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: Treatment of principal payments received on a debt, the ACB of which is less than the principal amount
Position: Each receipt of a principal payment is a partial disposition - Section 43 and para. 53(2)(d) applicable.
Reasons: Subparagraph (b)(ii) of definition of "disposition" -
J. P. Dunn
August 4, 1999
Re: Gain on Disposition of Debt Obligation
We are writing in response to your correspondence of June 28, 1999 wherein you had requested the views of the Department concerning the tax implications to a creditor which receives a payment on account of the principal amount of a debt obligation, which principal amount is greater than the adjusted cost basis thereof to that creditor. We would note that the following comments are predicated on the assumption that the debt obligation constitutes capital property to the creditor.
When the creditor receives a payment on account of the outstanding principal amount of a debt obligation, the creditor is considered to have disposed of a portion of that obligation with the amount of the payment constituting the proceeds of disposition of that portion.
Section 43 of the Income Tax Act is applicable to determine the adjusted cost base of that part of the property of which creditor has disposed. In the particular case under consideration, the adjusted cost base applicable to the part disposition would be equal to that proportion of entire adjusted cost base of the debt obligation immediately prior to the part disposition that the payment received is of the outstanding principal amount of the obligation at that same time.
Paragraph 53(2)(d) of the Act would be applicable to determine the adjusted cost base of the remaining portion of the debt obligation which, basically, provides that this remaining adjusted cost base is equal to the original adjusted cost base of the whole debt obligation less any amount that was determined pursuant to section 43 in respect of any previous partial dispositions.
Should any future amounts be received on account of the principal amount of the debt obligation, these same calculations would then be used to determine any capital gain in respect of those future partial dispositions, however the remaining principal amount and adjusted cost base of the debt obligation would be substituted in the calculations.
We trust that this is the information which you require
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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