16 January 1990 Administrative Letter 74436 F - Debtor's Gain on Settlement of Debts

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.

Subject:  24(1)

This is in reply to your memorandum of August 30, 1989 wherein you requested our views concerning the application of subsections 23(3) and (6) of the Ontario Business Corporations Act as well as the provision of subsection 80(1) of the Income Tax Act (the "Act") in the situation outlines hereunder.

We also acknowledge the additional information provided in our telephone conversations (Jones/Diguer), (Husack/Diguer), on November 2, 8, 28 and 30 as well as December 22, 1989.

Our understanding of the facts is as follows:

Facts

24(1)

District Office Request

Your request our views concerning the following with regards to the transaction outlined in paragraph 12 above.

In particular, you ask the following:

24(1)

Assumptions

We assume that:

1)     24(1)

Our Opinion

1)     With regards to the transaction in paragraph 12 above, subsection 23(3) of the OBCA provides that a corporation may not issue a share of its capital until the consideration for the share is fully paid in "money or in property..."  Subsection 23(6) of the OBCA provides that for purposes of subsection 23(3), a document evidencing indebtedness of a person to whom shares are to be issued does not constitute property.  A careful review of the wording in subsection 23(6) of the provincial statute in question and a subsequent comparison to the commercial publication upon which you were relying disclosed a small but significant printing error.

     Subsection 23(6) of the statute states in part that:

     (6)  "For the purposes of subsection (3) and of subsection 24(3), a document evidencing indebtedness of a person to whom shares are to be issued...does not constitute property". (our emphasis)

     whereas the reference found in the commercial publication which you consulted stated in part that:

     (6)  "For the purposes of subsection (3) and of subsection 24(3), a document evidencing indebtedness to a person to whom shares are to be issued...does not constitute property." (our emphasis)

     It is clear that by exchanging the incorrect word, "to" for the correct word, "of", the provision acquires an entirely different meaning.

     24(1)

     For purposes of subsection 80(1), the "amount paid" would be the fair market value of the shares issued, the "principal amount" would be expressed in CDN $ at the prevailing exchange rate and the "amount for which the obligation was issued" would be expressed in CDN $ at the historical exchange rate.  The subsection 80(1) gain (if any) would be the amount by which the lesser of the "principal amount" and "the amount for which the obligation was issued" exceeds the "amount paid".

Due to limited information available to us regarding this matter, our comments are, of necessity, restricted to the questions posed regarding this matter, our comments are, of necessity, restricted to the questions posed regarding the transaction described in paragraph 12 above and do not address any other consequences that may arise as a result of the transactions described, for example, whether paragraph 69(1)(a) might apply to reduce the cost of the Series A Special Shares acquired by Company as described in 11 above.

We trust that our comments will be of assistance to you.

ChiefCorporate Reorganizations III SectionReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch