Paragraph 80(2)(g)

Prior to its acquisition by an arm’s length purchaser, the Canadian taxpayer used share subscription proceeds from its US parent to pay a portion of the debt owing by it to the parent, with the purchaser then acquiring the taxpayer’s shares for a nominal amount and the debt for over 80% of the amount still owing, so that the debt-parking rules did not apply. In finding that the pay-down to the intercompany debt was an abusive circumvention of s. 80(2)(g), Bédard J stated (at para. 126-127, TaxInterpretations translation):

The spirit and object of paragraph 80(2)(g) are to ensure that, when a debt is settled in exchange for shares, the debt forgiveness rules apply by taking into account the actual value of the shares which are issued. ... In adopting this paragraph, the legislator sought to prevent a taxpayer from transforming a debt into shares with low value, thereby avoiding the debt forgiveness rules. ... In proceeding in two stages rather than effecting a direct conversion of debt to shares, the appellant circumvented the application of paragraph 80(2)(g) and, thus, a gain on debt settlement.

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.

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."