CRA indicates that forgiveness under a Bankruptcy proposal occurred when it was court-approved

Pursuant to a proposal under the Bankruptcy and Insolvency Act, Opco and its creditor agreed to write off $600,000 of its $1 million debt and to revise the terms of repayment of the new balance of $400,000, including providing for payments over four years.

The proposal was signed on September 30, 2022, the Superior Court of Quebec approved it on January 20, 2023, the first payments are made in February 2023 and the last payment is made in December 2026 (with a discharge). In finding that the forgiveness for s. 80 purposes occurred at the time of the Court approval, CRA stated:

[A] debt or obligation is settled or extinguished when the obligation to pay ceases to exist, and payment, cancellation, set-off, substitution of debtors and release are among the means of settlement. …

Furthermore … Richer indicat[ed] that "in the context of section 80, the word 'settle' connotes a final and legally binding resolution that terminates or reduces the debtor’s obligations” … .

CRA also indicated that the resulting tax applicable to the income under s. 80(13) did not arise until such time of forgiveness, rather than being treated as a provable claim in the proceeding.

Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.9 under s. 80(2)(a) and s. 80(13).