9 March 2005 External T.I. 2005-0113051E5 - Debt Parking and Shareholder loans

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: Is a shareholder loan debt of a CCPC written off by the creditor-shareholder under subsection 50(1) considered a "parked debt"

Position: Yes

Reasons: Wording of 80.01(6)(b) and 80.01(7)(b) and 80.01(8)

XXXXXXXXXX 							2005-011305
C. Tremblay, CMA
(613) 957-2139
March 9, 2005

Dear XXXXXXXXXX:

Re: Parked Debt

This is in reply to your letter of January 10, 2005, regarding the above-noted subject. You specifically ask whether a shareholder loan, which represents a debt of a CCPC that has been written off by the creditor-shareholder as a business investment loss under paragraph 39(1)(c) of the Act pursuant to the bad debt recognition provided by subsection 50(1) of the Act is considered a "parked debt" under the debt forgiveness rules of section 80 of the Act.

You are concerned that double taxation could result should any amount be realized on the debt in a year subsequent to the taxation year the debt was deducted as a business investment loss by the shareholder-creditor. As you point out, any amount realized on the debt would be included as a capital gain to the shareholder for that year while the corporation may have included an amount in income under subsection 80(13) of the Act in the year the debt became a "parked debt".

Finally, you ask us to consider that instead of writing the loss off pursuant to subsection 50(1) of the Act, the consequences of selling the debt arm's length for nominal consideration (which is the fair market value).

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following general comments, which may be of assistance.

Generally, the debt parking rules will apply when a debt obligation is settled. The debt parking rules under subsection 80.01(8) of the Act will only apply once there is a change in status with respect to the debt.

Under subsection 50(1) of the Act, debts established to have become bad debts by the creditor are deemed to have been disposed of by the creditor for no proceeds and to have been reacquired at a cost of nil. For purposes of the "debt parking" rules an obligation is considered to be a specified obligation pursuant to subsection 80.01(6) of the Act after the obligation is deemed to have been reacquired pursuant to subsection 50(1) of the Act. Where the obligation issued by the debtor is a specified obligation and the creditor and debtor do not deal at arm's length the obligation will be a parked obligation pursuant to subsection 80.01(7) of the Act. Subject to the specified cost test in subsection 80.01(8) of the Act there will be a deemed settlement of the obligation.

However, subsection 50(1) of the Act only applies to bad debts on an elective basis. A creditor may decide not to elect under subsection 50(1) of the Act to claim a bad debt if the election would result in the application of subsection 80.01(8) of the Act to a debtor in which the creditor had a significant interest or with whom the creditor did not deal at arm's length.

Generally, while we agree that the debt forgiveness rules will not apply where a shareholder-creditor sells the debt to an arm's length person for nominal consideration if the consideration represents fair market value, it is a question of fact whether the parties to such an arrangement are truly dealing at arm's length.

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 Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments will be of assistance to you.

Yours truly,

Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch