9 February 1996 External T.I. 9600735 - FORGIVENESS OF DEBT

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:

Forgiveness of debt over time

Position:

Section 80 applies and cost base is reduced

Reasons:

Scheme of the Act

									960073
XXXXXXXXXX							C. Tremblay

February 9, 1996

Dear Sir:

Re: Forgiveness Of Debt

This is in reply to your letter of December 13, 1995, requesting our opinion on the application of the Income Tax Act (the "Act") to a situation wherein parents who own all the shares of a corporation will sell the shares to their adult children for an interest bearing note and then forgive the note over the next five years.

The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Paragraph 69(1)(b) of the Act applies where a person has disposed of anything to a person with whom the taxpayer was not dealing at arm's length for proceeds of less than fair market value. Whether or not a sale is at fair market value is a question of fact. If the sale is not at fair market value, the seller will be deemed to have received proceeds of disposition equal to fair market value and if the purchaser has acquired the property by way of gift, the purchaser would be deemed to have acquired the property at fair market value which would become his adjusted cost base at the date of acquisition.

Where property is sold for a note with the intention that the commercial debt obligation will be forgiven over a period of time, in our opinion, section 80 would apply. In its application, section 80 of the Act may reduce the adjusted cost base of the property of the debtor.

Generally, a taxpayer (other than a taxpayer to whom subsection 12(3)of the Act applies) who holds an interest in an investment contract, shall include in computing his income for the year the interest that accrued to him to the end of the anniversary day of the contract, to the extent that the interest was not otherwise included in computing the taxpayer's income for the taxation year or any preceding taxation year. Thus in our view, the creditor must, pursuant to subsection 12(4) of the Act, include in income the amount of interest receivable pursuant to the debt obligation. The creditor may however claim a bad debt on the unpaid interest in the year the debt is established to have become a bad debt.

The above comments are only expressions of opinion on the application of the Income Tax Act generally and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

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