Forgiveness of Debt

In finding that the forgiveness of debt used to finance land inventory of a predecessor of the taxpayer occurred on capital account, so that s. 80 rather than s. 9 applied to the forgiven amount, Noel J.A. indicated that, based on the jurisprudence:

"Where a forgiveness occurs with respect to a debt incurred in a borrower-lender relationship entered into to finance the operations of the business, it will usually be treated as an abatement of a capital liability since the forgiveness falls outside the 'normal trading operations of the business'."

In 1961 the taxpayer purchased over £5 million of oxo-alcohol from a U.S. affiliate for a deferred U.S.-dollar purchase price. The subsequent devaluation of the Canadian dollar and a decline in commodity prices, which indicated that the taxpayer would suffer a loss on the resale of the inventory and possible insolvency, prompted the U.S. affiliate to forgive a portion of the indebtedness in 1962, which the taxpayer took into his accounting income for that year.

In finding that the cost of the inventory which the taxpayer had on hand at the beginning of its 1962 taxation year (and which initially had been recorded at a cost based on the exchange rate on the date of purchase) was reduced by the appropriate portion of the amount of the forgiveness, Walsh J. stated (p. 5303) that the taxpayer:

"as a result of this forgiveness of debt, was enabled to make a profit in the 1962 taxation year which is before me rather than suffering a loss which was otherwise inevitable and that it should, accordingly, pay the appropriate taxation on this profit."

The Canadian distributors of Morris cars, including the taxpayer, were offered by their British supplier ("Nuffield") a rebate of $250 for each car in inventory on September 1, 1951 which rebate was received, at the time that payment was made to Nuffield for the cars, by way of set-off against trade indebtedness owing to Nuffield. Because the arrangement, in reality, was simply the granting of a discount of $250 upon the sales price of cars sold or upon the purchase price (or, viewed in another aspect, the provision of a subsidy of $250 on each car sold in Canada), the rebates, most of which were realized by the taxpayer in its taxation year ended September 30, 1952 were earned on income account. Abbott J. stated (pp. 1121-1122):

"The fact that the rebates took the form of credits against appellant's indebtedness to Nuffield, did not alter their true character, or make them merely the 'forgiveness' of a past due debt incurred in a preceding year, as that term was used in the British-Mexican Petroleum case ..."

15% of indebtedness of the taxpayer to its English supplier which it had incurred for car shipped to it was forgiven by the English supplier, with a balance of 85% to be paid off in specified monthly payments. Because the forgiveness was "a clear-cut abatement" rather than something which the taxpayer in any way was required to earn, it was not credited to its income for income tax purposes.