wish to inform you that technical interpretation 9518785 will be withdrawn.
We trust that these comments will be of assistance.
Yours truly,
P. Lynch
Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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