12 March 1998 External T.I. 9804685 - DEBT FORGIVENESS - OPTIONAL REDUCTION OF TAX ATTRIBUTES

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:

Whether, given the ordering rule of paragraph 80(2)(c), a debtor can apply the remaining unapplied portion of the forgiven amount to depreciable properties and cumulative eligible capital in any order.

Position:

Although paragraph 80(2)(c) provides an ordering rule, certain reductions of tax attributes, such as reductions with respect to depreciable properties and cumulative eligible capital, are optional.

Reasons:

The wording ("in such manner as is designated" and "to the extent designated") of subsections 80(5) and 80(7) makes clear that the debtor has discretion as to the order and manner in which the remaining forgiven amount is applied in respect of the tax attributes described in these provisions.

5-980468
XXXXXXXXXX Carole Chouinard

March 12, 1998

Dear Sir/Madam:

Re: Debt Forgiveness Rules

This is in reply to your letter of February 19, 1998, wherein you inquired about the ordering rule as regards the application of subsections 80(5) and 80(7) of the Income Tax Act (the "Act").

In your view, the wording of the above-mentioned provisions is such that a debtor can at his discretion decide whether to allocate the remaining unapplied portion of the forgiven amount to depreciable property or to the cumulative eligible capital. In addition, you submit that, although the ordering rule of paragraph 80(2)(c) of the Act appears to require that the forgiven amount be applied first to depreciable property and then to the cumulative eligible capital, a debtor can at his discretion designate a nil amount under subsection 80(5) and allocate all of the unapplied portion of the forgiven amount to the cumulative eligible capital under subsection 80(7) of the Act.

Paragraph 80(2)(c) of the Act provides that the forgiven amount is applied to reduce the tax attributes of the debtor in the numerical order specified, namely, subsections 80(3) to 80(5) and 80(7) to 80(13) of the Act. Therefore, in the situation described above, unless otherwise provided, the forgiven amount would have to be applied first to reduce the tax attributes described in subsection 80(5) and then to reduce those described in subsection 80(7) of the Act. However, subsections 80(5) and 80(7) of the Act provide that the remaining unapplied portion of the forgiven amount shall be applied "in such manner as is designated" (in subsection 80(5)) and "to the extent designated" (in subsection 80(7)). In our view, these expressions indicate that the reductions under subsections 80(5) and 80(7) are optional, since these provisions only apply to the extent that an amount is designated by the debtor thereunder. Therefore, in our view, the remaining unapplied portion of the forgiven amount, after eliminating all loss carryforward balances, may be applied in any order, to the extent designated by the debtor, to reduce the tax attributes described in subsections 80(5) and 80(7) of the Act. However, if these tax attributes are not reduced to the maximum extent possible, the taxpayer will not be entitled to use the remaining forgiven amount to reduce other tax attributes, such as the adjusted cost base of capital properties and current year capital losses.

We trust these comments will be of assistance.

Yours truly,

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