Words and Phrases - "exercisable"

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

right to reduce notwithstanding that conditions precedent to interest forgiveness not yet satisfied

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.

Did the implementation of the Plan result in the application of s. 143.4(4)?

After describing the Taxpayer as having a right to reduce the Interest Debt that was contingent upon the conditions precedent, stating that such right was “exercisable” as it was “’capable of being made effective in action’ or ‘capable of being implemented’,” and after noting the Taxpayer’s submission that “for a right to be ‘exercisable,’ the taxpayer must have a positive right to reduce an amount,” so that “automatic reductions… beyond the control of the taxpayer would not be caught under the definition of a ‘right to reduce’,” CRA concluded:

[T]he Taxpayer’s right to reduce the Interest Debt is contingent upon a series of conditions that are set out in the Plan, including the Conditions Precedent, and … falls within the definition of a “right to reduce” in subsection 143.4(1) because it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable. …

Further, even if the Interest Debt is settled in a subsequent year, there should be no double taxation [given] (a)(i) of the definition of “excluded obligation”… .

Words and Phrases
exercisable
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(2) - Paragraph 80(2)(a) no settlement of debt under Plan before conditions precedent fulfilled 158
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(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