28 March 1996 Internal T.I. 9604937 - SECTION 80 OF THE ACT

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:

Section 80 of the Act and application of paragraphs 80(2)(g) and 80(2)(g.1)

Position:

Gave general position on application of above noted paragraphs.

Reasons:

The above noted paragraphs should apply however in certain circumstances, based on facts, there will be no forgiven amount.

								March 28, 1996

	Vancouver T.S.O.				Headquarters
	Client Assistance Directorate		Mary Pat Baldwin
	1166 Pender Street				(613) 957-8953
	12th Floor, Section 471-50
	Attention: Mr. Brian Kennedy

								7-960493

Technical Interpretation on Section 80 of the Income Tax Act

This is in reply to your facsimile of February 5, 1996 in which you sent us a copy of a letter from XXXXXXXXXX requesting a technical interpretation on paragraph 80(2)(g) of the Income Tax Act (the "Act") and how it relates to a particular fact situation.

The situation described in the letter is an actual fact situation and as noted in paragraph 21 of Information Circular 70-6R2, the district tax services offices are responsible for providing written opinions on completed transactions. However, we can offer the following general comments which should help you respond to the clients.

The provisions of paragraph 80(2)(g) of the Act as noted in the above noted letter only apply to taxation years ending prior to February 22, 1994. Pursuant to proposed amendments to subsection 80(2)(g) of the Act, for taxation years that end after February 21, 1994, subsection 80(2) of the Act is amended so that paragraph 80(2)(g) is split off into proposed paragraphs 80(2)(g) and 80(2)(g.1) of the Act.

In order for section 80 of the Act to apply there has to be a forgiven amount. In general the forgiven amount, at any time, in respect of a commercial obligation issued by a debtor is determined by the formula A - B, where

Ais the lesser of the amount for which the obligation was issued and the principal amount of the obligation and,

Bis the aggregate of nine different elements, one of which is:

(a) the amount, if any, paid at the time in satisfaction of the principal amount of the obligation.

Pursuant to proposed paragraphs 80(2)(g) and 80(2)(g.1) of the Act:

(g) where a corporation issues a share (other than an excluded security) to a person as consideration for the settlement of a debt issued by the corporation and payable to the person, the amount paid in satisfaction of the debt because of the issue of the share shall be deemed to be equal to the fair market value of the share at the time it was issued;

(g.1)where a debt issued by a corporation and payable to a person is settled at any time, the amount, if any, that can reasonably be considered to be the increase, as a consequence of the settlement of the debt, in the fair market value of shares of the capital stock of the corporation owned by the person (other than any shares acquired by the person as consideration for the settlement of the debt) shall be deemed to be an amount paid at that time in satisfaction of the debt;

Under these proposed provisions a corporate debtor is considered to have paid an amount in satisfaction of a debt equal to the fair market value of a share, where that share is issued by the debtor as consideration for the settlement of the debt. Pursuant to proposed paragraph 80(2)(g.1) of the Act, a corporate debtor is considered to have paid an amount equal to the increase in value of the shares of the capital stock of the debtor that are owned by the creditor (other than those shares issued as consideration for the settlement of the debt) to the extent that the increase in value is as a consequence of the settlement of the debt.

In the situation described in the incoming letter attached to your facsimile, the individual has converted a $112,000 demand non-interest bearing loan for additional common shares of Opco. He received 28,000 shares at $4 per share. The company has a deficit at the end of the year and it was presented as a fact that the fair market value of the shares is nil.

In this case, Mr. X is the sole shareholder and if the principal amount of the debt is equal to fair market value and the aggregate increase in the fair market value of the common shares of the debtor corporation owned by Mr. X have increased by an amount equal to the principal amount of the debt that has been settled, it would appear to be a reasonable conclusion to state that proposed paragraphs 80(2)(g) and 80(2)(g.1) would apply and that pursuant to these proposed paragraphs there would be no forgiven amount. However, as with any valuation question, it would come down to a question of fact and a determination of what is the fair market value of the shares and the fair market value of the debt would have to be done.

In any other situation, it would be a question of fact of whether or not section 80 applied. However, in the situation where the debt has a fair market value that is less than its principal amount and common shares are issued as payment to settle the debt, section 80 of the Act and in particular paragraphs 80(2)(g) and 80(2)(g.1) could apply.

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