30 August 2004 External T.I. 2003-000135

The only significant asset of FA2 is a loan receivable of $100 owing by its parent, FA1, which is a wholly-owned foreign affiliate of Canco. When the $100 debt is extinguished for less than its principal amount on a winding-up of FA2 into FA1, fapi is realized by FA1 by virtue of ss.15(1) and (1.2) assuming that FA2 does not actually carry on a business and given that the benefit conferred by FA2 on FA1 is a direct result of the settlement of the $100 note and not of the redemption or cancellation of the shares of FA2 on its dissolution. To the extent of the inclusion under s. 15(1), there would be a corresponding reduction in any "forgiven amount" for s. 80 purposes (provided that the $100 note was not considered to have been used by FA1 for a business use as a result of the application of s. 95(2)(a)(ii)(D)).

A grandchild foreign subsidiary of Canco ("FA2") is wound-up into an immediate foreign subsidiary of Canco ("FA1") at a time that a note owing by FA2 to FA1 exceeds the asset value of FA2 net of other liabilities. The Directorate commented:

"If the fair market value of the FA1 Note at the time it is settled is less than the lesser of the principal amount of the FA1 Note and the amount for which the FA1 Note was issued, section 80 of the Act could apply if, had interest been paid or payable by FA1 to FA2 in respect of the FA1 Note, clause 95(2)(a)(ii)(D) of the Act would not apply. With respect to the application of section 80 and paragraph 95(2)(g.1) of the Act, it is our view that the FA1 Note is a 'commercial debt obligation' within the meaning assigned under subsection 80(1) of the Act unless, had interest been paid or payable in respect of the FA1 Note, such amount of interest would have been deemed to be nil for the purposes of computing foreign accrual property income ("FAPI") of FA2 under descriptions A and D of the definition of FAPI ...."

The only significant asset of FA2 is a loan receivable of $100 owing by its parent, FA1, which is a wholly-owned foreign affiliate of Canco. The $100 note would be a commercial debt obligation for s. 80 purposes.