3 December 2002 External T.I. 2002-0170145 - UNPAID AMOUNTS

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: Application of subsection 78(1) of the Act to an amount that was previously forgiven under section 80.

Position: Subsection 78(1) of the Act cannot apply to an amount that has been previously forgiven under section 80.

Reasons: Subsection 78(1) requires that the amount be "unpaid". An amount that is a forgiven amount under section 80 is "settled or extinguished" and therefore, cannot be considered unpaid within the context of subsection 78(1).

XXXXXXXXXX Randy Hewlett, B.Comm.

2002-017014
December 3, 2002

Dear XXXXXXXXXX:

Re: Subsection 78(1) and Section 80 of the Income Tax Act (the Act)

We are writing in response to your letter of October 24, 2002, wherein you requested a technical interpretation on the interaction of subsection 78(1) and section 80 of the Act in a hypothetical situation.

In your letter, you describe the situation as follows:

? ACO is a Canadian-controlled private corporation that made a purchase which was a deductible outlay or expense in its December 31, 2001 taxation year (the "purchase").

? The purchase was from a non-resident person with whom ACO was not dealing at arm's length.

? ACO did not provide any consideration to the non-resident person for the purchase.

? At the end of ACO's December 31, 2002 taxation year, the non-resident person forgave the entire amount of the purchase.

? The entire amount of the purchase is considered a "forgiven amount" within the meaning of that term in subsection 80(1) of the Act. Accordingly, under the debt forgiveness rules in section 80 of the Act, ACO's various tax pools are reduced.

You are concerned that subsection 78(1) of the Act could also apply to include the entire amount of the purchase in ACO's income in the 2004 taxation year because it remains unpaid at the end of the 2003 taxation year. In your view, this would be an "unintended" result under the Act since section 80 has previously applied to the entire amount of the purchase. You feel that subsection 248(28) of the Act should apply to prevent the "double taxation".

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Subsection 78(1) of the Act applies where an amount in respect of a deductible outlay or expense, that was owing by a taxpayer to a person with whom the taxpayer was not dealing at arm's length at the time the outlay or expense was incurred, is "unpaid" at the end of the second taxation year following the taxation year in which the outlay or expense was incurred. The debt forgiveness rules in section 80 of the Act only apply to amounts in respect of debts or obligations that are "settled or extinguished". To be considered a debt or obligation that is settled or extinguished, all liability for payment must be terminated. Accordingly, it is our view that when the amount of a debt or obligation arising from a deductible outlay or expense, is subject to the debt forgiveness rules before the end of the second taxation year following the taxation year in which the outlay or expense was incurred, the amount is not considered "unpaid" for purposes of subsection 78(1) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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