10 July 1991 Ruling 91042-3 F - Debt Restructured - Debtor's Financial Difficulty

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.

DECISION SUMMARY     SOMMAIRE DE DéCISION     

Subject, Problem, Position, Rationale, Comments:

Sujet, problème, position, justification, observations:

Background

Frequently, when a debtor is experiencing financial difficulty, the creditor and debtor will agree to modify the terms of the debt. These modifications are intended to establish a workable repayment schedule and typically include an extension of the time to repay the indebtedness and either a reduction of the interest rate or a change in the method of calculating interest (e.g., a change from a set rate to one which is based on the debtor's profits). The restructured debt still bears interest at commercial rates and the debtor remains liable to repay all of the principal amount of the indebtedness. In the event of a default or in the case of bankruptcy, the creditor would be entitled to enforce his original debt claim in its entirety, in respect of both principal and interest.

Decision

Unless there has been a novation, the restructuring, in and by itself, would not result in a settlement or extinguishment of the original debt provided that:

(a)     the debt as renegotiated bears interest at commercial rates

( b)      the debtor remains liable to repay all of the principal amount of the debt: and

(c)     in the event of a default or in the case of bankruptcy, the creditor is entitled to enforce his original debt claim in its entirety, in respect of both principal and interest.

The application of section 80 to restructurings that do not meet the above criteria would have to be considered on a case by case basis.

The Department's position on the conversion of an interest-bearing debt to non-interest bearing debt should remain as set out in the 1987 Round Table (Question 58 - copy attached). Such a conversion is not indicative of a genuine restructuring.

The possible application of section 80 to a debt restructuring arising because of a debtor's financial-difficulty was considered in a 1984-advance income tax ruling request of …….. ……. 24(1).

That section 80 would not be applied to 24(1) by virtue only of the coming into effect of the restructuring plan and the modification of the terms of the indebtedness.

The position taken in the 24(1) file reflects the economic realities of many debt restructurings. It would be appropriate to apply the principle developed in that file to similar situations including those where income bonds, as defined in subsection 248(1), would be issued in exchange or substitution for the debt.