Forgiveness of Debt


Queenswood Land Associates Ltd. v. Canada, 2000 DTC 6065 (FCA)

settlement of land inventory 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'."

MNR v. Enjay Chemical Co. Ltd., 71 DTC 5293, [1971] CTC 535 (FCTD)

debt forgiveness related to inventory of operations

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."

Oxford Motors Ltd. v. Minister of National Revenue, 59 DTC 1119, [1959] CTC 195, [1959] S.C.R. 548

debt forgiveness effected inventory rebate

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 ..."

Plimley Automobile Co. Ltd. v. MNR, 58 DTC 1112, [1958] CTC 193 (Ex Ct), briefly aff'd on consent 60 DTC 1031 (SCC)

forgiveness was inventory abatement

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.

See Also

Molstad Development Co. Ltd. v. The Queen, 97 DTC 913 (TCC)

forgiveness of debt used to finance inventory

Following the sale by the taxpayer of its only asset (land inventory) at a loss, the secured creditor (a bank) forgave the amount of the debt that had not been paid off with the sale proceeds. In finding that the taxpayer's gain from the forgiveness was on capital account, Rip TCJ. noted that it was not relevant to this finding that the borrowed funds had been used to finance inventory, and that the forgiveness was made by the bank qua lender rather than qua supplier.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition 98

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

settlement of financing of land inventory on capital account

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.

Alco Dispensing Canada Ltd. v. The Queen, 96 DTC 1586 (TCC), briefly aff'd 97 DTC 5463 (FCA)

reversal of bonus was income

An agreement for the sale of the shares of the taxpayer required that accrued bonuses totalling approximately $1.6 million "be reversed back into the Company's income". Bonner TCJ. found that in light of this objective of the creditor, the fact that the release of the liability was not intended to shore up a shaky financial structure of the taxpayer and the lack of common sense in any assertion that the passage of the year somehow effected "some sort of a magical conversion of executive compensation operations from current account transactions to capital transactions" (p. 1590) indicated that the forgiveness was on income account.

Administrative Policy

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

forgiveness of source deductions on income account

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? After finding that the debt forgiveness rules would not apply, CRA stated:

Section 9… relates to income or loss from a business of property. If a settlement was reached with the CRA in relation to tax, then the difference in the amount would have to be returned to income. If however the settlement concerned the unremitted GST then this would be included in income pursuant to subsection 12(1)(x).

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 80 - Subsection 80(1) - Forgiven Amount tax debt not a commercial debt obligation 105

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

BIA settlement of unremitted GST on sales was on capital account

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 being compromised for the payment of a stipulated sum under a stipulated schedule. In finding that this settlement (like other settlements under Section I of Part III of the BIA) was on capital account and did not give rise to income under s. 9, CRA referred to IT-293R, para. 26 (quoted below).

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 80 - Subsection 80(1) - Commercial Debt Obligation BIA settlement of unremitted GST interest 121

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

purpose and effect of forgiveness

Court findings indicate that the determination as to whether the forgiveness of debts and similar obligations incurred in the course of carrying on a business give rise to income under s. 9 depends on the purpose and the effect of the forgiveness and the use of the debt proceeds.

IT293R "Debtor's gain on settlement of debt"

Trade Debts Forgiven

25. ...[F]orgiveness of a trade debt in the same taxation year in which it was incurred is required to be included in computing the debtor's income for that year under the general rules for computing profit from a business or property. ...

26. Contrary to the comments in 25 above..., the provisions of section 80 apply to situations where there is a bona fide compromise of a trade debt under Part III of the Bankruptcy Act or under other federal or provincial legislation relating to creditors, arrangements and the gain is excluded from the computation of income.