Principal Issues: Application of 80.01(8) to the disposition of a debt obligation between parties that are related to each other pursuant to 251(5)(b), taking into account the application of 40(2)(e.1) and 53(1)(f.1).
Position Taken: The ACB adjustment under 53(1)(f.1) takes place a moment after the disposition whereas the deemed settlement under 80.01(8) is based on the ACB of the debt at the time of the disposition/acquisition. Thus, 80.01(8) could produce a forgiven amount in these circumstances.
Reasons: Based on a textual, contextual and purposive interpretation of the Act.
XXXXXXXXXX 2014-052439
Sylvain Grégoire
March 31, 2016
Mr. XXXXXXXXXX,
Deemed settlement on debt parking
This is in response to your email dated March 13, 2014 in which you asked our opinion on the application of the terms of paragraph 53(1)(f.1) as well as those of paragraph 80.01(8) arising from the settlement of a debt. We apologize for the delay in responding.
We understand that you wish to know whether or not the terms of these provisions apply simultaneously where Corporation "X" disposes of a debt to Corporation "Y" at a time that the two corporations are related only because of paragraph 251(5)(b). For this purpose, we assume that Corporations "X" and "Y" are taxable Canadian corporations as defined in subsection 89(1), that the debtor is a wholly-owned subsidiary of Corporation "Y," and that the debt is a capital property of Corporation "Y."
Unless otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations issued on August 29, 2014.
When a loss to the taxpayer from the disposition of a debt is deemed to be nil under paragraph 40(2)(e.1), the amount of such loss is added to the cost of the debt to the acquirer in computing its adjusted cost base ("ACB") under paragraph 53(1)(f.1). In our view, this adjustment to the ACB occurs immediately after the acquisition of the debt.
When the conditions for the application of subsection 80.01(8) are also satisfied in this situation, this raises the question of its interaction with paragraph 53(1)(f.1). Subsection 80.01(8) deems a debt to be settled at the time it becomes a parked obligation and provides that the forgiven amount in respect of the obligation shall be determined as if the debtor had paid, at that time, in satisfaction of the principal amount of the debt, an amount equal to the "specified cost" of the obligation to the holder. In the queried situation, the "specified cost" equals the ACB of that debt to the holder. In our view, taking subsections 80.01(6) and (7) into account, the debt becomes a parked obligation at the time of its acquisition by Corporation "Y" and, therefore, the ACB of the debt to the holder should be established precisely at that moment. Since this determination is made at a time that precedes the adjustment provided for under paragraph 53(1)(f.1), it could be ["se pourrait"] that this deeming rule in paragraph 80.01(8) results, under these circumstances, in a forgiven amount that is subject to the application of section 80.
We hope that you will find helpful and please accept, Mr. XXXXXXXXXX, our best wishes.
Dave Beaulne, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch