Gaumond – Tax Court of Canada finds that a settled debt is not disposed of to the debtor

The taxpayer renounced debt owing to him by his small business corporation pursuant to a bankruptcy proposal.  Lamarre J found that, in the absence of a provision similar to s. 84(9) deeming the debt to have been disposed of to someone, all the taxpayer had was a disposition of the debt rather than a disposition to another person, so for that reason alone he did not have a business investment loss.  Furthermore, the French version of the BIL definition requires that such disposition be to a person with whom he did not have a non-arm’s length relationship, and this also could not be demonstrated.  (The English version, which she did not refer to, states a positive requirement that the disposition be to an arm’s length person, which more clearly was not satisfied.)

Notwithstanding its protestation to the contrary, s. 84(9) was not enacted "for greater certainty."  This indicates that the CRA position (e.g., in 2012-0448681E5 and 2010-0385771E5), that a non-resident capital beneficiary whose interest is satisfied is thereby disposing of property to the resident trust, is wrong.

Neal Armstrong.  Summary of Gaumond v. The Queen, 2014 TCC 339, under s. 39(1)(c).