21 January 1998 External T.I. 9800235 - LOSS ON DISPOSAL OF INTER-CORPORATE LOANS

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 ISSUE:

Whether creditor can refrain from taking loss (bad debt deduction) on loan disposed of for nil proceeds and related debtor corporations can show gain on investment in amount equal to outstanding principal amount of loan with off-setting deduction.

Position:

Disposal of loan for no proceeds probably subjects debtors to section 80 - confirm with tax service office.

Reasons:

Appears to be forgiven loan subject to section 80. Transaction completed and cannot confirm tax consequences at this stage.

980023
XXXXXXXXXX P. Spice

January 21, 1998

Re: Loss on Disposal of Inter-Corporate Loans

This is in reply to your fax of December 30, 1997, concerning a creditor corporation and several debtor corporations with outstanding loans of approximately $500,000 and further to our voice mail message of January 19, 1998. In your letter you indicated that the debtor corporations which borrowed the monies are all related to the creditor and that the creditor corporation “disposed” of the loans for nil proceeds when it was purchased by an arm’s length third party. In our telephone conversation of January 19, 1998 (Spice/XXXXXXXXXX) you advised that there were four loans in total and that the debtor corporations used the monies to purchase land for development. In its income statement the creditor corporation reported a loss on disposal of the loans of approximately $500,000.

You ask whether the creditor corporation may report $500,000 in taxable income on its corporate tax return for the taxation year in question and the debtor corporations show a gain on investment equal to their proportionate share of the loans and deduct an equal amount.

Generally where a loan is settled or extinguished for less than the principal amount the debtor may be subject to reductions to prior years’ and the current year’s losses, adjustments to the cost of its property, and an income inclusion, all in accordance with section 80 of the Income Tax Act. As advised in the voice mail message, if you wish to confirm the tax treatment with respect to this completed transaction, please provide the tax services office with complete details and the relevant documents which describe the circumstances of the loans and their disposition.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate