3 June 1992 Income Tax Severed Letter 9130405 - Intercorporate Debt on Amalgamation

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: INTERCO DEBT ON AMALGAMATION SECTION: 80(2), 20(1)(p)]

913040
M.P. Sarazin
(613) 957-2118

June 3, 1992

Dear Sirs:

Re: Subsection 80(2) of the Income Tax Act (the "Act")

This is in reply to your letter of October 31, 1991 wherein you requested our comments on the application of subsection 80(2) of the Act in the situation where a debtor corporation and a creditor corporation amalgamate and prior to the amalgamation the creditor corporation had previously claimed a deduction under paragraph 20(1)(p) of the Act with respect to a debt owing by the debtor corporation to the creditor corporation.

Your Views

Pursuant to the provisions of subsection 80(2) of the Act, the debt is deemed to have been settled immediately prior to the amalgamation for an amount that would have been the creditor corporation's cost amount of the debt at that time if the definition "cost amount" in section 248 of the Act were read without reference to paragraph (e) thereof. You are of the view that the amount at which such trade debt is deemed to have been settled for purposes of subsection 80(2), in the above situation, is not entirely clear. If the definition of "cost amount" in section 248 is read without reference to paragraph (e) thereof then you believe that paragraph (f) would be applicable in the determination of the settlement amount and, if so, you query whether the deduction previously claimed by the creditor corporation would reduce the cost amount.

If the deduction previously claimed does, in fact, reduce the cost amount of the trade debt then the cost amount of the trade debt for purposes of subsection 80(2) would be nil and subsection 80(1) of the Act would apply to the debtor corporation. Otherwise, the cost amount would equal the original principal amount and the creditor corporation would have to include in its income, pursuant to paragraph 12(1)(i) of the Act, an amount equal to the amount previously claimed under paragraph 20(1)(p) of the Act.

Comments

Since a trade debt held by a creditor corporation would usually be a capital property unless the creditor corporation is in the business of lending money, we are of the view that the cost amount, for the purposes of subsection 80(2) of the Act, would be determined in accordance with paragraph (b) of the definition "cost amount" in section 248 of the Act. Therefore, the cost amount would be its adjusted cost base at that time. Pursuant to paragraph 53(2)(m) of the Act, the amount previously claimed by the creditor corporation, under paragraph 20(1)(p) of the Act, would be deducted in the computation of the creditor corporation's adjusted cost base of the trade debt.

When the debtor corporation and creditor corporation amalgamate, the provisions of subsection 80(2) of the Act would apply so that the debt would be deemed to be settled or extinguished immediately before the time that is immediately before the amalgamation by a payment made by the debtor corporation and received by the creditor corporation of an amount equal to the creditor corporation's cost amount. Therefore, the debt would be deemed to have been settled immediately before the amalgamation for an amount equal to the adjusted cost base of the debt and the provisions of subsection 80(1) of the Act would apply to the debtor corporation.

The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to different conclusions. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch