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.
Whether, the debt forgiveness rules (section 80) apply where a person converts a loan receivable from a limited partnership into additional partnership capital.
Depends on the specific facts.
Reasons FOR POSITION TAKEN:
Adjustment to ACB
A formal conversion of debt by a partner will result in an addition to the ACB of the partner's interest pursuant to subparagraph 53(1)(e)(iv) of the Act. If the "contribution"/ "proceeds of disposition" equals the principle amount of commercial debt obligation there would not be any "forgiven amount". The amount of the "proceeds of disposition" and "contribution" would be questions of fact.
If the "contribution"/ "proceeds of disposition" is less than the "principal amount" of the commercial debt obligation, section 80 could apply with respect to the settlement of a debt owed by a partnership to a partner. However, the type and extent of a person's involvement in the business of the partnership is relevant in making this determination.
Where the "contribution" is less than the principal amount
If partner is "active" member as defined in 80(1)(k) of the definition of "forgiven amount", the forgiven amount is nullified such that section 80 will not apply.
Where the partner is "inactive", section 80 will apply.
P. Diguer CGA
June 23, 2003
Re: Section 80 of the Income Tax Act (Canada) (the "Act")
This is in reply to your e-mail dated May 23, 2003, in which you request our views on the application of section 80 of the Act (the "debt forgiveness rules") in the situation where a person converts a loan receivable from a limited partnership into additional partnership capital.
In particular, you describe a situation where a limited partnership has borrowed money (the "Loan") from a person (the "Partner"). The Partner is an inactive member of the partnership. The Loan is a "commercial debt obligation" as defined in subsection 80(1) of the Act. The partnership converts the Loan into additional partnership capital of the Partner.
In your view, paragraph 80(1)(k) of the definition of a "forgiven amount" in the Act does not apply to a limited partner who is inactive in the affairs of the partnership. Moreover, paragraphs 80(2)(g) and (g.1) of the Act apply where a corporation issues shares as consideration for the settlement of debts, however there does not appear to be a similar provision for the settlement of a debt by a partnership where the partnership converts the loan by an inactive partner into additional partnership capital.
How do the debt forgiveness rules in section 80 of the Act work in this situation?
The situation that is described in your letter appears to involve a series of actual completed transactions involving specific taxpayers. Written confirmation of the tax consequences inherent in particular transactions are 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 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant tax services office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you.
It is a question of fact as to whether a commercial debt obligation has been settled or extinguished for an amount that is less than the principal amount.
It is not evident from your request whether there is in fact a forgiven amount for purposes of the debt forgiveness rules. Additionally, it is not indicated whether the debt is held by the Partner on income account or capital account.
Adjusted cost base adjustment - subparagraph 53(1)(e)(iv)
Generally, a debt owing to a partner would be capital in nature and the provisions of subdivision c of the Act would apply. As such, a formal conversion to partnership capital of a debt owed by a partnership to a partner would result in an addition to the adjusted cost base of the partner's interest pursuant to subparagraph 53(1)(e)(iv) of the Act. The amount of the "proceeds of disposition" and "contribution" would be a question of fact.
If the amount of the "contribution" added to the adjusted cost base of the partner's interest as described above is less than the "principal amount" of the settled commercial debt obligation owed by the partnership to the partner, section 80 of the Act could apply with respect to the settlement of this debt by the partnership.
However, a partnership is a relationship between persons carrying on business for profit and in this regard Parliament has enacted legislation that makes the type and extent of a person's involvement in the business of the partnership relevant in determining whether section 80 of the Act will apply where the debtor is a partnership and an obligation payable to a member of the partnership is settled.
Active partner / Inactive partner
Where a commercial debt obligation owed by a partnership to a partner is settled and the debtor is a partnership and the obligation is payable to a member of the partnership:
Where the said member of the partnership is actively engaged, on a regular, continuous and substantial basis, in the partnership activities as described in paragraph 80(1)(k) of the definition of "forgiven amount", the forgiven amount determined by the formula set out therein is nullified. As a consequence, section 80 of the Act would not apply.
Where the said member of the partnership is not an "active" member of the partnership such that the forgiven amount is not nullified by paragraph 80(1)(k) of the definition of "forgiven amount" as described above, in our view, the provisions of section 80 of the Act will apply to the debtor partnership.
Where a forgiven amount results from a settlement of a commercial debt obligation issued by a partnership, (i.e. where a debt owing by a partnership to an inactive partner is settled for less than the principle amount as described above) subsection 80(15) of the Act provides for an alternate treatment of the said forgiven amount. Partners may decide either to include their share of the amount determined under subsection 80(13) of the Act in their income (determined at the partnership level) or they may pursuant to subsection 80(15) of the Act treat their share of the amount as if it was their own commercial debt obligation that is deemed to have been settled. In this situation, the particular partner's tax attributes will be reduced in accordance with the provisions of section 80 of the Act.
The purpose of subsection 80(15) of the Act is to provide relief for members of a partnership, in recognition of the fact that a partner may well have undeducted loss carry-forwards and resource expenditure pools that are attributable to activities of the partnership. The forgiveness of an obligation that is deemed to arise for a partner is treated in the same manner as a forgiven amount in respect of an obligation issued by the debtor would be treated.
In addition, special rules are provided with respect to partnership obligations under paragraphs 80(2)(n) of the Act [i.e. loans negotiated by partners on behalf of partnership] and (o) [joint and several obligation can be severed as one party settles its share] and subsection 80(18) of the Act [limitation on reduction of ACB].
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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