Principal Issues: A taxpayer ("A") owns all of the issued and outstanding shares of the capital stock of a corporation ("Aco"). Over the years, A made advances (the "Debt") to Aco. A would sell all of the issued and outstanding shares of the capital stock of Aco to an arm's length person ("B"). A would also sell the Debt to B for nominal consideration. Whether there would be tax consequences to B when B would receive payments on account of the outstanding principal amount of the Debt.
Position: General comments provided. If the debt is capital property to B and since the adjusted cost base to B of the debt is nominal, B will incur a capital gain as a result of the repayment of the Debt. When B will receive a payment on account of the outstanding principal amount of the Debt, B will be considered to have disposed of a portion of the Debt with the amount of the payment constituting the proceeds of disposition of that portion. If the Debt is not capital property to B (for example, the Debt is used in a business carried on by B), the reimbursement of the Debt will give rise to business income in the hands of B. Finally, the debt parking rules could possibly apply to Aco, depending on the facts
Reasons: Wording of the Act and previous positions.
2008-029977 XXXXXXXXXX S .Prud'Homme (613) 957-8975 September 8, 2009
Dear XXXXXXXXXX,
Subject: Request for Technical Interpretation - Tax implications to the creditor arising from the repayment of a debt obligation
This is in response to your email of October 15, 2008 in which you asked our opinion regarding certain tax consequences, to the creditor, resulting from the repayment of a debt in a particular situation.
Unless otherwise stated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
It appears to us that the situation described in your email and briefly summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be of assistance. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. As a result, and given that your letter only provides a very brief description of a hypothetical situation, the comments we make below may not apply in full in a particular situation.
(1) The Particular Situation
You have presented us with the situation briefly described below (the "Particular Situation") as part of your request for a technical interpretation.
(a) A taxpayer ("A") holds all of the issued and outstanding shares of the capital stock of a corporation ("Aco").
(b) Over the years, A made advances (the "Debt") to Aco.
(c) A sold all of the issued and outstanding shares of the capital stock of Aco to another taxpayer ("B"). A also sold the Debt to B for nominal consideration.
(d) A and B deal with each other at arm's length.
(2) Your Question respecting the Particular Situation
You asked us to confirm that the repayment by Aco of the Debt held by B would not result in any tax consequences to B.
(3) Our Comments on this File
We are of the view that the repayment by Aco of the Debt held by B would result in tax consequences to B.
To the extent that the Debt constituted capital property to B and given that, in the Particular Situation, the adjusted cost base to B would be nominal and therefore less than the principal amount of the Debt, the partial or total repayment of the Debt would result in a capital gain to B. Indeed, such a repayment would constitute a disposition of the Debt or part thereof. In these circumstances, the proceeds of disposition would correspond to the payment made on the principal of the Debt. In connection with the foregoing, we refer you to subparagraphs (b)(i) and (ii) of the definition of "disposition" in subsection 248(1), as well as subsection 43(1).
It is possible, however, that the Debt would not constitute capital property for B in the Particular Situation. This could be the case, for example, if B held the Debt as part of a business. In such circumstances, the partial or total repayment of the Debt would give rise to business income to B, and not to a capital gain.
Furthermore, the rules on debt forgiveness could apply at the level of Aco, depending on the facts and circumstances relating to the Particular Situation. In this regard, we refer you to, inter alia, subsections 80.01(6) to (8) and 80.01(10).
In closing, due to the fact that your letter does not contain several essential pieces of information, it is impossible for us to comment on other tax consequences that may result from the Particular Situation.
We apologize for the delay in our response to your question. We hope that our comments will be of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.