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:
Debt parking rules 80.01- hypothetical situation
Position TAKEN:
Opinion given
Reasons FOR POSITION TAKEN:
Current legislation and technical notes
July 18, 1995
Vancouver District Office Headquarters
D. M. Luciuk S.J. Tevlin
Acting Director (613) 957-2746
Attention: Ted Fitz-Clarke
951761
Debt Forgiveness/Parking
We are writing further to your facsimile transmission of April 28, 1995 and our telephone conversation (Tevlin/Fitz-Clarke) of July 5, 1995 wherein you requested that we provide you with general comments as to whether the following hypothetical situation would be considered "debt parking" pursuant to subsections 80.01 (6), (7) and (8) of the Income Tax Act ("the Act").
Facts
1.Opco is owned 50/50 by individual X and ACo. X and ACo are not related.
2.Opco is indebted to ACo in the amount of $250,000. The debt is a "commercial debt obligation" as that term is defined in subsection 80(1) of the Act.
3.In addition X owns 100% of BCo.
4.Subsequently, BCo acquires from ACo both the 50% of the shares of Opco and the debt receivable of $250,000, for proceeds of $200,000 which can be fully attributable to the debt.
5.As a result of the transaction in 4 above, BCo owns 50% of the shares of Opco and has a loan receivable from Opco with a principal amount of $250,000 and a "specified cost", as that term is defined in subsection 80.01(1) of the Act, of $200,000.
In order to be a "parked obligation" certain conditions must apply:
(a) -the debt must be a "specified obligation" as that term is described in subsection 80.01(6) of the Act.
In the situation described above the debt acquired by BCo is a "specified obligation" since pursuant to subparagraph 80.01(6)(a)(ii) of the Act the debt obligation was acquired by BCo from ACo with whom BCo is not related.
(b) -and, the current holder of the debt does not deal at arm's length with the debtor, or where the debtor is a corporation, the current holder of the debt has a significant interest (as defined in subsection 80.01(2) of the Act) in the debtor.
BCo does not deal at arm's length with the debtor Opco and also as holder of 50% of the shares of Opco, has a "significant interest" in Opco. As such the second condition is met.
Therefore the debt obligation has become a "parked obligation".
(c) -under subsection 80.01(8) of the Act, at a particular time where a commercial debt obligation becomes a "parked obligation" and the specified cost at the particular time to the holder is less than 80% of the principal amount of the obligation, the obligation shall be deemed to have been settled at that particular time.
In the situation described above the specified cost of the debt obligation to BCo will not be less than 80% of the principal amount of the obligation and as such subsection 80.01(8) of the Act will not apply.
As noted in the explanatory notes to the legislation, "in applying the income tax law to acquisitions of debt to which subsection 80.01(8) does not apply, one of the issues that will be considered is the application of the general anti-avoidance rule".
We trust are comments will be of assistance to you.
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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