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.
CRA indicated that, as the conditions precedent had not been satisfied, and the Plan implementation did not occur, in Year X, the settlement did not occur, and s. 80(2) did not apply, in that year.