Principal Issues: [TaxInterpretations translation] In a particular situation, can the Minister designate amounts by applying subsections 80(5) to 80(11)?
Position: Yes.
Reasons: The Act
September 2, 2009
| MONTÉRÉGIE RIVE-SUD TSO Nathalie Girard Technical advisor Verification and Enforcement Division |
HEADQUARTERS 2009-032925 |
Request for interpretation - Sections 80 and 61.3
This is in response to your note of June 25, 2009, in which you requested our comments on the application of the debt forgiveness rules in section 80 in the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Particular Situation:
Our understanding of the Particular Situation you submitted to us is as follows:
1. ACO is a "taxable Canadian corporation" within the meaning of subsection 89(1) and a "Canadian-controlled private corporation" within the meaning of subsection 125(7).
2. In its taxation year ending on XXXXXXXXXX, ACO benefited from the forgiveness of commercial debt obligation for $XXXXXXXXXX, giving rise to a forgiven amount of that amount. This debt had been issued by ACO in the course of its carrying on of a business (the "Business").
3. ACO filed with its income tax return for the taxation year ending on XXXXXXXXXX a Form T2156 - Agreement to Transfer a Forgiven Amount Under Section 80.04 to effect a transfer of the forgiven amount of $XXXXXXXXXX to an eligible transferee. ACO did not include any amount in respect of the forgiveness of debt in computing its income (being a loss) from the Business for the taxation year ending on XXXXXXXXXX. The loss to ACO resulting from the Business for the taxation year ended XXXXXXXXXX was $XXXXXXXXXX without regard to the debt forgiveness rules contained in section 80.
4. In addition, ACO sustained an allowable capital loss of $XXXXXXXXXX resulting from the disposition of a capital property in the taxation year ending on XXXXXXXXXX. ACO did not generate any other income or incur any other losses in the taxation year ended on XXXXXXXXXX.
5. On XXXXXXXXXX, the net assets of ACO were a total of $XXXXXXXXXX.
6. Prior to the application of the debt forgiveness rules contained in section 80, ACO had the following tax balances on XXXXXXXXXX:
a. Balance of a non-capital loss realized in a previous year and available for carry forward: $XXXXXXXXXX.
b. Cumulative eligible capital balance: $XXXXXXXXXX.
c. Adjusted cost base of shares of the capital stock of related corporations: $XXXXXXXXXX.
7. Your TSO has audited the income tax return filed by ACO for the taxation year ended on XXXXXXXXXX and you have determined that ACO cannot benefit from the transfer of forgiven amount provided for in section 80.04.
8. Following that determination, ACO requested that the rules on debt relief be applied as follows:
a. A portion of the forgiven amount, $XXXXXXXXXX, be applied against the balance of the non-capital loss in a previous year as per subsection 80(3).
b. An amount of $XXXXXXXXXX (($XXXXXXXXXX - $XXXXXXXXXX) x 1/2) be added in computing its income from a business in accordance with subsection 80(13).
c. An amount of $XXXXXXXXXX be deducted in computing income in accordance with subsection 61.3(1).
9. You propose pursuant to subsection 80(16) designating amounts to the maximum extent permitted under subsections 80(7) and (11). Consequently, the debt forgiveness rules would apply as follows:
a. A portion of the forgiven amount, $XXXXXXXXXX, be applied against the balance of the non-capital loss in a previous year in accordance with subsection 80(3).
b. A portion of the forgiven amount, equal to $XXXXXXXXXX, be applied as a reduction of the balance of the cumulative eligible capital up to 3/4 of that amount (3/4 x $XXXXXXXXXX = $XXXXXXXXXX) under subsection 80(7).
c. A portion of the forgiven amount, $ XXXXXXXXXX, be applied to reduce the adjusted cost base of shares of the capital stock of related corporations under subsection 80(11).
d. An amount of $XXXXXXXXXX be deemed to be a capital gain from the disposition of capital property under subsection 80(12) (taxable capital gain of $XXXXXXXXXX).
e. An amount of $XXXXXXXXXX (($XXXXXXXXXX - $XXXXXXXXXX - $XXXXXXXXXX - $XXXXXXXXXX) x 1/2) be added in computing its income from a business in accordance with subsection 80(13).
f. An amount of $XXXXXXXXXX be deducted in computing income in accordance with subsection 61.3(1) ((XXXXXXXXXX - (2 x $XXXXXXXXXX)).
Your Questions:
You asked us to confirm your interpretation of subsections 80(16) and 80(12) and the calculations above.
Furthermore, you asked whether the combined application of subsections 80(13) and 61.3(1) in computing ACO's income would result in a "non-capital loss" being incurred by ACO for the taxation year ending on XXXXXXXXXX in the amount of $XXXXXXXXXX computed as follows:
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Loss incurred by ACO from the Business for the taxation year ended on XXXXXXXXXX: |
($XXXXXXXXXX) |
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Amount to be included under subsection 80(13) |
XXXXXXXXXX |
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Insolvency deduction under subsection 61.3(1) |
(XXXXXXXXXX) _________________ |
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$XXXXXXXXXX |
Our Comments:
Subsection 80(16):
Subsection 80(16) provides that where a commercial obligation issued by a debtor is settled at any time in a taxation year and, as a consequence of the settlement an amount would be deducted under section 61.2 or 61.3 in computing the debtor’s income for the year and the debtor has not designated amounts under subsections 80(5) to 80(11) to the maximum extent possible in respect of the settlement, the Minister may designate amounts under subsections 80(5) to 80(11) to the extent that the debtor would have been permitted to designate those amounts and the amounts designated by the Minister are deemed to have been designated by the debtor in accordance with subsections 80(5) to 80(11).
Subsection 80(12):
Subsection 80(12) provides that where a commercial obligation issued by a debtor is settled at any time in a taxation year and amounts have been designated by the debtor under subsections 80(5), 80(7), 80(8) and 80(9) to the maximum extent permitted in respect of the settlement, the debtor shall be deemed to have a capital gain for the year from the disposition of capital property equal to the lesser of two amounts. The first amount is the remaining unapplied portion of the forgiven amount at that time in respect of the obligation. The second amount is the amount, if any, of the total of the following amounts:
(A) all of the debtor’s capital losses from the dispositions of properties (other than listed personal properties and excluded properties), and
(B) twice the amount that would, because of subsection 88(1.2), be deductible under paragraph 111(1)(b) in computing the debtor’s taxable income for the year, if the debtor had sufficient income and taxable capital gains for the year,
exceeds the total of
(C) all of the debtor’s capital gains for the year from the dispositions of such properties (determined without reference to this subsection), and
(D) all amounts each of which is an amount deemed by this subsection to be a capital gain of the debtor for the year as a consequence of the application of this subsection to other commercial obligations settled before that time;
Furthermore, this subsection provides that the forgiven amount at that time in respect of the obligation shall be considered to have been applied under subsection 80(12) to the extent of the amount deemed by that subsection to be a capital gain of the debtor for the year as a consequence of the application of that subsection to the settlement of the obligation at that time.
We agree with your interpretation of subsections 80(16) and 80(12). Among other things, we are of the view that in the Particular Situation, the Minister may under subsection 80(16) designate amounts to the maximum extent permitted under subsections 80(5) to 80(11) as you have proposed. The amounts so designated are deemed to have been designated by ACO in accordance with subsections 80(5) to 80(11). Furthermore, we agree with your interpretation that pursuant to subsection 80(12), ACO is deemed to have a capital gains from the disposition of capital property for the XXXXXXXXXX year in the amount of $XXXXXXXXXX (taxable capital gain of $XXXXXXXXXX).
Non-capital loss:
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. Based on our understanding of the Particular Situation, ACO earned business income of $XXXXXXXXXX for the XXXXXXXXXX year calculated as follows:
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Loss incurred resulting from the Business (before 80(13)) |
($XXXXXXX) |
|
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Amount included in computing ACO’s income for the year from the Business under 80(13): |
XXXXXXX ___________ |
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ACO’s income for the year from the Business: |
$XXXXXXX |
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Add: the remainder computed under paragraph 3(c) regarding ACO for the XXXXXXXXXX year as follows: |
||
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Any excess of: |
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Total for paragraph 3(a): |
$XXXXXXX |
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Amount determined under paragraph 3(b): |
($XXXXXXXXXX - $XXXXXXXXXX) XXXXXXX |
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|
$XXXXXXX |
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Total deductions allowed by subdivision e: |
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Insolvency deduction - 61.3 (1) |
$XXXXXXX |
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|
____________ |
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Excess |
XXXXXXX |
Consequently, we are of the view that ACO's non-capital loss for the taxation year ended on XXXXXXXXXX is XXXXXXXXXX.
We hope that our comments will be of assistance.
Best regards,
Ghislain Martineau
Manager, Financial Institutions and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch