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:
Does section 80 apply to a defeasance transaction involving the assumption of a corporation's responsibilities under a debt by an arm's length corporation where the creditor is aware of the agreement but does not release the debtor from the legal liability
Position TAKEN:
Unable to determine without examining a specific transaction
Reasons FOR POSITION TAKEN:
We have a position on economic defeasance transactions involving the settling by the debtor of income earning assets into a reversionary trust. Our position is that section 80 does not apply to this type of transaction. However, we have not addressed the type of transaction outlined in this letter
941805
XXXXXXXXXX F. Francis
Attention: XXXXXXXXXX
August 2, 1994
Dear Sirs:
Re: Technical Interpretation Section 80 of the Income Tax Act
This is in reply to your letter of July 12, 1994, wherein you requested our comments on the application of section 80 of the Income Tax Act (the " Act") to a situation where a debtor enters into an economic defeasance arrangement with an arm's length corporation in order to remove the debt from its financial statements.
Whether or not a particular defeasance arrangement is an economic defeasance can only be determined following consideration of all of the terms and conditions pertaining to the particular defeasance. It is our understanding that, in a typical economic defeasance arrangement, the debtor is not relieved of his legal obligations under the debt instrument but discharges the debt in economic terms by settling upon a trust such income producing assets as are necessary to meet scheduled payments of interest and principal. The terms of the trust require the trustee to make the debt service payments out of the trust assets, with any residue remaining at maturity reverting to the debtor-settlor. Generally, it is our view that, in the foregoing situation, section 80 of the Act would not apply to this type of economic defeasance arrangement.
We have not encountered an economic defeasance arrangement other than that described in the foregoing paragraph. Consequently, a meaningful reply on a different type of transaction would not be possible without an examination of a specific factual situation and a review of all the pertinent documentation.
We hope the above comments are of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
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