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.
Principal Issues:
Whether there is "forgiven amount" for purposes of new section 80 when one commercial debt obligation is exchanged for another commercial debt obligation having a principal amount and terms identical.
What if the principal amount is the same but the terms change. ie: will there be a FMV determination as per our R\T #4 1987 CTC.
Position TAKEN:
No forgiven amount in situation described in question.
Reasons FOR POSITION TAKEN:
Subparagraph 80(2)(h)(i) of the proposed amendments to section 80 states that where a new commercial debt obligation is issued by the debtor as consideration for the settlement of a particular commercial debt obligation an amount equal to the principal amount of the new obligation shall be deemed to be paid by the debtor at that time in satisfaction of the principal amount.
The key definition in new section 80 is "forgiven amount". The interaction of the definition and subparagrpagh 80(2)(h)(i) is such that where the amount that is deemed to have been paid at the time of the exchange in satistisfaction of the principal amount of the obligation is equal to the lessor of the amount for which the original obligation was issued and the principal amount of that obligation, there will be no forgiven amount for purposes of section 80. The result would apply whether or not certain terms of the debt obligation have changed. As to whether such changes in terms would result in a disposition of the original debt obligation is a question of fact.
The new obligation is considered to have been issued for an amount equal to the amount, if any, by which the principal amount of the new obligation exceeds the amount, if any, by which
-the principal amount of the new obligation exceeds
-the amount for which the particular obligation was issued.
As such the original principal amount is preserved for purposes of determining a forgiven amount with respect to new obligation in the future.
Proposed paragraph 80(2)(b) of the draft legislation states that any interest payable by a debtor in respect of an obligation issued by the debtor shall be deemed to be an obligation issued by the debtor that has a principal amount and was issued by the debtor for an amount. Therefore, if on the issue of the new debt obligation there is no consideration given in satisfaction of that deemed principal amount, it is our view that there would be a forgiven amount in respect of that obligation.
Revenue Canada Round Table
Alberta CICA
Question 4
DEBT FORGIVENESS
For purposes of the draft legislation relating to section 80 of the Income Tax Act, will there be a "forgiven amount" where a commercial debt obligation which was issued for an amount equal to its principal amount is settled in exchange for another commercial debt obligation having the same principal amount?
What if certain terms of the new commercial debt obligation, other than the principal amount, do not correspond to the previously issued commercial debt obligation?
Department's Position:
Subparagraph 80(2)(h)(i) of the proposed amendments to section 80 states that where a new commercial debt obligation is issued by the debtor as consideration for the settlement of a particular commercial debt obligation, an amount equal to the principal amount of the new obligation shall be deemed to be paid by the debtor at that time in satisfaction of the principal amount.
Where subparagraph 80(2)(h)(i) deems an amount to have been paid at the time of the exchange in satisfaction of the principal amount of the obligation and that amount is equal to the lessor of the amount for which the original obligation was issued and the principal amount of that obligation, there will be no "forgiven amount", for purposes of new section 80. This result would apply whether or not certain terms of the debt obligation have been amended.
Pursuant to subparagraph 80(2)(h)(ii) the new obligation is considered to have been issued for an amount equal to the amount, if any, by which the principal amount of the new obligation exceeds the amount, if any, by which
- the principal amount of the new obligation exceeds
- the amount for which the particular obligation was issued.
As such the original principal amount is preserved for purposes of determining a forgiven amount with respect to new obligation in the future.
Proposed paragraph 80(2)(b) of the draft legislation states that any interest payable by a debtor in respect of an obligation issued by the debtor shall be deemed to be an obligation issued by the debtor that has a principal amount and was issued by the debtor for an amount equal to the portion of such amount that was or would but for subsection 18(2) or (3.1) or section 21, have been deductible by the debtor. Therefore, if there is a deemed obligation with respect to interest payable on the original obligation it will be necessary to determine whether there has been a forgiven amount on the exchange.
Author:S.J. Tevlin
File:7-951210
Date:May 24, 1995
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