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:
What is the "amount paid" within the meaning of the term "forgiven amount" where debt of a partnership is settled in exchange for an interest in the partnership
Position:
Equal to the amount of cash the partnership would be entitled to receive on the admission of a new partner but gave up in return for a settlement of the obligation
Reasons: Case law / use of words "amount paid", and not "amount or value received"
2003-002581
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 941-1722
September 3, 2003
Dear XXXXXXXXXX:
Re: Issuance of Partnership Units in Settlement of Debt
We are writing in reply to your letter dated June 18, 2003 wherein you requested our views on income tax consequences where a commercial debt obligation of a partnership is settled by the issuance of partnership units to the former creditor. For the purposes of this enquiry, we have assumed that none of the existing partners of the partnership is the former creditor.
Written confirmation of the consequences 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. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
The term "forgiven amount" is defined in subsection 80(1) of the Income Tax Act (the "Act"):
""forgiven amount" at any time in respect of a commercial obligation issued by a debtor is the amount determined by the formula
A - B
where A is the lesser of the amount for which the obligation was issued and the principal amount of the obligation, and
B is the total of
(a) the amount, if any, paid at that time in satisfaction of the principal amount of the obligation, etc."[emphasis added]
In our view, the "amount paid" by the partnership when it's debt was retired in exchange for the issuance of partnership units is equal to the amount of cash the partnership would be entitled to receive on the admission of a new partner but gave up in return for a settlement of the obligation. Of course, such a transaction may, as a consequence of the application of provincial law or the partnership agreement, result in dissolution of the old partnership, the disposition by all former partners of their partnership interests in the old partnership, and the formation of a new partnership.
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 CCRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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