In the particular taxation year, a commercial debt obligation that ACO issued in the course of carrying on its business was forgiven. In addition, ACO sustained an allowable capital loss from the disposition of a capital property. Prior to the application of the debt forgiveness rules, ACO had a balance of a non-capital loss realized in a previous year and available for carry forward, a cumulative eligible capital balance and adjusted cost base of shares of related corporations.
The Directorate confirmed the TSO approach, which was to designate pursuant to s. 80(16) the maximum amounts permitted under ss. 80(7) and (11), so that the forgiven amount would be applied first against the balance of the non-capital loss, second as to reduce ¾ of the cumulative eligible capital and third, to reduce the adjusted cost base of the related corporation shares under s. 80(11), resulting in an amount being deemed to be a capital gain from the disposition of capital property under s. 80(12). This resulted in an amount to be added in computing ACO’s business income under s. 80(13), and with a deduction under s. 61.3(1).
Turning to the computation of the remaining non-capital loss, the Directorate stated:
The definition of "non-capital loss" in subsection 111(8) indicates that a taxpayer's non-capital loss for a taxation year is the amount determined under a formula. In this case, in order for an amount to be determined under that formula, ACO must have incurred a loss for the year in respect of its Business and that loss must be greater than the remainder computed under paragraph 3(c) for that year.
The Directorate went on to provide a redacted computation showing the s. 61.3 insolvency deduction as a subdivision (e) deduction under s. 3(c).