CRA may deny the insolvency deduction if it is maximized through debt parking

S. 61.3(3) is an anti-stuffing provision which denies the corporate insolvency deduction under s. 61.3(3) at the end of a taxation year if it may reasonably be considered that one of the reasons for the corporation becoming indebted in the year was to increase the deduction.  That deduction generally will be larger if a debt owing by an insolvent corporation to the bank is purchased from the bank by its shareholder for 10 cents on the dollar (Scenario 2) rather than that sum being lent by the shareholder to the corporation to be used by it to settle the debt for the same amount (Scenario 1).

CRA appears to consider that it would have the potential ability in Scenario 2 to apply s. 61.3(3), on the grounds that, in the year, the corporation became indebted to its shareholder for the full amount of the debt.  This position is dubious, as normally an assignment of the debt to the shareholder would not give rise to new indebtedness.

Neal Armstrong.  Summary of 19 December 2013 T.I. 2012-0468851E5 F under s. 61.3(3).