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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Subject: FORGIVENESS OF DEBT Section(s): 80]
February 25, 1992
L.H. Delorme Corporate
Chief, Audit Division Reorganizations I
Saskatoon District Office D. Yuen
(613) 957-8967
Attention: Ms. R. Speiser
Business Audit Section
XXX
This is in response to your memo of July 12, 1991 wherein you requested our views on the application of section 80 of the Income Tax Act (the "Act") in a certain situation.
XXX
The Business Equity Valuations Section of the Calgary District Office provided an opinion that the preferred shares had a nil fair market value because the preferred shares did not have either a redemption value or a par value.
Your Questions
- 1. Would these transactions be considered the settlement or extinguishment of a debt or obligation?
- 2. Paragraph 11 of Interpretation Bulletin IT-293R states that where a debtor corporation issues its own shares to a creditor in settlement of a debt, section 80 of the Act will apply where the fair market value of the shares is less than the principal amount of the debt. Would this position apply in the above situation?
- 3. If section 80 of the Act does not apply in this situation, would we consider the transactions to be offensive and what other provisions of the Act would be applicable?
Our Replies
- 1. It is our view that the words "settled or extinguished" as used in section 80 of the Act mean the final extinguishment of a debt by any legal means such as payment, cancellation, set-off, substitution of debtors and release. Whether there has been such a final extinguishment of the debts in question must be determined based on all the relevant circumstances.
It is our understanding that, with one exception, all of the relevant circumstances here would support a finding that there was no settlement or extinguishment of the debts: the parties did not enter into any written agreements to convert the debts to shares; there were no corporate minutes evidencing any such conversions; no share certificates were ever issued; and the creditor corporations did not reflect any such conversions on their financial statements or tax returns (in particular we understand that the creditor corporations did not claim any loss in respect of a settlement or extinguishment of the debts owing to them).
The only evidence to indicate that the debts were converted to shares appears to be the financial statements of the debtor corporations. The taxpayers now apparently maintain that the financial statements were in error and that they misrepresented the true nature of the transactions between the corporations.
The courts have held that the financial accounting treatment given to a transaction is not determinative of the income tax treatment to be given to the transaction, if the accounting treatment is in error. (see, for example Thibault v. M.N.R., 63 DTC 76 and Desbarats v. M.N.R., 65 DTC 227).
Accordingly, it is our view that if the financial statement treatment was the only evidence of a settlement of the debts, and you are satisfied with the taxpayers' explanation that those financial statements were in error, it cannot be said that the debts were settled or extinguished. If that is the case, section 80 of the Act would not apply.
- 2. If it is your view, on the basis of some other evidence, that a settlement of debts has taken place, the provisions of subsection 80(1) of the Act and the comments in paragraph 11 of Interpretation Bulletin IT-293R would be applicable.
- 3. If it is your view that there has been no settlement of debts such that the provisions of subsection 80(1) of the Act are not applicable, it is our view that no other provisions of the Act would be applicable in the circumstances.
Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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