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: Whether our position in document #E9208835 remains applicable.
Position: Yes.
Reasons: The gift of funds by a creditor to a debtor to allow the repayment of the debt is an indirect forgiveness of debt.
XXXXXXXXXX 2003-000248
P. Massicotte, CA, M.Fisc.
June 2, 2003
Dear XXXXXXXXXX:
Re: Debt Forgiveness
This is in response to your letter of February 6, 2003, in which you request we provide you with updated comments on the same fact pattern you presented to us in document #E9208835. In that document, you submitted a hypothetical situation whereby a farmer wished to transfer farm property to an adult child at fair market value taking back a promissory note as consideration. The father then made a gift to his child of enough funds to allow for repayment of the note. Specifically you ask us if section 80 or subsection 245(2) of the Income Tax Act (the "Act") would be applied to such transactions.
As mentioned in document #E9208835, the particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and proposed transactions. 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, as explained in Information Circular 70-6R5. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide you with the following general comments.
The debt forgiveness rules in section 80 of the Act 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 present situation, we assume the child's debt is a commercial obligation.
Although, as a result of the gift, the child's debt may be settled by the remittance of cash for an amount that is not less than the lesser of the principal amount of the obligation and the amount for which it was issued, it would appear that the transactions described above might reasonably be considered to be undertaken or arranged primarily to avoid the consequences of section 80 of the Act, which would otherwise apply on a straightforward forgiveness of the debt.
It remains our opinion, as indicated in document #E9208835 that such transactions may be subject to subsection 245(2) of the Act. However, as explained in paragraph 2 of Information Circular 88-2, General Anti-Avoidance Rule - Section 245 of the Income Tax Act, should you wish to obtain a binding opinion, the Canada Customs and Revenue Agency will issue advance rulings with respect to the application of the general anti-avoidance rule to proposed transactions where such a request is submitted in accordance with Information Circular 70-6R5.
We trust the above comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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