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.
Principal Issues: Under subsection 80(9) of the ITA, is a debtor allowed to reduce the adjusted cost base to the debtor of a capital property that is a debt issued by a partnership that is related to the debtor?
Position: Generally, yes if the conditions of the provision are otherwise met. If there is a bona fide partnership and the partners are jointly and severally liable for the partnership debts, we will generally view the partnership as the debtor and not the corporate partner.
Reasons: Wording of the Act and scheme of the debt forgiveness rules.
XXXXXXXXXX
2010-037102
Chrys Tzortzis, CA
January 10, 2011
Dear XXXXXXXXXX :
Re: Paragraph 80(9)(a)
We are writing in reply to your letter dated June 11, 2010, wherein you inquire whether a debtor is allowed under paragraph 80(9)(a) of the Income Tax Act (the "Act") to reduce the adjusted cost base to the debtor of a capital property that is a debt issued by a partnership that is related to the debtor. In particular, you ask whether a debt issued by a partnership is excluded from that provision if the debtor is a specified shareholder of a corporation that is a corporate partner of the partnership.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the CRA Web site at www.cra-arc.gc.ca. However, we are prepared to provide the following general comments, which may be of assistance.
Our Comments
As noted in your correspondence, the debt forgiveness rules in section 80 of the ITA may apply to a partnership. However, your question does not deal with the settlement of a debt issued by a partnership. Instead, it deals with the settlement of a debt issued by a debtor who becomes subject to the debt forgiveness rules and whether, under paragraph 80(9)(a) of the ITA, that debtor may reduce the adjusted cost base to the debtor of a capital property that is a debt issued by a partnership.
Where all the conditions of subsection 80(9) of the ITA are otherwise met, paragraph 80(9)(a) provides that the remaining unapplied portion of a debtor's forgiven amount may be applied to reduce the adjusted cost bases to the debtor of capital properties other than shares of the capital stock of corporations of which the debtor is a specified shareholder at that time, debts issued by corporations of which the debtor is a specified shareholder at that time, interests in partnerships that are related to the debtor at that time, depreciable property that is not of a prescribed class, personal-use properties and excluded properties.
It is our understanding that your main concern is that, under common law, debts of a partnership are generally considered as owed by the partners. Therefore, debts issued by corporations may be considered to include debts issued by a partnership of which the corporation is a partner. However, in our view, given the scheme of the debt forgiveness rules, debts issued by a partnership will not be considered to be debts issued by the corporate partner for the purposes of subsection 80(9) of the ITA where there is a bona fide partnership and the partners are jointly and severally liable for the partnership debts. Consequently, in our view, a debtor is generally allowed under paragraph 80(9)(a) of the ITA to reduce the adjusted cost base to the debtor of a capital property that is a debt issued by a partnership that is related to the debtor if all the conditions of subsection 80(9) are otherwise met.
We trust that these comments will be of assistance.
Yours truly,
G. Moore
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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