Loans subject to s. 95(2)(a)(ii)(B) or (D) not commercial debt obligations (p. 695)
[I]f interest on a loan owing by a debtor affiliate to another affiliate is recharacterized under clause 95(2)(a)(ii)(B), in most cases, the loan will not be a commercial debt obligation. That is because the interest will, in most cases, be deductible in computing the debtor affiliate's active business income, and thus will not be deductible in computing its FAPI.
[E]lements A and D of the definition of FAPI (discussed in more detail below) each deem interest payments that are subject to clause 95(2)(a)(ii)(D) to be nil for purposes of computing an affiliate's income or loss from property, from a business other than an active business or from a non-qualifying business. The result of that restriction appears to be that a loan, the I interest on which is recharacterized under clause 95(2)(a)(ii)(D) cannot be a commercial debt obligation for FAPI purposes.
Exception where gap in application of s. 95(2)(a) (pp. 695-6)
While a debt to which clause 95(2)(a)(ii)(B) or (D) applies should, in most cases, not be considered a commercial debt obligation, that may not be the case where those rules cease to apply for a period of time….
[T]he definition of commercial debt obligation as it is modified by subparagraph 95(2)(g. l)(i) refers to a debt where an amount in respect of interest was or would have been deductible in computing the debtor's FAPI. The phrase "an amount in respect of interest" appears to be broad enough to apply to a circumstance where any interest in respect of a particular debt is, or would be, deductible in computing. FAPI.
Application of forgiven amount only to reduce losses (p. 697)
[O]ne of the main distinctions between the FAPI debt forgiveness regime and the ordinary debt forgiveness regime is that an income inclusion can arise under the ordinary regime where the debtor does not have sufficient attributes to grind in the year. In contrast, under the FAPI regime, if the debtor does not have a sufficient amount of attributes to absorb the forgiven amount in the year the debt is forgiven, the excess will be carried forward indefinitely to reduce attributes that arise in the future.
Ordering of loss application (pp. 697-8)
[T]he FAPI regime does not specify the order in which attributes are reduced in the same way that subsections 80(3) to (12) do. However, this is not to say that FAPLs and FACLs are treated equally with respect to attribute reductions….
Pursuant to the definition of FAPI, the amounts included in elements E and F.l (i.e., an affiliate's FACLs and FACL carryforwards and carrybacks) are limited to the total taxable capital gains included in element B for that year. In other words, if there is no taxable capital gain included in element B for the year, elements E and F. 1 will be equal to nil, even if the affiliate has current or prior year allowable capital losses that are otherwise deductible in computing FAPI. Thus, there is a preference within the FAPI debt forgiveness regime to reduce FAPLs, since only FAPLs will be reduced in a year where no taxable capital gain arises to the affiliate. Moreover, in years where FACLs are available for reduction, there should always be an offsetting taxable capital gain, meaning that the forgiven amount will still absorb the affiliate's FAPLs or result in an unsheltered taxable capital gain.
Immediate FAPI for income account forgiveness (p. 699)
[F]rom the FAPI perspective, it is therefore important to identify income account debts incurred in the course of earning income from property or from a business other than an active business, as the forgiveness of such debts could result in net FAPI as opposed to merely reducing the affiliate's FAPLs or FACLs.
Priority of s. 15(1.2) rule (pp. 698-9)
[T]he existence of this rule suggests that a forgiven shareholder loan will typically be considered a shareholder benefit under subsection 15(1) unless one of the exceptions to that rule applies. The shareholder benefit rules operate in priority to those in section 80, and generally apply to any obligation (not just a commercial debt obligation) owing by the shareholder. As a result, taxpayers should be cautious of forgiving shareholder loans owing by a foreign affiliate unless the forgiveness results from a transaction to which subsection 15(1) does not apply.
Whether foreign tax on forgiven amount can be FAT (p. 699)
[T]he definition of FAT requires that the relevant foreign income tax reasonably be regarded as applicable to the subsection 91(1) amount. It is not obvious whether this condition could be met if foreign tax is paid on a forgiven amount that reduces the debtor's FAPLs or FACLs in a particular year and the debtor realizes FAPI in a future year as a result. Can the foreign tax "reasonably be regarded as applicable" to the resulting subsection 91(1) income? Arguably, it can be. The CRA has previously opined, in a different context, that it is necessary to consider all of the facts and potentially a number of taxation years in order to determine when foreign tax will be FAT. [fn :15:CRA Document 2002-013420117]…
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