31 October 1995 External T.I. 9518785 - SETTLEMENT OF DEBT BY ISSUE OF SHARES

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.

	 	    5-951878
XXXXXXXXXX                 	    J. Teixeira
(613) 957-8953

Attention: XXXXXXXXXX

October 31, 1995

Dear Sirs:

Re: Technical Interpretation

This is in reply to your letter of June 30, 1995, requesting an interpretation of the application of section 80 and subsection 245(2) ("GAAR") of the Income Tax Act (the "Act") to a particular situation. You have described a situation where a Canadian corporation ("Canco") is indebted to its U.S. parent ("Parentco") and proposes to issue shares to capitalize part of this debt. Canco is currently in a deficit position and has accumulated non-capital losses.

You have commented that the partial capitalization of Canco's debt would result in a "forgiven amount" as defined in subsection 80(1) of the Act. In order to avoid this tax consequence, you have proposed to carry out two courses of action which result in either the parent of Parentco or a subsidiary of Parentco subscribing for shares in Canco. Canco would then utilize the funds received on the issuance of its shares to repay part of its debt to Parentco. It is your opinion that section 80 and the Department's administrative position in IT-293R only address direct settlements and not indirect settlements of intercompany debt.

The situation described in your letter appears to relate to an actual fact situation related to a past transaction or to an actual proposed transaction. If the situation described relates to a past transaction the review of such transactions falls within the responsibility of the local tax services office where the taxpayer resides. If the situation described relates to an actual proposed transaction, it should be the subject of an advance income tax ruling. However, we can provide you with the following general comments regarding the issues raised in your letter.

Our Comments

The provisions of paragraph 80(2)(g) of the Act apply where the consideration for the settlement of the debt consists of a share or shares. Where the lesser of the amount for which the debt was issued or the principal amount of the debt exceeds the amount determined pursuant to paragraph 80(2)(g) of the Act it will result in a forgiven amount. The implementation of proposed transactions to avoid this result which may be reasonably considered to have not been undertaken for a bona fide purpose other than to obtain a tax benefit would be an avoidance transaction. In our opinion, the proposed transactions would result in an abuse having regard to the provisions of the Act and would not be exempted by virtue of subsection 245(4) of the Act. Accordingly, subsection 245(2) of the Act would be applied to deny the tax benefit and to treat the settlement of the debt on the basis that Canco issued its shares directly to Parentco.

The foregoing comments are not rulings and, in accordance with the practice referred to in Information Circular 70-6R2 dated September 28, 1990, are not binding on Revenue Canada.

Yours truly,

for Director
Reorganization and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

??