Section 61.3

Subsection 61.3(3) - Anti-avoidance

Administrative Policy

19 December 2013 External T.I. 2012-0468851E5 F - Deduction for Insolvency

maximizing deduction through debt parking with parent rather than simple settlement subject to s. 61.3(3)

Mco has a wholly-owned subsidiary (Aco) which is in financial difficulty, is not an insurance corporation, bank or credit union, does not have any attributes to grind under ss. 80(3) to (5), or (7) to (12), and whose sole liability is the Debt owing to a bank which it is willing to settle for cents on the dollar.

In Scenario 1, Aco uses funds lent by Mco to settle the Debt, so that there is an income inclusion under s. 80(13). In Scenario 2, Mco instead uses the same sum to purchase the Debt, so that the debt parking rule in s. 80.01(8) applies. Did CRA agree that Scenario 2 produced a better result under s. 61.3(1), as there was a larger deduction (under C of the formula) for the full amount of the Debt?

CRA first noted that the underlying premise was "questionable," as under GAAP the amount of the Debt after its acquisition by Mco might be written down. Furthermore, s. 61.3(3) might be applied (TaxInterpretations translation):

In Scenario 2, Aco apparently becomes the debtor of Mco in the 12-month period preceding the end of the taxation year, by reason of the acquisition by Mco of the original debt due to the Bank by Aco. It is also possible to claim ... that one of the reasons for Aco becoming indebted to Mco was to increase the amount which Aco had the right to deduct under subsection 61.3(1)... . In such a situation, the CRA could seek to apply subsection 61.3(3) to deny the claimed deduction for insolvency.