9 February 2000 External T.I. 1999-0015145 - FORGIVENESS-DEBT RECEIVABLE

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: General comments were provided on the forgiveness of a debt receivable.

Position: See principal issues

Reasons: See principal issues

XXXXXXXXXX 1999-001514
M. Eisner
February 9, 2000

Dear Sir:

Re: Forgiveness of a Debt Receivable

This is in reply to your facsimile of December 20, 1999, concerning the above noted subject. We also acknowledge our telephone conversation (Eisner/XXXXXXXXXX) on January 24, 2000, in which we obtained some clarification on the circumstances of your situation.

You have indicated that you have a client who realized a capital gain over 3 years ago, but did not collect the full proceeds arising from the sale. The payments in respect of the related debt receivable were to be made to your client over a five year period. The full amount of the gain was reported on his T-1 in the year of disposition. Your client forgave the debt in 1998, but did not account for it in that year as there does not seem to be instructions on how to deal with the loss arising from the forgiven debt. However, you have suggested that the forgiven amount should be reported on schedule 3, since the capital gain was reported on that schedule (an allowable business investment loss described in paragraph 39(1)(c) of the Income Tax Act (the "Act") is not involved).

Our Comments

The following comments on the above situation are of a general nature as we have not reviewed any of the related documentation in respect of your particular situation.

When a debt receivable has been forgiven, it is our view that there would be a "disposition" pursuant to subparagraph (b)(ii) of the definition of that term in section 54 of the Act, which may result in a capital loss to the taxpayer. Under subparagraph 40(2)(g)(ii) of the Act, a taxpayer's loss on the disposition of a debt or other right to receive an amount is nil unless (i) the debt was acquired by the taxpayer for the purpose of gaining or producing income (other than exempt income) from a business or property, or (ii) the debt was acquired by the taxpayer as consideration for the disposition capital property to a person with whom the taxpayer was dealing at arm's length.

In reporting a loss from a forgiveness of a debt receivable, the debt receivable can be regarded as belonging to the category of "other properties" under the heading "Bonds, debentures, promissory notes, and other properties, lines 151 and 153" on page 15 of the 1998 "Capital Gains" guide. For reporting purposes, the comments under that heading include references to schedule 3 of the T-1 general income tax return.

Our comments do not constitute an advance income tax ruling and are not binding on the Canada Customs and Revenue Agency with respect to any particular transaction.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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