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.
SUBJECT: DEBTOR'S GAIN ON SETTLEMENT OF DEBT SECTION: 80(1)]
1992 Corporate Management Tax Conference
DEBT SETTLEMENT - FARMERS
Question 14
In many debt settlements involving farmers a debt is settled by a farmer making a cash payment with the remaining debt being "forgiven". It is normal in these circumstances that the amount of debt outstanding include an element of accrued but unpaid interest, which has not been deducted by the farmer as he is on a cash basis (Section 28). Does the Department consider the cash payment to be applied: (i) first to interest, or (ii) a prorata share of the payment as interest and principal, or (iii) none of the payment applied to interest? The mortgage documents usually state that all payments will be applied against outstanding interest first.
Department's Position
Generally speaking, we would consider that the cash payment which was made to settle the debt would be applied in accordance with the mortgage documentation. In the above example, the payment would first be applied against any accrued but unpaid interest, with the balance of the payment being applied against the outstanding principal portion of the debt.
Prepared by: Allan Nelson
June 11, 1992
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