17 October 1995 External T.I. 9524035 - S 80 AND THE FORGIVENESS OF INTEREST PRIOR TO MAY 9,1985 SECTION 80

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:

What was the Department's position with respect to the forgiveness of interest for a debt extinguished or settled prior to May 9, 1985 and the introduction of subsection 80(4).

Position TAKEN:

The Department's position was that section 80 did not apply to the forgiveness of interest and such a forgiveness would not be considered a trading receipt to the debtor in the year the debt was forgiven.

Reasons FOR POSITION TAKEN:

ITA, IT-293 at the time, definition of principal amount, decision summary and legal opinion.

		5-952403
XXXXXXXXXX	M.P. Baldwin

Attention: XXXXXXXXXX

October 17, 1995

Dear Sirs:

Re: Forgiveness of Interest

This is in reply to your letter of September 5, 1995 in which you requested our position with respect to the issue of forgiveness of interest for a debt settled or extinguished prior to May 9, 1985 and the introduction of subsection 80(4) of the Income Tax Act (the "Act").

Prior to May 9, 1985, section 80 of the Act provided that where a debt or other obligation of a taxpayer was settled or extinguished without any payment (or by payment of a lesser amount) the amount by which the principal amount of the debt exceeds the amount paid, if any, is applied against carried forward losses and the cost of different property.

Principal amount was further defined in subsection 248(1) as:

"principal amount" in relation to any obligation, means the amount that, under the terms of the obligation or any agreement relating thereto, is the maximum amount or maximum total amount, as the case may be, payable on account of the obligation by the issuer thereof, otherwise than as or on account of interest or as or on account of any premium payable by the issuer conditional upon the exercise by the issuer of a right to redeem the obligation before the maturity thereof;"

Also, the Department had stated in paragraph 22 of Interpretation Bulletin IT-293R that:

"Section 80 only applies where the amount paid is less than the principal amount of the debt or obligation. Since the definition of "principal amount" in subsection 248(1) specifically excludes interest, section 80 is not applicable to the forgiveness of interest."

Accordingly, the Department's position, prior to May 9, 1985 and the introduction of subsection 80(4), was that section 80 did not apply to forgiveness of interest and such a forgiveness would not be considered a trading receipt to the debtor in the year the debt was forgiven.

However, the Department was also of the opinion that the debtor was not entitled to any deduction in the year the debt was forgiven for accrued interest on the forgiven loan, as such amount was not in fact payable at the end of the year since both the loan and accrued interest were forgiven. An accrual that is in fact not a liability would not be deductible under the general rules for computation of income in section 9 of the Act. More specifically, accrued interest, which would be deductible only by virtue of paragraph 20(1)(c) of the Act, would not be deductible in these circumstances, since there is no longer "borrowed money", as required by that paragraph.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch