17 June 1997 External T.I. 9712425 - DEBT FORGIVENESS

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 is the effect of a guarantor making good on a partnership loan and the subsequent calculation of a terminal loss?

Position:

If section 80 applies then amount will affect 20(16) calculation.

Reasons:law

XXXXXXXXXX 971242

Attention: XXXXXXXXXX

June 17, 1997

Dear Sirs:

Re: Debt Forgiveness and Terminal Loss

We are writing in response to your letter dated April 25, 1997 wherein you requested our opinion with respect to whether an amount paid by a guarantor of a loan will affect the partnership's calculation of a terminal loss with respect to equipment owned by the partnership.

In this regard we offer the following general comments.

A terminal loss is calculated pursuant to subsection 20(16) of the Income Tax Act (the "Act") as being the excess of the amounts used to determine A to D in the definition of "undepreciated capital cost" in subsection 13(21) of the Act in respect of a taxpayers depreciable property, over the total of all amounts used to determine E to J in that same definition in respect of the particular property. Clause E.1 of the definition of "undepreciated capital cost" includes any amount by which the undepreciated capital cost of a property has been reduced because of subsection 80(5) 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, 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, three of which are:

(f) any portion of the principal amount of the obligation that is included in the amount determined for A,B,C or D in subsection 79(3) in respect of the debtor for the taxation year of the debtor that includes that time or for a preceding time;

(i) where the debtor is a bankrupt at that time, the principal amount of the obligation, and

(l) the amount if any given at or before that time by the debtor to another person as consideration for the assumption by the other person.

It is a question of fact as to whether any of these events has occurred in a particular situation.

Where a "forgiven amount" is determined, that forgiven amount is applied in the manner described in subsections 80(3)-(13) of the Act. Where a portion is applied pursuant to subsection 80(5) of the Act, that amount will be used in the calculation of the terminal loss pursuant to subsection 20(16) of the Act.

You have also asked what the tax implications would be if the guarantor were a government or farm agency.

In general terms paragraph 12(1)(x) of the Act governs situations where a taxpayer receives from a government, municipality or other public authority an amount as reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an outlay or expense.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, and are not binding on Revenue Canada, Taxation.

Yours truly,

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