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.
Principal Issues: Gifting of promissory note to son for no proceeds - consequences
Position: 69(1)(b) issue
Reasons: Scheme of the Act
2004-008570
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
November 3, 2004
Dear XXXXXXXXXX,
This is in reply to your letter of July 14, 2004 wherein you ask us whether the provisions of section 80 or any other section of the Income Tax Act (the "Act") would apply to the situation you describe in your letter.
You describe a situation where corporation A (we assume that all the shares are owned by C) purchases the assets and goodwill of a proprietorship from B (B is the father of C). B takes back a promissory note from corporation A of $200,000. Shortly, thereafter, B gifts his promissory note to C. The result is that now corporation A owes C the promissory note.
The particular circumstance in your letter on which you have asked for our views is a factual situation. As explained in Information Circular 70-6R5 issued by Canada Revenue Agency ("CRA"), 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. Although we are unable to provide any binding assurance with respect to the interpretations requested, we do provide the following general comments for your information.
In order for section 80 of the Income Tax Act (the "Act") to apply there must be a "forgiven amount", as that term is defined in subsection 80(1) of the Act, resulting from a settlement or extinguishment of an obligation. It would appear, in your situation, that there has been no settlement or extinguishment of the obligation since corporation A still owes on the promissory note. Further, the note does not appear to be a specified obligation in relation to the debt parking rules in subsections 80.01(6) and (7) of the Act.
However, paragraph 69(1)(b) of the Act may have application with respect to the non-arms length transfer. Please see the comments in paragraph 3 of Interpretation Bulletin IT-405 in this regard.
Paragraph 40(2)(e.1) of the Act may also apply. Paragraph 40(2)(e.1) of the Act provides that the loss from the disposition of certain indebtedness is considered to be nil where the transferor and the transferee are related to each other.
We trust our comments are of assistance.
Yours truly,
Steve Tevlin
For Director
Financial Industries Division
Income Tax rulings Directorate
Policy and Planning Branch
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