Section 80

Subsection 80(2) (old)

Administrative Policy

93 C.P.T.J. - Q.38

Where one corporation (Y) lends $100,000 U.S. to an affiliate (X) at a time that the equivalent Canadian dollar amount is $115,000, and the two corporations amalgamate when the Canadian dollar equivalent is $125,000, s. 80(2) will deem the debt obligation to have been settled or extinguished by a payment of an amount equivalent to Y's adjusted cost base of $115,000. Consequently, s. 80(1) will not apply to X.

3 June 1992 T.I. 913040 (May 1993 Access Letter, p. 198, ¶C76-067)

Where on the amalgamation of a debtor corporation and creditor corporation, the creditor corporation was owed a trade debt on which it previously had claimed a deduction under s. 20(1)(p), the cost amount of that debt will be its adjusted cost base as reduced under s. 53(2)(m) for the amount claimed under s. 20(1)(p), with the result that s. 80(1) will apply to the debtor corporation as a result of the amalgamation.

Subsection 80(1) - Definitions

See Also

Mitchell v. The Queen, 96 DTC o (TCC)

set-off

The taxpayer, who was the general manager of a corporation ("HSS"), acquired debt of another corporation ("LTM") for consideration that was found by the Court to be nominal. Following the acquisition of LTM by HSS and the subsequent amalgamation of HSS and LTM, the debt owing by the amalgamated corporation ("Amalco") that the taxpayer had so acquired was set-off by book entry against debt owing by the taxpayer to Amalco.

Beaubier TCJ. found that because one of the purposes of the carefully-planned transactions was for HSS to cause LTM to become profitable, and because the taxpayer reasonably foresaw (and intended) that he would realize a profit on the loans, the gain realized by the taxpayer on the subsequent set-off of the loans was on income account.

Hanson v. The Queen, 95 DTC 311 (TCC)

promissory note enforceable

A promissory note that the taxpayer had given as consideration for a limited partnership interest acquired by him was found to be a legally enforceable claim of the banks to which it had been assigned. Accordingly, the release of the taxpayer's obligations under the promissory note in consideration for the payment of a lower cash amount gave rise to the application of s. 80(1).

Les aliments Kouri Inc. v. MNR, 93 DTC 35 (TCC)

assumption of liabilities

The taxpayer paid a relatively nominal amount to acquire all the shares of a corporation ("Grandiose") having substantial non-capital losses and liabilities substantially in excess of the book value of its assets. After the acquisition, Grandiose sold all its assets to the taxpayer "subject to the [taxpayer] assuming and discharging all of the liabilities of [Grandiose]", and on the basis that the purchase price (which was stated to be the book value of the assets) was to be payable on demand, and that the taxpayer was to discharge all the liabilities of Grandiose.

On the basis of these terms, Couture C.J. found that s. 80(1) did not apply.

National Trust Co. v. Mead, [1990] 5 WWR 455, [1990] 2 S.C.R. 410

tests for novation

The assumption of a mortgage was found not to entail its novation in light inter alia of a clause in the original mortgage which provided that no "dealing by the Mortgagee with the owner of the equity of redemption of the Mortgage Premises shall in any way affect or prejudice the rights of the Mortgagee against the Mortgagor ... for the payment of the money secured by this Mortgage." Wilson J. also discussed the following four-part test for determining whether a novation has occurred (p. 472):

  1. The new debtor must assume the complete liability.
  2. The creditor must accept the new debtor as a principal debtor and not as an agent or guarantor.
  3. The creditor must accept the new contract in full satisfaction and substitution for the old contract.
  4. The new contract must be made with the consent of the old debtor.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition assumption of loan did not entail its novation 188

MNR v. Mid-West Abrasive Co. of Canada Ltd., 73 DTC 5429, [1973] CTC 548 (FCTD)

indefinite payment arrangements for interest

Sweet, D.J. indicated that under an arrangement where a Canadian subsidiary agreed to pay interest "when requested" on advances totalling $210,000 made to it by its U.S. parent, liability for interest was created on the execution of the promissory notes and that the U.S. "lender's omission to make the request would merely be a waiver of its rights and a forgiveness of the respondent's liability for interest which existed from the beginning."

Administrative Policy

2007 Ruling 2007-0245281R3 - windup of income trust on sale of assets:3rd party

In connection with the winding-up of an income fund (the "Fund") after the acquisition of all its units, the Fund disposes of its assets (principally, limited partnership units) to the acquiring corporation ("Bidco") in consideration for a note of Bidco, and then distributes the note to Bidco in satisfaction of a capital distribution and capital gains distribution declared by the Fund so that the note is extinguished as a matter of law.

Ruling that there will be no forgiven amount upon such extinguishment of the note.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.3) capital loss on redemption of trust units following distribution of most of its assets including as capital gains distribution 106
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) no ACB reduction for capital gains distribution by unit trust to bidco 84
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) trustees making filings on behalf of terminated fund 46
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) assumed debt traceable to capital distribution 93
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) realization and distribution of target MFT gain 99
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 86

5 December 2003 External T.I. 2002-0165195 - Debt Forgiveness in Foreign Affiliates

"If a portion of the debt has been used to earn FAPI, and the remainder to earn active business income, we are of the view that the whole debt would be a 'commercial debt obligation', not just the portion that related to the earning of FAPI ... if any amount in respect of interest on the CFA1 debt would have been deductible in computing CFA1's FAPI had interest been paid or payable thereon, the income inclusion attributable to the forgiveness of the whole debt would be brought into the computation of FAPI. However ... the forgiveness of the CFA1 debt does not affect the computation of FAPI because all of the debt was used to earn dividends from subsidiaries and interest income that was deemed active business income pursuant to subparagraph 95(2)(a)(ii) ... ."

9 September 2002 External T.I. 2002-014100 -

Canco, which is indebted to an NRO in an amount greater than the value of its assets, receives a contribution of capital from its non-resident parent in an amount sufficient to pay off that debt. "Section 80 would not appear to apply, since the total debt will be repaid in cash."

2 August 1994 T.I. 941805 (C.T.O. "Economic Defeasance")

S.80 would not apply to a defeasance arrangement under which the debtor is not relieved of its legal obligations under the debt instrument but discharges the debt in economic terms by settling upon a trust some income-producing assets that will be sufficient to meet scheduled payments of interest and principal.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 50

5 April 1994 T.I. (C.T.O. "Debtor's Gain on Settlement of Debt")

Non-capital losses arising before an acquisition of control can be utilized under s. 80(1)(a) even though the prospects for such losses otherwise being deducted from taxable income for future taxation years are less than 100%.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 34

93 C.R. - Q. 46

Pursuant to s. 80(1)(a), non-capital losses for preceding taxation years will not be reduced where they are not deductible in computing the taxpayer's taxable income for the year or a subsequent year. Accordingly, pre-acquisition losses that are not available for carry forward will not be reduced by a post-acquisition forgiveness.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 50

9 May 1994 Memorandum 940934 (C.T.O. "Shares Issued for Debt")

Where shares are issued in exchange for indebtedness, and the shares have a lower fair market value, s. 80 will apply to the difference notwithstanding that the full amount of the indebtedness cancelled was added to the stated capital of the shares issued.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 42

92 C.R. - Q.18

Where s. 87(7) applies to a winding-up by virtue of s. 88(1)(e.2), s. 88(1) will not apply to an obligation of the subsidiary that is assumed on the winding-up.

92 C.M.TC - Q.14

Where a debt owing by a cash-basis farmer including accrued but unpaid interest is settled by a cash payment of less than the full amount owing, and the mortgage provides that all payments will be applied against outstanding interest first, RC will consider the payment to have been applied first against accrued but unpaid interest.

91 CPTJ - Q.2

The acquisition of control of a parent holding an intercompany debt (resulting in the application of s. 111(4)(d)) does not result in the application of s. 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 26

November 1991 Memorandum (Tax Window, No. 13, p. 17, ¶1581)

S.80 can be applied only at the partnership level and cannot be applied to the partners.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 16

23 October 1991 Memorandum (Tax Window, No. 12, p. 23, ¶1549)

Accounts receivable arising in the normal course of the business of a taxpayer are not capital property of the taxpayer for purposes of s. 80.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 24

11 October 1991 Memorandum (Tax Window, No. 11, p. 22, ¶1518)

Where there has been a forgiveness of debt of the taxpayer before the end of the year that the taxpayer has disposed of all its depreciable property of a class, the undepreciated capital cost of the class at the end of the year must be determined after making the adjustments required by s. 80. S.80 will be applied where capital property of a taxpayer has been transferred to a creditor prior to the forgiveness or settlement as part of the same series of transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 83

10 July 1991 Decision Summary (Tax Window, No. 5, p. 12, ¶1346)

S.80 will not apply to debt restructurings involving an extension of the time to repay or a change in the method of calculating interest at a commercial rate, provided there is no novation. However, s. 80 should apply on the conversion of an interest-bearing debt to a non-interest bearing debt because such a conversion does not indicate a genuine restructuring.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 59

26 June 1991 T.I. (Tax Window, No. 4, p. 8, ¶1317)

Where $100,000 is lent to A and B on a joint and severable basis and the debt later is settled for $60,000 paid by A and B in proportion to their use of the money, s. 80 will apply to A and B only to the extent of their respective shares of the forgiven $40,000.

Where A instead pays B $25,000 to assume A's joint and severable obligations on the $100,000 debt, s. 80 will not apply at the time of the assumption if C does not release A from its obligation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 85

3 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 11, ¶1062)

Where receivables are transferred to the debtor corporation in consideration for treasury shares, s. 80 applies if the fair market value of the shares is less than the principal amount of the debt.

8 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 10, ¶1046)

Ss.69(1)(a) and 80(1) both will be applied where a creditor accepts low fair market value shares in satisfaction of the debt previously owing to it.

90 C.P.T.J. - Q.5

Where the creditors of a corporation in financial difficulty agree to exchange their debt for common shares of the corporation on the basis of the market price of a share on the date of the agreement, section 80 will apply if the market price of the shares declines by the time for closing the exchange.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 54

11 June 1990 T.I. (November 1990 Access Letter, ¶1524)

Where a parent corporation sells depreciable property to a wholly-owned subsidiary under a sales agreement, the depreciable property is transferred back to the parent on default by the subsidiary at a time that the property has a UCC of $100,000 and a fair market value of $50,000, and the debt owing by the subsidiary of $80,000 to the parent is extinguished by a quit claim deed, s. 80 will apply to the amount of $80,000 owing by the subsidiary to the parent.

7 June 1990 T.I. (November 1990 Access Letter, ¶1522)

Where a corporate taxpayer makes a gain on the purchase of its obligation where s. 39(3) does not apply, s. 80 will apply to the gain.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 24

10 April 1990 Memorandum (September 1990 Access Letter, ¶1421)

The loss of the right to sue by prescription does not result in the settlement or extinguishment of the debt.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 20

30 October 89 T.I. (March 1990 Access Letter, ¶1146)

Because the disposition of money in Canadian currency would not result in a capital gain or a capital loss, money is not a capital property for purposes of s. 80(1).

89 C.M.TC - Q.21

a partnership is a taxpayer for purposes of ss.79 and 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 10

88 C.R. - Q.14

Where the debts of a partnership have been settled or extinguished, s. 80(1)(a) will not reduce the losses of the partners.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 21

87 C.R. - Q.58

On the conversion of an interest-bearing debt into a non-interest bearing debt, the interest-bearing debt will be settled or extinguished on the conversion for an amount equal to the fair market value of the non-interest bearing debt at the time of the conversion.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 43

86 C.R. - Q.60

Generally, S.80 has no effect where the taxpayer has no loss carryforwards or capital property.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 15

80 C.R. - Q.38

Re application of s. 80 to the cancellation of debt on the winding-up of a subsidiary.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 15

80 C.R. Q.46

S.6(1)(a) generally will prevail over s. 80 when an employee stock-acquisition loan is forgiven.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 14

79 C.R. Q.27

Where a shareholder contributes funds to the corporation which in turn are paid to satisfy the debt owing to him, s. 80 may apply. RC is prepared to rule that s. 80 is not applicable where the shareholder limits the adjustment to his ACB to the increase in the fair market value of his shares.

S.80 applies where an outstanding debt is converted under its terms into shares of the corporation which have a value lower than the principal amount of the debt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 81

IT-293R "Debtor's Gain on Settlement of Debt"

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

IT-382 "Debts Bequeathed or Forgiven on Death"

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

IT-239R2 "Deductibility of Capital Losses from Guaranteeing Loans for Inadequate Consideration and from Loaning Funds at less than a Reasonable Rate of Interest in Non-arm's Length Circumstances" under "Application of Section 80"

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

Articles

Schafer, "Tax Implications of Restructuring and Refinancing", 1992 Corporate Management Tax Conference Report, c. 4.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

Wertschek, "Application of a Corporation's Indebtedness to the Issue Price of its Shares Constitutes the Full Payment of the Debt", Corporate Structures and Groups, Vol. 1, No. 2, 1992, p. 16

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

Frankovic, "Taxing Times: Foreclosures, Default Sales, Debt Forgiveness, Doubtful and Bad Debts", 1991 Canadian Tax Journal, p. 889.

Durand, "Debt Restructuring for Companies in Financial Difficulty", Tax Aspects of Corporate Financing, CCH Seminars, September 13, 1990

Discussion of authorities supporting the proposition that s. 80 does not apply where a taxpayer in financial difficulty issues shares or debt in replacement of its existing indebtedness.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 27

Brussa, "Strategies for Troubled Times", 1990 Conference Report, c. 17.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

Flynn, "Restructuring Financially Troubled Corporations", 1989 Conference Report, c. 19.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

Couzin, "Debt Restructuring", 1986 Corporate Management Tax Conference Report, p. 140.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 0

Commercial Debt Obligation

See Also

Genex Communications inc. v. The Queen, 2010 DTC 1064 [at 2840], 2009 TCC 583, rev'd 2011 DTC 5061 [at 5707], 2010 FCA 353)

rev'd on other grounds 2011 DTC 5061 [at 5707], 2010 FCA 353

Favreau J. found that non-interest bearing shareholder advances to a corporation satisfied paragraph (b) of the definition of "commercial debt obligation" given that the advances had been made to the corporation to fund its operations. While the French version is vague on this point, the English version clearly contemplates in paragraph (b) that not all commercial debt obligations entail an obligation to pay interest. Furthermore, it was not relevant that it was contemplated at the time of the advances that they would be subsequently converted into preferred shares.

Administrative Policy

9 April 2014 Internal T.I. 2014-0519231I7 - Debt forgiveness and guarantees

guarantee obligation not a commercial debt obligation

Forco, a wholly-owned subsidiary of Canco, borrowed under a secured "Borrowing" from a lending syndicate, with Canco providing a guarantee" secured by, inter alia, its shares of Forco and with no fee being charged by it. Canco also guaranteed various contractual obligations of Forco. Forco became insolvent, both guarantees (the "Guarantees") were called and Canco commenced CCAA proceedings. There was an insufficiency after a sale of Forco, and Canco defaulted on its Guarantees.

In finding that s. 80 did not apply in respect of the forgiveness of amounts owing by Canco under the Guarantees, the Directorate noted (respecting s. 20(1)(c)(i)) that "Canco should not be considered to have borrowed money under the Borrowing" and (respecting s. 20(1)(c)(ii)) "the amounts owing by Canco were not amounts payable for property acquired for the purpose of gaining or producing income from property." Accordingly, the Guarantee obligations were not commercial debt obligations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest on guarantee obligation non-deductible 149

20 May 2014 External T.I. 2013-0516121E5 F - Debt forgiveness

BIA settlement of unremitted GST interest

A compromise by Aco under Division I of Part III of the Bankruptcy and Insolvency Act resulted in reassessments owing by Aco for unremitted GST and QST including interest and penalties being compromised for the payment of a stipulated sum under a stipulated schedule. After finding that the forgiveness "gain" was not income under s. 9, CRA stated (TaxInterpretations translation) that:

[T]he portion of the amount of the gain arising from the settlement of the unremitted GST and QST (including interest and penalties) would not be subject to …section 80 given that such [amounts]…would not be considered as an "obligation issued" by the debtor under the terms of subsection 248(26), as is required by the definition of "commercial debt obligation" in subsection 80(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) BIA settlement of GST interest and penalties included under s. 12(1)(x)(iv) 149
Tax Topics - Income Tax Act - Section 12 - Subsection 12(2.2) s. 12(1)(x)(iv) inclusion from BIA settlement of GST interest and penalties could be offset against related expense 149
Tax Topics - Income Tax Act - Section 248 - Subsection 248(26) unremitted GST and QST were not obligation "issued" by debtor 94
Tax Topics - Income Tax Act - Section 9 - Forgiveness of Debt BIA settlement of unremitted GST on sales was on capital account 78

Articles

Marie-Andrée Beaudry, Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations", 2015 Annual CTF Conference paper

Whether forgiven amount arises on settlement of contractual claims (pp. 13:34-13:35)

In addition to the issue of deductibility of claims for contractual damages, consideration must also be given to whether the settlement of any such claims under a restructuring for less than the amount of the liability may result in the application of the debt forgiveness rules. ...

Subsection 248(26) provides, inter alia, that for the purpose of applying the provision of the ITA relating to the treatment of the debtor in repect of the liability, any amount that a debtor becomes liable to pay that is otherwise deductible in computing the debtor's income will be considered to be an obligation issued by the debtor having a principal amount equal to the amount of the liability. …

[T]o conclude that any such obligation constitutes a commercial debt obligation, one must conclude that interest would be deductible if it were payable on the obligation. It may be difficult to conclude that any such interest owing in respect of the claim for damages would be deductible under paragraph 20(1 )(c), since it is difficult to say that any such liability for contractual claims qualifies either as "borrowed money" or has been incurred for the acquisition of a "property". Although an argument could be made, depending on the precise facts, that any such interest may be deductible under section 9,…if a taxpayer is seeking to deduct any claims for damages, the CRA will likely argue strenuously that if the deduction of those claims is allowed, then their settlement should also be subject to the application of the debt forgiveness rules. …

Debtor

Cases

Metro Can Construction Ltd. v. The Queen, 2000 DTC 6495, 2001 FCA 227

McDonald J.A. accepted the position of the Crown that former s. 80(1) applied, in computing income at the partnership level, to a partnership whose debts had been forgiven notwithstanding that the portion of the provision dealing with the extinguishing of non-capital losses could have no application to a partnership.

See Also

Metro-Can Construction Ltd. v. The Queen, 99 DTC 29 (TCC)

Because s. 80 in its pre-1995 form applied at the partnership level rather than the level of the member partners, the forgiveness of debts owing by a partnership of which two subsidiaries of the taxpayer were members reduced the undepreciated capital cost of depreciable property of the partnership, rather than reducing losses of the subsidiaries.

Excluded Obligation

See Also

Denthor Developments Ltd. v. The Queen, 97 DTC 667 (TCC)

The gain of the taxpayer, which was a land developer, on being discharged pursuant to a settlement agreement of bank indebtedness of $2.2 million through the payment of $1 million to the bank, did not give rise to income to it under s. 9. Accordingly, the only tax consequences to the taxpayer arose under the forgiveness rules in former s. 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Forgiveness of Debt settlement of financing of land inventory on capital account 57

Administrative Policy

10 October 2014 APFF Roundtable Q. 15, 2014-0538151C6 F - 2014 APFF Roundtable, Q. 15 - Section 143.4 & Reverse Earn-out

reverse earnout obligation of Buyco re Target was excluded obligation

A newly formed corporation ("Newco") purchases the shares of a target corporation ("Target") for consideration that includes an earn-out clause (resulting in a debt which is subsequently forgiven). Newco and Target amalgamate, so that the shares of Target are cancelled. (a) Would a reduction in the cost of the shares of Target (through the application of subsection 143.4(2) of the ITA) prior to the subsequent amalgamation of Target with Newco cause the debt to qualify as an "excluded obligation" (as defined in subsection 80(1) of the ITA), so that the settlement of the debt following the amalgamation should not result in a "forgiven amount" (as defined in subsection 80(1) of the ITA)? (b) When the transaction (and related debt) occurred in a taxation year ending before March 16, 2011 (so that s. 143.4 does not apply due to the transitional rule), or there was no "right to reduce", would the fact that the shares no longer exist after the amalgamation and that their cost is therefore not reduced, result in a "forgiven amount" because the debt that is settled would not qualify as an "excluded obligation" as per s. 80(1)? CRA responded (TaxInterpretations translation):

[Y]ou have assumed that Newco, at the time of the acquisition, has an existing legal obligation to pay the maximum purchase price, so that ITA subsection 143.4(2) would be applicable at the time of the acquisition of the shares respecting the unpaid purchase price, and that the purchase price would be extinguished after the amalgamation. It is not possible to provide definitive responses without knowing all the facts of a specific case. However we can offer the following general comments which nonetheless, in some circumstances, would not apply in a particular situation. …

(a)…[A] reduction in the cost of the shares in the capital stock of Target through the application of subsection 143.4(2) prior to the amalgamation would in general permit the debt to qualify as "excluded obligation" as defined in subsection 80(1), by reason of the application of paragraph (a) of that definition.

Paragraph (d) of the definition of "excluded obligation in general could not apply because the debt was of a capital nature.

(b) In such situations, it appears to us that in general the extinguishing of the debt could generally give rise to a "forgiven amount" given that the debt would not qualify as an "excluded obligation" as per the definition provided in paragraph 80(1).In the situations presented in this question (with ITA subsection 143.4(2) not being applicable), the fact that the shares no longer existed following the amalgamation and that consequently their cost would not be reduced, does not appear relevant to the question of there being a "forgiven amount" as defined in paragraph 80(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 143.4 - Subsection 143.4(2) reverse earnout obligation of Buyco re Target shares 275

29 January 1997 T.I. 963597

"A reduction of the eligible capital expenditure of a taxpayer pursuant to paragraph 14(3)(b) of the Act is a result contemplated by subparagraph (a)(iii) of the definition of 'excluded obligation' in subsection 80(1) of the Act."

15 July 2009 External T.I. 2008-0289731E5 - Forgiveness of Accrued Interest

In response to a question whether s. 80 would apply where a creditor waived the right to receive accrued and payable interest on a debt, the Directorate indicated that where the forgiven interest amount is determined to be on account of capital, s. 80 is applicable irrespective of whether or not the amount was forgiven in the same or subsequent taxation year.

Paragraph (a)

Administrative Policy

20 March 2017 External T.I. 2014-0545591E5 - Upstream Loan and Debt Forgiveness Rules

s. 80 non-application where s. 90(6) applies to forgiven loan even if offsetting surplus deduction

FA makes a loan to Canco, its wholly-owning parent. Canco then sells its interest in FA to a third party, but due to foreign tax and other regulatory concerns, Canco does not repay the loan. The loan then is forgiven. Would the forgiveness satisfy the repayment condition in ss. 90(8) and 90(14), and would both the upstream loan rules and the s. 80 forgiveness rules apply in the situation described?

After noting that the loan forgiveness would not constitute its repayment for purposes of ss. 90(8) and 90(14), CRA stated:

[S]ince Canco will have to include the “specified amount” in respect of the loan in computing its income under subsection 90(6), Canco’s obligation in respect of the loan from FA will be considered an “excluded obligation”…[notwithstanding] that Canco may be able to claim a deduction under subsection 90(9)…so that the debt forgiveness rules will not result in tax implications to Canco.

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Tax Topics - Income Tax Act - Section 90 - Subsection 90(9) potential indefinite application of surplus where upstream loan forgiven after FA sale 187
Tax Topics - Income Tax Act - Section 90 - Subsection 90(14) debt forgiveness not a repayment 54

Forgiven Amount

See Also

Richer v. The Queen, 2009 DTC 1413, 2009 TCC 394

A forgiven amount arose in respect of the indebtedness of the taxpayer for unpaid contribution amounts to a partnership at the time that he entered into an agreement settling the claim of the general partner against him for those amounts, rather than at the time he paid the amount owing by him pursuant to the Settlement Agreement. The amount of the forgiven amount was not simply the difference between the amount owing by him for unpaid contributions and the amount paid by him, but rather was reduced further by the value of the rights in the form of potential claims he had against the general partner that he gave up by entering into the Settlement Agreement.

Administrative Policy

2016 Ruling 2016-0651621R3 - Partnership carried on by sole proprietor

no forgiven amount where partner assumed debt owing to it by partnership

Immediately before the winding-up of a partnership under s. 98(5), the general partner assumed a debt that was owing to it by the partnership, with the result that the debt was extinguished by operation of law. CRA ruled that this did not result in a forgiven amount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) the assumption by a partner of a debt owing to it by a partnership bumped the partner’s ACB 182
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) ACB increased by assumption of debt owing to partner by partnership 89

2016 Ruling 2015-0623731R3 - Subsections 55(2) and (2.1)

policy on set-off of unequal redemption notes does not extend beyond a butterfly reorg

Background

As described in 2015-0601441R3, Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent, a public corporation) accomplished a winding-up of a general partnership (“Partnership”) through a transfer under s. 85(1) by Sub2 of its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and for a non-interest bearing demand promissory note (the “Sub1 Note”) with a principal amount equal to the non-interest-bearing demand promissory note (the “Sub2-Partnership Note”) owing by Sub2 to the Partnership, jointly electing under s. 85(1).

Proposed transactions
  1. The Sub1 Note and the Sub2-Partnership Note will be settled in full by way of set-off.
  2. Sub1 will redeem the Sub1 Preferred Shares held by Sub2. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub1 Redemption Note”).
  3. Sub2 and Parent will undertake a s. 86 reorganization of Sub 2’s capital so that, following articles of amendment, Parent will exchange all of the issued and outstanding shares of Sub2 for Sub2 New Common Shares and (non-voting redeemable retractable) Sub2 Preferred Shares. The aggregate redemption amount of the Sub2 Preferred Shares will be equal to the amount owing by Sub1 under the Sub1 Redemption Note, and the aggregate FMV of the Sub2 New Common Shares and Sub2 Preferred Shares will be equal that of the exchanged Sub2 Shares, which will be greater than the FMV of the Sub1 Redemption Note.
  4. Parent will transfer to Sub1 all of the Sub2 Preferred Shares (the “Transferred Sub2 Shares”) in consideration for the issuance of Sub1 common shares (the “New Sub1 Shares”), electing under s. 85(1) at Parent’s ACB of the Transferred Sub2 Shares.
  5. Sub2 will redeem the Transferred Sub2 Shares held by Sub1. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub2 Redemption Note”).
  6. The Sub1 Redemption Note and the Sub2 Redemption Note will be settled by way of set-off and cancelled in full satisfaction of the obligations under the Sub1 Redemption Note and the Sub2 Redemption Note.
Ruling

Provided that the amount owing under the two notes is equal, s. 80(1) will not apply to the settlements in 6. The summary answered the question of “Whether administrative position in respect of section 80 applies” with “No,” stating: “Set-off and cancellation of debts not occurring in context of a distribution as defined in subsection 55(1).”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) requirement to pro-rate PUC 530
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) stated capital of old shares required to be prorated amongst new classes based on relative FMV 130

13 January 2016 External T.I. 2015-0604521E5 - ACB increase in paragraph 55(3)(a) reorganization

contribution of note by creditor to debtor

Described steps included the holder of a "Newco note" (Holdco) transferring the Newco note to Newco (the debtor) as a capital contribution or share subscription. CRA did not comment on the debt forgiveness rules.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) GAAR may be applied if the transactions produce an outside basis step-up 372
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) objectionable for a s. 55(3)(a) spin-off to result in an increase in the aggregate outside basis 169

2013 Ruling 2013-0498551R3 - Loss Consolidation

no forgiven amount on loan transfer to debtor

Lossco, an indirect subsidiary of Parent, will make interest-bearing loans to (profitable) Parent, and Parent will subscribe for redeemable retractable preferred shares of Lossco ("prefs"). On the unwinding following utilization of Lossco's losses, Lossco will redeem the prefs by delivering the loans which it made to Parent. Ruling inter alia that such delivery of the loans on the pref redemption will not give rise to a forgiven amount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) loss shift to parent/loans to parent used to redeem prefs/no borrowing capacity rep 62

12 September 2012 Annual CTF Roundtable, 2012-0453381C6 - 2012 CICA Conference

tax debt not a commercial debt obligation

An insolvent (but not bankrupt) company negotiates a settlement with CRA of unpaid source deductions and unremitted GST for less than the balance owing. Would this give rise to a forgiven amount or other income? CRA stated:

[I]nterest and penalties assessed under the ITA are not deductible (see section 67.6 and paragraph 18(1)(t)…). As such, the debt owed by the company…would not satisfy the definition of a commercial debt obligation and therefore, the debt forgiveness rules would not apply.

However, the amount as it related to source deductions would be included in income under s. 9, and under s. 12(1)(x) as it related to GST.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) forgiveness of unremitted GST 33
Tax Topics - Income Tax Act - Section 9 - Forgiveness of Debt forgiveness of source deductions on income account 102

28 November 2010 CTF Roundtable, 2010-0387451C6 - Debt forgiveness and Bankruptcy Annulment

no exemption for proposal

IT-293R continues to reflect CRA's view that para. (i) of the definition of "forgiven amount" does not apply in circumstances in which a bankruptcy is annulled as the result of a proposal under Part III of the Bankruptcy and Insolvency Act.

2010 Ruling 2009-0330901R3 - Reorganization of XXXXXXXXXX

no forgiven amount on transfer by unit trust to its parent of debt owing by parent

A unit trust (Trust 1) purchases for cancellation of most of its units held by its parent (Subco) in consideration for the transfer to Subco of debt owing by Subco. Ruling that no forgiven amount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) no ACB reduction for capital gain distributed to Trust parent on repurchase of most Trust units notwithstanding parent amalgamation before Trust year end 408
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.1) recognition of capital loss on distribution of capital gain through redemption of most of trust units by corporate unitholder 98

2012 Ruling 2012-0452821R3 - Forgiveness of debt

debt for debt-and-equity exchange structured to reduce s. 80 hit

Aco is a Canadian public company holding interest-bearing promissory notes (Bco Notes) and shares of a Canadian subsidiary (Bco). Preliminarily to a Plan of Arrangement:

  • Aco will transfer the Bco Notes (having an adjusted cost base equal to their principal) to a newly-incorporated CBCA corporation (Newco1) in consideration for the issuance of Newco1 common shares
  • Aco will transfer its Newco1 common shares to Bco in consideration for the issuance of a nominal number of Bco common shares
  • the paid-up capital of the Newco1 common shares will be reduced
  • Newco1 will be wound-up into Bco, with Bco making a s. 80.01(4) election
  • a CBCA corporation (New Aco) will be incorporated

Under the Plan of Arrangement:

  • convertible debentures owing by Aco will be converted into Aco common shares
  • Aco (and New Aco on its behalf) will deliver or issue cash, Aco senior notes, Aco debentures exchangeable into New Aco common shares and New Aco common shares in exchange for the debt (which is then cancelled) of existing debt holders of Aco – with Aco thereafter issuing first preferred shares and notes to New Aco in consideration for the issuance of the New Aco common shares to such debt holders
  • the pre-Arrangement common and preferred shares of Aco will be purchased by Aco in consideration for the delivery of New Aco common shares and cashless warrants to acquire New Aco common shares

Rulings:

  • ss. 40(2)(e.1) and 53(1)(f.1) will apply to the dispositions of the Bco Notes to Newco1, so that their ACB is preserved
  • the extinguishment of the Bco Notes on the winding-up of Bco will not give rise to a forgiven amount (per s. 80.01(4))
  • interest on the debt issued by Aco to the former debt holders will be deductible provided the interest on the former debt was deductible
  • capital losses arising to Aco under s. 111(4)(d) on the acquisition of its control by New Aco [i.e., because its first preferred shares are voting?] will form part of its capital losses for its taxation year ending immediately before such acquisition of control for purposes of s. 80(12)
  • the settlement of the debt of Aco will result in a forgiven amount
  • s. 245(2) will not apply
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(4) debt elimination through drop-down, transfer and wind-up 159

20 April 2009 Internal T.I. 2008-0302511I7 - LYONS - Open Market Purchase

s. 80 does not apply to open market purchases

On an open market purchase of liquid yield option notes ("Lyons"), s. 80 will not apply on the repurchase if s. 39(3) so applies (i.e., there is a gain on capital account). CRA stated:

[S]ubsection 39(3)...allow[s] for a capital gain or capital loss where a taxpayer purchases in the open market any obligation earlier issued by the taxpayer and these provisions would apply in these current circumstances. The provisions do not...affect transactions which are income transactions under the general rules for distinguishing income from a capital gain. ...Subsection 248(27) of the Act clarifies that the open market purchase of any portion of an obligation under subsection 39(3) of the Act is treated on the same basis as the purchase of the entire obligation. Further, the definition in subsection 80(1) of the Act of "forgiven amount", at paragraph (d) of the formula calculating B, clarifies that any portion of a debt extinguished under circumstances to which subsection 39(3) of the Act applies is not subject to the application of subsection 80(1) of the Act. Subsection 39(3) of the Act overrides any of the more general provisions. Accordingly, in our view, section 80 would not apply in the situation described.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(3) s. 80 does not apply to open market purchases 232

30 April 2004 External T.I. 2004-005753 -

Respecting the situation where a wholly-owned corporation with an accounting deficit was wound-up pursuant to s. 238(1)(e) of the Business Corporations Act (Ontario), the Agency noted that paragraph (i) of the definition of forgiven amount did not apply to a person who was an insolvent person but did not have the legal status of a "bankrupt". S.61.3(1) of the Act in effect provided that an insolvent corporation was required to recognize income as a consequence of s. 80(13) only to the extent of twice the amount of its net assets.

23 January 1996 External T.I. 5-952790 -

"Section 79 has priority over section 80 except if paragraph 80.01(8) has applied in a previous year." [Translation]

19 January 1996 T.I. 952810 (C.T.O. "Forgiven Amount - Second Partnership Tier")

Where a corporation that is active in the operations of a particular partnership is not a member of the particular partnership but, instead, is a member of a partnership which, in turn, is a member of the particular partnership, the exemption in paragraph (k) of the definition of "forgiven amount" will not be available.

Relevant loss balance

Administrative Policy

7 October 2011 APFF Roundtable, 2010-0371941C6 F - Application de l'article 80 - fusion/liquidation

NCL of acquired subsidiary preserved for debt forgiveness purposes on amalgamation but lost (if business ceased) on wind-up

Where following an acquisition of control of a subsidiary, non-capital losses and net capital losses of the subsidiary for taxation years ending before the acquisition of control are precluded from being carried forward under the rules in s. 111(5) and (4), such losses would not be includible in the relevant loss balance of the parent following a winding-up of the subsidiary under s. 88(1) given the application of the rules in s. 88(1.1)(b) and 88(1.2)(b) unless the condition in s. 88(1)(1.1)(e) continued to be satisfied at the time of the wind-up. However, such losses generally would be included in the amalgamated corporation's relevant loss balance by virtue of s. 87(2.1) if the subsidiary instead was amalgamated with the parent corporation under s. 87(1), provided that the restrictions in para. (d) and (e) of the relevant loss balance definition did not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) - Paragraph 88(1.1)(e) fiction in s. 80(13) is insufficient to preserve non-capital losses of a subsidiary from a business that ceased following an AOC where subsidiary wound-up and parent has forgiven amount 344

Subsection 80(2) - Application of debt forgiveness rules

Paragraph 80(2)(a)

Cases

Dieni v. The Queen, 2001 DTC 290 (TCC)

The transfer of Quebec real estate by the taxpayer to a lender pursuant to a Deed of Giving In Payment which was executed following an action by the lender that McArthur T.C.J. described (at p. 291) as "equivalent to that of mortgage foreclosure in most other provinces" was governed by s. 79 rather than s. 80. McArthur T.C.J. noted (at p. 294) that the lender and the taxpayer did not fix or vary their existing rights and obligations with respect to the property, and the lender took the property in accordance with the strict terms of its Deed of Loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 79 - Subsection 79(2) 100

Canada v. Diversified Holdings Ltd., 97 DTC 5203 (FCA)

legally binding settlement required

The predecessor of the taxpayer ("Diversified Holdings") purchased, in an arm's length transaction, all the shares of another BC company ("860"). Prior to the amalgamation of Diversified Holdings and 860 to continue as the taxpayer, a corporation wholly owned by the taxpayer's individual shareholder ("173235") purchased mortgage indebtedness of 860 owing to Central Trust Company as part of transactions that resulted in the encumbered land being transferred by 860 to Central Trust Company and the mortgage being discharged.

Although agreeing (at p. 5205) "that for all practical purposes the debt no longer exists", Strayer J.A. indicated (at p. 5206) "that for a debt to be settled or extinguished within the meaning of subsection 80(1) there must be a legally binding termination in form and that does not exist in the present case".

Words and Phrases
settle

See Also

Central City Financial Services Ltd. v. The Queen, 98 DTC 1021 (TCC), aff'd 98 DTC 6645 (FCA)

A hand-written settlement agreement (whose terms were not clearly described in the reasons for judgment) between the guarantor of debt of the taxpayer and the bank was characterized as giving rise at that time to a settlement of the debt notwithstanding that various matters (that were characterized by Margeson TCJ. as of an "administrative" nature) remained to be carried out.

Carma Developers Ltd. v. The Queen, 96 DTC 1798 (TCC), briefly aff'd 96 DTC 6569 (FCA)

Under a plan that was approved by the requisite majority of creditors in accordance with the companies' Creditors Arrangement Act, various classes of unsecured or undersecured creditors of the taxpayer ("CDL") transferred indebtedness of the taxpayer in exchange for shares of the taxpayer's parent corporation ("CL").

Bowman TCJ. found that the debts were not extinguished by novation notwithstanding that the creditors acknowledged to CDL that no further consideration was owed to them in respect of the assigned indebtedness, and stated (at p. 1802):

"A novation involves the creation of a new contractual relationship, generally where a debtor is released from its obligation to an obligee with the consent of the obligee and the assumption of the obligation by a third party so that a new obligation arises between the obligee and the third party. Here there is no new contract. The same debt of CDL continues to exist."

He also found that the debts had not been settled, and stated (at p. 1802):

"'Settle' connotes a final and legal resolution of a taxpayer's obligation whereby that obligation is reduced or brought to an end."

Words and Phrases
extinguish settle

Administrative Policy

26 May 2016 Internal T.I. 2016-0628741I7 - Interaction of s. 80 and s. 143.4

no settlement of debt under Plan before conditions precedent fulfilled

The Taxpayer, which for a number of years had gone without paying interest on its Notes, had a Plan accepted in Year X and implemented in Year X+1 after a number of conditions precedent had been fulfilled. “Notes, including the Interest Debt, will be settled on the Plan Implementation Date and be replaced with rights to Interest Distributions.” Although the Taxpayer mostly had not deducted the amounts of the Interest Debt, in its return (apparently for Year X), the Taxpayer added such amounts to its non-capital losses at the beginning of the year – then in Year X+1, it deducted the forgiven amount, equalling the difference between the Interest Debt and the fair market value of its assets, from the balance of its non-capital losses.

CRA indicated that, as the conditions precedent had not been satisfied, and the Plan implementation did not occur, in Year X, the settlement did not occur, and s. 80(2) did not apply, in that year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest only deductible in the year paid or payable 159
Tax Topics - Income Tax Act - Section 143.4 - Subsection 143.4(1) - Right to reduce right to reduce notwithstanding that conditions precedent to interest forgiveness not yet satisfied 311
Tax Topics - Income Tax Act - Section 143.4 - Subsection 143.4(4) s. 143.4(4) caused an immediate income inclusion of prior years’ interest that was to be forgiven at a later date under an approved Plan of Compromise 175

12 October 2016 Internal T.I. 2016-0637781I7 - Employee loan or debt extinguished or settled

writing-off debt was its settlement

Respecting the situation where an employee debt became statute-barred, and the employer then wrote it off because it was thus no longer legally collectible, CRA considered this writing-off to be sufficient to trigger s. 6(15).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(15) writing-off a statute-barred debt of an employee or remitting for financial hardship triggers benefit 213

21 November 2014 External T.I. 2014-0535361E5 - Debt forgiveness rules

"settle" denotes finality

In the course of a general discussion, CRA stated:

Carma Developers Ltd. v. The Queen, [1996] 3 C.T.C. 2029 (T.C.C.), affirmed at [1997] 2 C.T.C. 150 (F.C.A.), stated:

In the context of section 80, however, "settle" connotes a final and legal resolution of a taxpayer's obligation whereby that obligation is reduced or brought to an end. Moreover, it must be a final and legally binding termination or reduction of the debtor's obligations.

The Queen v. Diversified Holdings Ltd., [1997] 2 C.T.C. 263 (F.C.A.)… dealt similarly with this issue.

8 August 2014 External T.I. 2014-0524951E5 - Debt forgiveness; liability on dissolution

meaning of "settle"

Before going on to note that the debt parking rules in ss. 80.01(6) and (8) would in any event deem the debt to be forgiven, CRA noted that in the circumstances there might also be a settlement of the debt for nil consideration on more general principles, and quoted a statement in Carma Developers Ltd. v. The Queen, [1996] 3 C.T.C. 2029 (T.C.C.), affirmed at [1997] 2 C.T.C. 150 (F.C.A.), that "'settle' connotes a final and legal resolution of a taxpayer's obligation whereby that obligation is reduced or brought to an end… ."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(8) s. 50 write-down triggers deemed forgiveness 152

2 August 1994 T.I. 941805

Generally, it is the view of RC that s. 80 does not apply to an economic defeasance arrangement.

4 April 1997 T.I. 970436

"Section 80 would apply where a son repays a commercial debt obligation owing to his father from a gift received immediately before and for the sole purpose of repayment of the commercial debt obligation."

Paragraph 80(2)(b)

Administrative Policy

13 June 2011 External T.I. 2011-0393561E5 - Debt forgiveness

In the course of a general discussion, CRA stated:

Paragraph 80(2)(b) of the Act is a deeming clause, and, in essence, it provides that for the purposes of subsections 80(1) and (3), an amount of interest in respect of a debt shall be deemed to be a debt issued by a taxpayer that has a principal amount. Therefore, subsections 80(1) and paragraph 80(2)(b) of the Act, read together, apply both to the principal amount of a debt in its ordinary sense and the amount of the debt that is made up exclusively of interest deducted or deductible by the debtor.

15 July 2009 External T.I. 2008-0289731E5 - Forgiveness of Accrued Interest

In response to a question as to whether s. 80 would apply where interest is waived and forgiven in the same taxation year in which it was accrued, or whether such interest should be included in the debtor's income for that year by virtue of s. 9, CRA noted that where the gain on the settled debt is of an income nature, the debt is an excluded obligation (so that s. 80 does not apply), and stated that where the debt

is a trade debt or on account of income, it may be included in the taxpayer's computation of profit under section 9 of the Act. If the debt is considered on account of capital, section 80 of the Act may apply.

CRA concluded:

Therefore, where the interest amount is determined to be on account of income, and the interest on the debt is forgiven in the same taxation year in which the interest expense is deducted or deductible, the interest amount is included in income in that same taxation year. Generally, where such amount is forgiven in a subsequent year, in our view, section 80 of the Act will apply.

Paragraph 80(2)(g)

See Also

Corner Brook Pulp and Paper Limited (Formerly Deer Lake Power Company Limited) v. The Queen, 2006 DTC 2329, 2006 TCC 70

In determining the fair market value of shares issues by a subsidiary ("Deerlake Power"), a power company, to its parent in satisfaction of debt owing by Deerlake Power to its parent, it was appropriate to ignore a long term supply contract for the supply of electricity by Deerlake Power to its parent at prices substantially below current electricity prices, given that if the parent had ever wished to sell the shares of Deerlake Power, it first would have arranged for the cancellation of that contract. Accordingly, the debt forgiveness rules did not apply to the settlement of the debt as the shares issued had a fair market value substantially in excess of the debt.

King Rentals Ltd. v. The Queen, 96 DTC 1132 (TCC)

The pre-1994 version of s. 80 did not apply to the satisfaction of indebtedness of the taxpayer (a New Brunswick corporation) through the issuance of preferred shares having an equivalent par value but a much lower fair market value. Lamarre TCJ. stated (at p. 1138):

"Here, by issuing the shares in full satisfaction of its liabilities ... the Appellant gave up its rights to claim from the subscriber the price that it would have been entitled to receive on this share subscription, which is the par value of the new shares. The Appellant therefore acted in conformity with the statute as the shares were paid in property (forgiveness of the debt) that was the fair equivalent of the money that the Appellant would have received if the shares had been issued for money."

Administrative Policy

10 March 1999 External T.I. 5-982912 -

Although a price adjustment clause may be used for satisfying the requirements of s. 80(2)(g), "an acceptable price adjustment clause should not involve the cancelling of issued shares or the issuing of additional shares".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 34

Paragraph 80(2)(h)

Administrative Policy

28 February 1996 TI 960179

Where a debt denominated in U.S. dollars was replaced by a new debt obligation denominated in Canadian dollars whose amount was equivalent to the U.S.-dollar debt at the current exchange rate, there would be a foreign exchange gain recognized and no forgiven amount recognized.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) s. 39(2) rather than s. 80 applicable to replacement with C$ obligation 47
Tax Topics - Income Tax Act - Section 80 - Subsection 80(2) - Paragraph 80(2)(k) 47

1995 Alberta CICA Roundtable Q. 4, 7-951210 -

There is no forgiven amount where one commercial debt obligation is exchanged for another commercial debt obligation having the same principal amount.

Articles

Marie-Andrée Beaudry, Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations", 2015 Annual CTF Conference paper

Changes that reduce debt FMV (p. 13:7)

[C]hanges to certain terms of a debt, such as interest rates and payment schedules, should not lead to a forgiven amount in and of themselves, provided that the principal amount of the debt is not altered, even though such changes may reduce the market value of the debt….

Paragraph 80(2)(k)

Administrative Policy

2009 Ruling 2009-0313921R3 - Wind-up of creditor into debtor

Ruling that when a Canadian debtor is wound-up into its Canadian parent and an election under s. 80.01(4)(c) is made, then, in light of s. 80(2)(k), no gain or loss will be realized under s. 39(2).

28 February 1996 TI 960179

Where a debt denominated in U.S. dollars was replaced by a new debt obligation denominated in Canadian dollars whose amount was equivalent to the U.S.-dollar debt at the current exchange rate, there would be a foreign exchange gain recognized and no forgiven amount recognized.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) s. 39(2) rather than s. 80 applicable to replacement with C$ obligation 47
Tax Topics - Income Tax Act - Section 80 - Subsection 80(2) - Paragraph 80(2)(h) 47

Articles

Carrie Aiken, Johnson Tai, "Debt Restructuring Transactions – Issues, Strategies and Trends", 2016 CTF Annual Conference draft paper

Facts of conversion of DIP financing and USD bonds to equity (pp. 7-8)

Canco has US$1 billion of bonds (the "Bonds") payable to unrelated parties (the "Bondholders")… [who] do not constitute a "group of persons"… . The Bonds were issued when one US dollar was worth CAD$1…. Canco has CAD$1 billion of adjusted cost base…in its FA shares. FA has no material… surplus. Canco owns no other assets. The current fair market value of the FA shares is… US$100 million. The fair market value of the Canco shares is nominal…[and] of the Bonds is…US$100 million. … One US dollar is currently worth CAD$1.30. Canco has CAD$500 million of non-capital losses and no net capital losses. … All of the non-capital losses are attributable to deductible interest expense on the Bonds.

An unrelated Canadian corporation ("Buyer") proposes to provide US$200 million of debtor-in-possession ("DIP") financing. … Buyer anticipates that after Canco emerges from CCAA, Buyer will own approximately 67% of the shares of Canco (with a fair market value of US$200 million) as a result of Buyer receiving shares of Canco in complete settlement of the DIP financing, and the Bondholders will receive shares of Canco representing 33% of the issued and outstanding Canco shares (with a fair market value of US$100 million) in complete settlement of the Bonds.

Application of s. 111(12) if DIP financing settled first (pp. 9-10)

[S]uppose that the DIP financing is settled 1st, immediately followed by the settlement of the Bonds… .

As a result of the LRE, Canco has a CAD$870 million capital loss from the write down of the ACB in its FA shares [and] Canco has a CAD$300 million foreign currency capital loss from the write down of its Bonds.

The CAD$900 million forgiven amount arising from the Bond settlement would be applied first to Canco's CAD$500 million of non-capital losses… The remaining CAD$400 million forgiven amount would be applied to reduce Canco's net capital losses….

Application of s. 39(2) (on non-forgiven amount only) if DIP financing settled 2nd (pp. 9-10)

Now…the Bonds are settled on Day 1 and the DIP financing is settled on Day 2:

Canco recognizes a CAD$30 million foreign currency capital loss from the settlement of the Bonds (US$100 million x 1.30 minus US$100 million x 1.00). It should be noted that this is significantly less than the CAD$300 million foreign currency capital loss from a write down of the Bonds triggered by a LRE. …

The CAD$900 million forgiven amount arising from the Bond settlement would be applied first to reduce Canco's CAD$500 million of non-capital losses. Canco can then designate, under subsection 80(10), CAD$370 million to reduce Canco's ACB in its FA shares to CAD$630 million (i.e., CAD$1 billion minus CAD$370 million). Lastly, Canco can use its current year CAD$30 million foreign currency capital loss to offset the remaining CAD$30 million forgiven amount under subsection 80(12).

There would be an acquisition of control and loss restriction event for Canco when the DIP financing is settled on Day 2 because the Buyer would acquire 67% of Canco's issued and outstanding shares from this settlement. The principal tax consequence of this LRE would be a CAD$500 million capital loss from the write down of the ACB in its FA shares (i.e., CAD$630 million ACB minus CAD$130 million fair market value).

Subject to the limitations set out in subsection 111(4), Canco ends up with CAD$500 million of net capital losses (CAD$30 million minus CAD$30 million plus CAD$500 million).

If the Bonds are settled first, immediately followed by the settlement of the DIP financing on the same day, subsection 256(9) would deem the acquisition of control and loss restriction event arising from the DIP financing settlement to occur at the beginning of the day, and thus before the Bond settlement. The tax consequences of this sequencing of events would be the same as those described above for the DIP financing settlement-Bond settlement sequencing. Making an election for subsection 256(9) not to apply in this "same day" situation would reverse the sequence of events so that the Bond settlement occurs before the DIP financing (and resulting LRE). …

Comparison of two sequences (pp. 10-11)

The CAD$270 million difference is attributable to different foreign currency capital loss amounts – a CAD$300 million foreign currency capital loss under the DIP financing settlement – bond settlement sequencing, versus a CAD$30 million foreign currency capital loss under the Bond settlement – DIP financing settlement sequencing.

In the example described above, there are sufficient tax attributes under either sequencing of events to absorb the entire forgiven amount, making the sequencing irrelevant from solely a debt forgiveness perspective. However, there may be other reasons to maximize the amount of capital losses and other tax attributes in this type of situation -- for example, Canco may be under a CRA audit and the auditor may be questioning significant portions of Canco's non-capital losses, or there may be some doubt as to the accuracy of the ACB of the FA shares.

Didier Fréchette, Ryan Rabinovitch, "Current Issues Involving Foreign Exchange", 2015 CTF Annual Conference paper

Repayment of FX debt with Cdn-dollar note (pp. 26:31-32)

[T]he application of paragraph 80(2)(k) is less straightforward, however, when the debt is repaid in Canadian dollars. ...

The issue arose in [9601795] involving the following facts. A US$1,000 note was issued by a Canadian company for US$1,000 at a time when the US dollar was worth Cdn$1.40. The note was then repaid using a Cdn$1,000 note when the US dollar and the Canadian dollar were trading at par. Because the debt was repaid with a promissory note, it was necessary to apply paragraph 80(2)(h), which states that where an old debt is repaid with a new debt, an amount equal to the principal amount of the new debt is deemed to have been paid in satisfaction of the old debt.

The CRA applied somewhat convoluted reasoning to avoid the application of the debt-forgiveness rules. It concluded that the principal amount of the Cdn$l,000 note must first be converted into US dollars at the exchange rate in effect at the time of repayment (into US$1,000), and then be converted back into Canadian dollars at the exchange rate in effect at the time the debt was originally issued (into Cdn$1,400). The result of these calculations was that the amount paid in satisfaction of the debt was the same as the principal amount and the amount paid in satisfaction of the note. ...

Notwithstanding the policy intent, the CRA's reasoning has been criticized on the basis that it produces the wrong result in the "reverse scenario," described as follows. [fn 98: See Firoz Ahmed and Jack A. Silverson, "The New Debt-Forgiveness Rules: Planning Opportunities and Traps for the Unwary,"…1996 Conference Report…21:1-38. ...] A US$1,000 note is issued by a Canadian company when the US dollar and the Canadian dollar are trading at par, and is then repaid using a Cdn$1,000 note when the US dollar is worth Cdn$1.40. Under paragraph 80(2)(k), the principal amount of the old note is deemed to be Cdn$1,000, and the principal amount of the new note—using the reasoning of the CRA—must be converted into US dollars using the current exchange rate (resulting in an amount of US$714), and then back into Canadian dollars using the exchange rate in effect at the time the note was originally issued (resulting in an amount of Cdn$714). Accordingly, a debt forgiveness of Cdn$286 results. The authors state that this contradicts the purpose of paragraph 80(2)(k), which is to avoid a debt forgiveness arising as a result of a currency fluctuation. …

In our view, the result reached in what is characterized as the reverse scenario is not inappropriate. The issuer has a Cdn$286 debt forgiveness, but presumably it also has a Cdn$286 foreign exchange loss (thus resulting in a new tax attribute). The issuer has repaid US$714 of its loan with Cdn$1,000 and the issuer received Cdn$714 for this portion of the loan. …

Repayment of FX debt with FX-denominated property (pp. 26: 32-33)

Similar questions arise when a foreign-currency denominated debt is repaid with foreign-currency denominated property, such as an amount owing to the debtor (by setoff), a promissory note/debt owing by a third party, or preferred shares denominated in foreign currency. ...

The taxpayer in Richer owed US$1.3 million to the manager of four limited partnerships, which had made loans to the taxpayer in an amount sufficient to permit him to make certain capital contributions to the partnerships. The manager of the limited partnerships owed the taxpayer US$0.1 million in damages as a result of having improperly charged management fees to the limited partnerships, and its obligations to the taxpayer were set off against the US$1.3 million owing by the taxpayer. Jorré J of the Tax Court of Canada held that the "amount paid" in respect of the US$1.3 million must be computed using the exchange rate in effect at the time the US$1.3 million debt first arose under paragraph 80(2)(k).

Carrie Smit, "Debt Restructuring and the Falling Canadian Dollar"

No automatic offset of FX loss against forgiven amount on USD debt restructuring (p. 5)

Canadian corporations undergoing debt restructurings of US dollar denominated debt will need to understand the interaction of section 80 (and the computation of a "forgiven amount") and subsection 39(2) (respecting the realization of foreign exchange gains and losses). A common misconception is that the entire foreign exchange loss inherent in a US dollar denominated debt may be utilized to offset the forgiven amount arising on a debt restructuring….

Example of separate s. 80(2)(k) forgiven amount and s. 39(2) FX gain (pp. 5-6)

[A]ssume that the Canadian debtor described above is now settling and extinguishing the US$100 million debt for cash consideration of US$15 million (or CDN$21.43 million). Assuming that the US$100 million of debt was issued when the currencies were at par, and that the Canadian dollar is now valued at US$0.70…[t]he foreign exchange loss under subsection 39(2)…is calculated as the Canadian dollar equivalent of US$l5 million using the current exchange rates (CDN$21.43 million) less the Canadian dollar equivalent of US$15 million using the exchange rate at the time the debt was issued (CDN$15 million).

In aggregate, the Canadian debtor has realized a forgiven amount of CDN$85 million and a foreign exchange loss of CDN$6.43 million….

Need to use up other s. 80 attributes first before using current s. 39(2) (p. 6)

[U]nder section 80, the foreign exchange loss of CDNS6.43 million realized on the debt exchange cannot be used to offset the CDN$85 million forgiven amount if there are sufficient other tax attributes in the debtor. In particular, if the debtor has non-capital or capital loss carryforwards, undepreciated capital cost, cumulative eligible capital, resource pools, or adjusted cost base in certain capital property, those attributes must be used before the forgiven amount can be applied against the current year foreign exchange loss. Accordingly, planning to utilize or move other more valuable tax attributes prior to the debt forgiveness should be considered.

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Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) 132

Thomas A. Bauer, "Restructuring Debt Obligations", 2008 Conference Report

Discussion of issues where US dollar debt is settled in Canadian dollars (an issue raised in 1996 Conference Report article by Firoz Ahmed and Jack Silversen entitled "The New Debt Forgiveness Rules: Planning Opportunities and Traps for the Unwary").

Paragraph 80(2)(o)

Administrative Policy

2 October 1997 T.I. 972542

"Paragraph 80(2)(o) of the Act results in section 80 only applying to the particular person for his proportionate share ... . Section 80 of the Act will not apply with respect to the settled amount to any of the other debtors other than the particular person."

Subsection 80(3) - Reductions of non-capital losses

Administrative Policy

17 June 2003 External T.I. 2002-017825 -

The non-capital losses of a subsidiary which amalgamates with its parent would be available to be applied against a forgiven amount arising on the forgiveness of a commercial debt obligation incurred by the subsidiary before the amalgamation. In particular, s. 87(2.1)(a) would apply to the application of s. 80(3): even though s. 80(3) is in Division B, not Division D, and s. 87(2.1)(a) applies for Division D and not Division B purposes, s. 80(3) applies for the purpose of computing Amalco's taxable income in Division D including a determination of Amalco's non-capital losses.

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Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) 90

Articles

Marie-Andrée Beaudry, Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations", 2015 Annual CTF Conference paper

Wind-up of subsidiary (Subco) immediately before CCAA compromise to insulate its non-capital losses (“NOLs”) from s. 80 (p. 13:16)

The winding up of Subco into Pubco also results in Subco's ... NOLs flowing up to Pubco pursuant to subsection 88(1.1). However, these NOLs are only available to be utilized by Pubco beginning in respect of its next year that commences after the year in which the windup of Subco occurs. Importantly, these NOLs should not be considered NOLs of Pubco for the year of Pubco ending before compromise, and therefore they should not be reduced by any forgiven amount of Pubco that arises in the year of Pubco in which the debt settlement occurs. ....

Paragraph 80(3)(a)

Administrative Policy

23 May 2012 Internal T.I. 2011-0418071I7 F - Remise de dettes, PAC

debt settlement results in immediate application of forgiven amount to reduce NCL at that time

After the taxpayer had settled a commercial debt obligation so as to give rise to a forgiven amount, it was assessed by CRA to increase its taxable income for two other taxation years. CRA acceded to the taxpayer’s request to apply non-capital losses (NCLs) which the taxpayer had sustained in taxation years preceding that of the debt settlement because it was not yet aware of the debt settlement, as the return for the debt-settlement year had not yet been filed. When the return was filed, the taxpayer applied the forgiven amount against its undepreciated capital cost balance.

In finding the forgiven amount should have instead reduced the NCLs that had been incorrectly applied to carryover to the assessed taxation years, the Directorate stated:

Where a debt settlement occurs, element D.2 of the definition of NCL in subsection 111(8) reduces the amount of the NCL in a taxation year by the amount of the reduction that results from the application of section 80. Consequently, the NCL for each taxation year that ended before the time of settlement of the debt is reduced within the limits set out in paragraph 80(3)(a). The NCL reduction for a taxation year due to a debt settlement is applicable from the moment the debt settlement takes place.

In other words, the settlement of a commercial debt that results in the application of section 80 automatically and immediately reduces the NCL balance for a taxation year because of the D.2 element of the NCL definition in subsection 111(8).

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Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(8) - Non-Capital Loss - D.2 debt settlement results in immediate application of forgiven amount to reduce NCL at that time 215

Subsection 80(4) - Reductions of capital losses

Administrative Policy

92 C.M.TC - Q.15

S.80(4) would not apply to accrued but unpaid interest for a cash basis farmer, because such interest is not deductible until paid.

92 C.M.TC - Q.14

Where a debt owing by a cash-basis farmer including accrued but unpaid interest is settled by a cash payment of less than the full amount owing, and the mortgage provides that all payments will be applied against outstanding interest first, RC will consider the payment to have been applied first against accrued but unpaid interest.

11 June 1991 T.I. (Tax Window, No. 4, p. 8, ¶1297)

S.80 does not apply to forgiven interest which was not deductible because of the thin capitalization rules.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) 46

Articles

Marie-Andrée Beaudry, Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations", 2015 Annual CTF Conference paper

Generation of net capital losses (NCLs) to absorb forgiven amount (p. 13:11)

Another common tax planning theme…is to trigger any embedded capital losses on the shares of related subsidiaries held by the debtor in the year preceding the year of debt settlement so that those embedded capital losses will become NCLs and any forgiven amount will be mandatorily applied to those NCLs (after NOLs are fully reduced). Because of the issues that arise with respect to designating an unapplied forgiven amount to be applied to reduce the ACB of the shares of related subsidiaries (discussed above), the realization of embedded losses in those shares can effectively allow the debtor to apply a forgiven amount to the embedded loss in those shares without having to first make mandatory designations to reduce other valuable tax attributes or enter into a section 80.04 agreement with the subsidiary. Such an agreement would expose the tax attributes of the related subsidiary to the application of the debt-forgiveness rules. ...

Subsection 80(5) - Reductions with respect to depreciable property

See Also

Richer v. The Queen, 2009 DTC 1413, 2009 TCC 394

After finding that various other provisions subsequent to ss.80(3) and (4) applied only if the taxpayer chose to utilize them, Jorré, J. found that the remaining balance of the forgiven amount after being applied under ss.80(3) and (4) was to be included (as to 1/2 thereof) in the taxpayer's income, as the taxpayer had not made such a designation. Accordingly, there was an inclusion in a statute-barred taxation year of the taxpayer, and the undepreciated capital costs of depreciable property of the taxpayer was not reduced.

MNR v. Mid-West Abrasive Co. of Canada Ltd., 73 DTC 5429, [1973] CTC 548 (FCTD)

Sweet, D.J. indicated that under an arrangement where a Canadian subsidiary agreed to pay interest "when requested" on advances totalling $210,000 made to it by its U.S. parent, liability for interest was created on the execution of the promissory notes and that the U.S. "lender's omission to make the request would merely be a waiver of its rights and a forgiveness of the respondent's liability for interest which existed from the beginning."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) 109
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) indefinite payment arrangements for interest 74

Administrative Policy

2007 Ruling 2007-0245281R3 - windup of income trust on sale of assets:3rd party

In connection with the winding-up of an income fund (the "Fund") after the acquisition of all its units, the Fund disposes of its assets (principally, limited partnership units) to the acquiring corporation ("Bidco") in consideration for a note of Bidco, and then distributes the note to Bidco in satisfaction of a capital distribution and capital gains distribution declared by the Fund so that the note is extinguished as a matter of law.

Ruling that there will be no forgiven amount upon such extinguishment of the note.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.3) capital loss on redemption of trust units following distribution of most of its assets including as capital gains distribution 106
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) no ACB reduction for capital gains distribution by unit trust to bidco 84
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) trustees making filings on behalf of terminated fund 46
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) assumed debt traceable to capital distribution 93
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) realization and distribution of target MFT gain 99
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 86

5 December 2003 External T.I. 2002-0165195 - Debt Forgiveness in Foreign Affiliates

"If a portion of the debt has been used to earn FAPI, and the remainder to earn active business income, we are of the view that the whole debt would be a 'commercial debt obligation', not just the portion that related to the earning of FAPI ... if any amount in respect of interest on the CFA1 debt would have been deductible in computing CFA1's FAPI had interest been paid or payable thereon, the income inclusion attributable to the forgiveness of the whole debt would be brought into the computation of FAPI. However ... the forgiveness of the CFA1 debt does not affect the computation of FAPI because all of the debt was used to earn dividends from subsidiaries and interest income that was deemed active business income pursuant to subparagraph 95(2)(a)(ii) ... ."

9 September 2002 External T.I. 2002-014100 -

Canco, which is indebted to an NRO in an amount greater than the value of its assets, receives a contribution of capital from its non-resident parent in an amount sufficient to pay off that debt. "Section 80 would not appear to apply, since the total debt will be repaid in cash."

2 August 1994 T.I. 941805 (C.T.O. "Economic Defeasance")

S.80 would not apply to a defeasance arrangement under which the debtor is not relieved of its legal obligations under the debt instrument but discharges the debt in economic terms by settling upon a trust some income-producing assets that will be sufficient to meet scheduled payments of interest and principal.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 50

5 April 1994 T.I. (C.T.O. "Debtor's Gain on Settlement of Debt")

Non-capital losses arising before an acquisition of control can be utilized under s. 80(1)(a) even though the prospects for such losses otherwise being deducted from taxable income for future taxation years are less than 100%.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 34

93 C.R. - Q. 46

Pursuant to s. 80(1)(a), non-capital losses for preceding taxation years will not be reduced where they are not deductible in computing the taxpayer's taxable income for the year or a subsequent year. Accordingly, pre-acquisition losses that are not available for carry forward will not be reduced by a post-acquisition forgiveness.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 50

9 May 1994 Memorandum 940934 (C.T.O. "Shares Issued for Debt")

Where shares are issued in exchange for indebtedness, and the shares have a lower fair market value, s. 80 will apply to the difference notwithstanding that the full amount of the indebtedness cancelled was added to the stated capital of the shares issued.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 42

92 C.R. - Q.18

Where s. 87(7) applies to a winding-up by virtue of s. 88(1)(e.2), s. 88(1) will not apply to an obligation of the subsidiary that is assumed on the winding-up.

92 C.M.TC - Q.14

Where a debt owing by a cash-basis farmer including accrued but unpaid interest is settled by a cash payment of less than the full amount owing, and the mortgage provides that all payments will be applied against outstanding interest first, RC will consider the payment to have been applied first against accrued but unpaid interest.

91 CPTJ - Q.2

The acquisition of control of a parent holding an intercompany debt (resulting in the application of s. 111(4)(d)) does not result in the application of s. 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 26

November 1991 Memorandum (Tax Window, No. 13, p. 17, ¶1581)

S.80 can be applied only at the partnership level and cannot be applied to the partners.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 16

23 October 1991 Memorandum (Tax Window, No. 12, p. 23, ¶1549)

Accounts receivable arising in the normal course of the business of a taxpayer are not capital property of the taxpayer for purposes of s. 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 24

11 October 1991 Memorandum (Tax Window, No. 11, p. 22, ¶1518)

Where there has been a forgiveness of debt of the taxpayer before the end of the year that the taxpayer has disposed of all its depreciable property of a class, the undepreciated capital cost of the class at the end of the year must be determined after making the adjustments required by s. 80. S.80 will be applied where capital property of a taxpayer has been transferred to a creditor prior to the forgiveness or settlement as part of the same series of transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 83

10 July 1991 Decision Summary (Tax Window, No. 5, p. 12, ¶1346)

S.80 will not apply to debt restructurings involving an extension of the time to repay or a change in the method of calculating interest at a commercial rate, provided there is no novation. However, s. 80 should apply on the conversion of an interest-bearing debt to a non-interest bearing debt because such a conversion does not indicate a genuine restructuring.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 59

26 June 1991 T.I. (Tax Window, No. 4, p. 8, ¶1317)

Where $100,000 is lent to A and B on a joint and severable basis and the debt later is settled for $60,000 paid by A and B in proportion to their use of the money, s. 80 will apply to A and B only to the extent of their respective shares of the forgiven $40,000.

Where A instead pays B $25,000 to assume A's joint and severable obligations on the $100,000 debt, s. 80 will not apply at the time of the assumption if C does not release A from its obligation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 85

3 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 11, ¶1062)

Where receivables are transferred to the debtor corporation in consideration for treasury shares, s. 80 applies if the fair market value of the shares is less than the principal amount of the debt.

8 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 10, ¶1046)

Ss.69(1)(a) and 80(1) both will be applied where a creditor accepts low fair market value shares in satisfaction of the debt previously owing to it.

90 C.P.T.J. - Q.5

Where the creditors of a corporation in financial difficulty agree to exchange their debt for common shares of the corporation on the basis of the market price of a share on the date of the agreement, section 80 will apply if the market price of the shares declines by the time for closing the exchange.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 54

11 June 1990 T.I. (November 1990 Access Letter, ¶1524)

Where a parent corporation sells depreciable property to a wholly-owned subsidiary under a sales agreement, the depreciable property is transferred back to the parent on default by the subsidiary at a time that the property has a UCC of $100,000 and a fair market value of $50,000, and the debt owing by the subsidiary of $80,000 to the parent is extinguished by a quit claim deed, s. 80 will apply to the amount of $80,000 owing by the subsidiary to the parent.

7 June 1990 T.I. (November 1990 Access Letter, ¶1522)

Where a corporate taxpayer makes a gain on the purchase of its obligation where s. 39(3) does not apply, s. 80 will apply to the gain.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 24

10 April 1990 Memorandum (September 1990 Access Letter, ¶1421)

The loss of the right to sue by prescription does not result in the settlement or extinguishment of the debt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 20

30 October 89 T.I. (March 1990 Access Letter, ¶1146)

Because the disposition of money in Canadian currency would not result in a capital gain or a capital loss, money is not a capital property for purposes of s. 80(1).

89 C.M.TC - Q.21

a partnership is a taxpayer for purposes of ss.79 and 80.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 10

88 C.R. - Q.14

Where the debts of a partnership have been settled or extinguished, s. 80(1)(a) will not reduce the losses of the partners.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 21

87 C.R. - Q.58

On the conversion of an interest-bearing debt into a non-interest bearing debt, the interest-bearing debt will be settled or extinguished on the conversion for an amount equal to the fair market value of the non-interest bearing debt at the time of the conversion.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 43

86 C.R. - Q.60

Generally, S.80 has no effect where the taxpayer has no loss carryforwards or capital property.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 15

80 C.R. - Q.38

Re application of s. 80 to the cancellation of debt on the winding-up of a subsidiary.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 15

80 C.R. Q.46

S.6(1)(a) generally will prevail over s. 80 when an employee stock-acquisition loan is forgiven.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 14

79 C.R. Q.27

Where a shareholder contributes funds to the corporation which in turn are paid to satisfy the debt owing to him, s. 80 may apply. RC is prepared to rule that s. 80 is not applicable where the shareholder limits the adjustment to his ACB to the increase in the fair market value of his shares.

S.80 applies where an outstanding debt is converted under its terms into shares of the corporation which have a value lower than the principal amount of the debt.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 81

IT-293R "Debtor's Gain on Settlement of Debt"

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

IT-382 "Debts Bequeathed or Forgiven on Death"

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

IT-239R2 "Deductibility of Capital Losses from Guaranteeing Loans for Inadequate Consideration and from Loaning Funds at less than a Reasonable Rate of Interest in Non-arm's Length Circumstances" under "Application of Section 80"

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

Articles

Schafer, "Tax Implications of Restructuring and Refinancing", 1992 Corporate Management Tax Conference Report, c. 4.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

Wertschek, "Application of a Corporation's Indebtedness to the Issue Price of its Shares Constitutes the Full Payment of the Debt", Corporate Structures and Groups, Vol. 1, No. 2, 1992, p. 16

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

Frankovic, "Taxing Times: Foreclosures, Default Sales, Debt Forgiveness, Doubtful and Bad Debts", 1991 Canadian Tax Journal, p. 889.

Durand, "Debt Restructuring for Companies in Financial Difficulty", Tax Aspects of Corporate Financing, CCH Seminars, September 13, 1990

Discussion of authorities supporting the proposition that s. 80 does not apply where a taxpayer in financial difficulty issues shares or debt in replacement of its existing indebtedness.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 27

Brussa, "Strategies for Troubled Times", 1990 Conference Report, c. 17.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

Flynn, "Restructuring Financially Troubled Corporations", 1989 Conference Report, c. 19.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

Couzin, "Debt Restructuring", 1986 Corporate Management Tax Conference Report, p. 140.

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Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 0

Subsection 80(9) - Reductions of adjusted cost bases of capital properties

Administrative Policy

22 March 2017 External T.I. 2016-0666481E5 - Debt forgiveness in a tiered partnership

on wind-up of lower-tier partnership, ACB bump from its s. 80(13) forgeiveness income is included

A bottom partnership (BP) is wound-up into its partners including an upper-tier partnership (TP) in the same year that BP realizes debt-forgiveness income under s. 80(13).

CRA considers that s. 80(15) would apply to TP, so that it would have a deemed debt forgiveness equal in amount to the s. 80(13) income of BP that was allocated to it for the year. If TP was unrelated to BP (meaning, broadly, that it had a minority interest), TP would be able under s. 80(9) to apply its deemed forgiven amount first against the ACB of its BP partnership interest that was disposed of on the winding-up and which was increased by the amount of the s. 80(13) income allocated to it – so that there would be a reduced, or no, amount of remaining s. 80(13) debt forgiveness income to be allocated by TP to its partners. If TP was related to BP, it could not utilize s. 80(9), and a larger amount of s. 80(13) income would be allocated to TP’s partners.

Either way, s. 80(15) would also apply at the level of TP’s partners, so that they could apply their own tax attributes to absorb any s. 80(13) income which was allocated to them.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Sulbsection 80(15) double application of s. 80(15) and dovetailing with s. 80(9) where lower-tier partnership is wound-up into upper-tier partnership 335

10 January 2011 External T.I. 2010-0371021E5 - Debt forgiveness - 80(9)(a)

Debts issued by a partnership will not be considered to be debts issued by a corporate member of that partnership, provided that there is a bona fide partnership and that the partners are jointly and severally liable for partnership debts. Consequently, a debtor is generally allowed under s. 80(9)(a) to reduce the adjusted cost base to the debtor of a capital property that is a debt issued by a partnership related to the debtor if all the conditions of subsection 80(9) are otherwise met.

Subsection 80(13) - Income inclusion

See Also

GKN Sinter Metals - St. Thomas Ltd. v. The Queen, 2006 DTC 3025, 2006 TCC 248

Before going on to consider the interpretation of regulations pursuant to the debt forgiveness rules that have since been repealed, Paris J. applied a statement of a commentator that:

"The tax policy rationale for triggering a tax gain when a debt forgiveness occurs is that the debt enabled the debtor to acquire property or make expenditures that gave rise to deductions in computing income. To the extent that debt is forgiven, the cost of the expenditures has not been borne by the debtor, and should therefore not be recognized for tax purposes."

Administrative Policy

2 September 2009 Internal T.I. 2009-0329251I7 F - Application du paragraphe 80(16)

s. 80(13) income was from the debtor's business

The forgiveness of a commercial debt obligation that ACO had issued in the course of carrying on its business gave rise under s. 80(13) to income from that business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(16) s. 80(16) designation under s. 80(11) increased s. 80(13) income inclusion 209
Tax Topics - Income Tax Act - Section 111 - Subsection 111(8) - Non-Capital Loss - A s. 61.3 deduction reduced non-capital loss 281

2 June 2003 External T.I. 2003-000248 -

A farmer transfers farm property to an adult child at fair market value taking back a promissory note as consideration, then makes a gift to his child of enough funds to allow for repayment of the note. Such a transaction would appear to be undertaken primarily to avoid the consequences of section 80, which would otherwise apply on a straightforward forgiveness of the debt, and, accordingly, such transaction may be subject to s. 245(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 72

Articles

Marie-Andrée Beaudry, Dean Kraus, "Selected Income Tax Considerations in the Court-Approved Debt Restructurings and Liquidations", 2015 Annual CTF Conference paper

Requirement to use related person’s tax attributes on s. 80.04 designation (p. 13:9)

Further considerations arise when a debtor seeks to make a designation of the forgiven amount in respect of the shares or debts of the related corporation or interests in related partnerships (i.e. the third category of capital property referenced above [in s.80(11)]. In fact, such a designation would not reduce the amount included in the debtor's income under subsection 80(13) by the amount designated in respect of that third category of capital property to the extent that certain related parties of the debtor have "gross tax attributes" and an amount of "residual balance" exists. An amount of "residual balance" generally exists if the gross tax attributes of related entities exceed the debtor's unapplied forgiven amount.

Conversion of non-capital losses (“NOLs”) to other attributes (p. 13:10-13:11)

A common planning theme in a restructuring context is to seek to maximize the tax attributes of the debtor following restructuring by effectively converting NOLs into other tax attributes that will be available after debt settlement. In this respect, there is an inherent arbitrage potential in the application of the debt forgiveness regime because any forgiven amount will mandatorily reduce NOLs on a dollar-for-dollar basis, while any remaining forgiven amount, after mandatory and elective applications of the forgiven amount to the tax attributes of the debtor, will only result in a one-half inclusion of the remaining forgiven amount in the debtor's income. ...

[W]ays that NOLs can effectively be converted into other tax attributes….[include] amend[ing] tax returns for taxation years ending prior to the taxation year in which the settlement of the debt occurs in order to reduce discretionary deductions (for example, capital cost allowance [CCA] or deductions in respect of CEC) and thereby reduce NOLs, with the result that the debtor could have increased deductible pools after emerging from the restructuring process. Similarly, not claiming certain reserves (for example, under paragraph 20(1)(m)) in the year preceding settlement may also reduce NOLs and potentially provide a benefit to the debtor. Another planning avenue to consider in order to accelerate income and thereby reduce NOLs includes the debtor effecting an internal taxable transfer of assets in the year preceding settlement. …

[C]areful tax modeling will be required to ensure that no material cash taxes will arise in the year of the restructuring as a result of the income inclusion under subsection 80(13), taking into account the potential five-year inclusion under section 61.4… .

Debt slides (p. 13:11)

[O]ther planning avenues…include (i) a so-called tuck-under transaction to eliminate underwater debt owed between corporations in the same corporate group... . [fn 42: See…Advanced Tax Ruling 66…and…2004-0081691R3.]

Bernstein, "Update on Debt Forgiveness - Part I", Tax Profile, Vol. 4, No. 25, July 1995, p. 269.

Ahmed, "Debt Forgiveness Rules and Share Purchase Transactions", Canadian Current Tax, March 1995, Vol. 5, No. 6, p. 58.

  • The creditor must accept the new debtor as principal debtor and not merely as an agent or guarantor; and
  • The creditor must accept the new contract in full satisfaction and substitution for the old contract." [check]

Sulbsection 80(15)

Administrative Policy

22 March 2017 External T.I. 2016-0666481E5 - Debt forgiveness in a tiered partnership

double application of s. 80(15) and dovetailing with s. 80(9) where lower-tier partnership is wound-up into upper-tier partnership

What is the interaction of ss. 80(9) and (15) where a bottom partnership (the “BP”) in a tiered partnership structure has a forgiven amount in the same year that the BP is wound up? CRA responded:

…BP would have a fiscal period that was deemed to end immediately before the time that is immediately before the time that the BP ceases to exist (the “deemed fiscal period”). Thus, the BP’s income inclusion under subsection 80(13) would be included in the deemed fiscal period, and, as a partner of the BP, the top partnership (the “TP”) could deduct an amount in respect of the relevant limit which would then be deemed to be a commercial debt obligation that was issued by the TP and settled at the end of the BP’s deemed fiscal period. The TP could then apply this forgiven amount against its own tax attributes under subsections 80(5) to 80(10), as applicable.

With regard to subsection 80(9), the forgiven amount may only be applied against the ACB of the TP’s interest in the BP if the BP is not related to the TP. If the BP is not related to the TP, the forgiven amount could be applied to the ACB of the TP’s interest in the BP determined immediately after the BP’s deemed fiscal period, which would include the TP’s share of any income inclusion for that deemed fiscal period, including any income included under subsection 80(13).

The balance of any forgiven amount…would be included in the TP’s income under subsection 80(13) and allocated to its members. [S]ince the TP would be deemed by subparagraph 80(15)(c)(i) to have issued a commercial debt obligation that was settled at the end of the BP’s deemed fiscal period, subsection 80(15) would apply to the partners of the TP. Thus, such partners may be entitled under subparagraph 80(15)(a) to deduct an amount in respect of the relevant limit which could then be treated as a forgiven amount and applied against the partners’ own tax attributes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(9) on wind-up of lower-tier partnership, ACB bump from its s. 80(13) forgeiveness income is included 196

Subsection 80(16)

Administrative Policy

2 September 2009 Internal T.I. 2009-0329251I7 F - Application du paragraphe 80(16)

s. 80(16) designation under s. 80(11) increased s. 80(13) income inclusion

In the particular taxation year, a commercial debt obligation that ACO issued in the course of carrying on its business was forgiven. In addition, ACO sustained an allowable capital loss from the disposition of a capital property. Prior to the application of the debt forgiveness rules, ACO had a balance of a non-capital loss realized in a previous year and available for carry forward, a cumulative eligible capital balance and adjusted cost base of shares of related corporations.

The TSO proposed to designate pursuant to s. 80(16) the maximum amounts permitted under ss. 80(7) and (11), so that the forgiven amount would be applied first against the balance of the non-capital loss, second as to reduce ¾ of the cumulative eligible capital and third, to reduce the adjusted cost base of the related corporation shares under s. 80(11), resulting in an amount being deemed to be a capital gain from the disposition of capital property under s. 80(12). This resulted in an amount to be added in computing ACO’s business income under s. 80(13), and with a deduction under s. 61.3(1).

The Directorate indicated that it agreed with the TSO’s interpretations of ss. 80(16) and (12), stating that “the Minister may under subsection 80(16) designate amounts to the maximum extent permitted under subsections 80(5) to 80(11) as you have proposed.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(8) - Non-Capital Loss - A s. 61.3 deduction reduced non-capital loss 281
Tax Topics - Income Tax Act - Section 80 - Subsection 80(13) s. 80(13) income was from the debtor's business 28