5 June 1989 Ruling 57993 F - Meaning of "Amortized Cost"

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.

June 5, 1989

Dear Sirs:

Re:  Meaning of "Amortized Cost"

This letter is in response to your own of May 1, 1989 wherein you requested our views on the application of the term "amortized cost", as defined in subsection 248(1) of the Income Tax Act (Canada) (the "Act").

The Hypothetical Fact Situation

You have asked us to assume that the creditor corporation had, at an earlier time, advanced money to its subsidiary and that the debt, capital property to the creditor, subsequently became bad, so that the creditor was deemed by subsection 50(1) of the Act to have disposed of the debt and to have reacquired it immediately thereafter at a "cost" equal to nil.

We are also asked to assume that the subsidiary's fortunes have improved to the point that the debt is once again worth its face amount.  The creditor corporation transfers the debt into a "taxable Canadian corporation", as defined in paragraph 89(1)(i) of the Act, intending to utilize the provisions of subsection 85(1) of the Act on the transfer to affect the transfer on an income tax-deferred basis.

Your Observations

You noted in your letter that the application of paragraph 85(1)(c.1) of the Act would preclude an election at less than the lesser of the fair market value of the debt (in this example the principal amount outstanding) and the cost amount of the debt. As you noted, paragraph (e) of the definition of "cost amount" in subsection 248(1) of the Act provides that where property is a debt owing to the taxpayer the cost amount means the "amortized cost" of the property, or where the property does not have an amortized cost, the amount of the debt outstanding at the time.

Your Question

You wish our views on what the "amortized cost" of the debt would be.  More particularly, you wonder whether all of paragraphs (a), (b) and (c) of the definition of "amortized cost" in subsection 248(1) would apply in the situation put forth by you.

Your Position

You are of the view that

(i)      paragraphs (a), (b) and (c) of the definition of "amortized cost" are mutually exclusive;

(ii)     that paragraph (c) of the said definition is inapplicable on the assumed facts; and

(iii)      left with a choice of paragraphs (a) and (b) of the said definition, it seems more logical that paragraph (b), rather than (a), would be applicable.

Our Views

We agree with you that paragraphs (a) to (c) of the definition of "amortized cost" in subsection 248(1) of the Act are mutually exclusive, and we agree with you that paragraph (b), and not paragraph (a), of the said definition is applicable where a taxpayer, having made a loan, disposes of it (or is deemed to have disposed of it pursuant to the Act) and then acquires it (or is deemed to have acquired it pursuant to the Act).

As stated in paragraph 24 of Information Circular IC 70-6R dated December 18, 1978, the views expressed herein are not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch