On an open market purchase of liquid yield option notes ("Lyons"), s. 80 will not apply on the repurchase if s. 39(3) so applies (i.e., there is a gain on capital account). CRA stated:
[S]ubsection 39(3)...allow[s] for a capital gain or capital loss where a taxpayer purchases in the open market any obligation earlier issued by the taxpayer and these provisions would apply in these current circumstances. The provisions do not...affect transactions which are income transactions under the general rules for distinguishing income from a capital gain. ...Subsection 248(27) of the Act clarifies that the open market purchase of any portion of an obligation under subsection 39(3) of the Act is treated on the same basis as the purchase of the entire obligation. Further, the definition in subsection 80(1) of the Act of "forgiven amount", at paragraph (d) of the formula calculating B, clarifies that any portion of a debt extinguished under circumstances to which subsection 39(3) of the Act applies is not subject to the application of subsection 80(1) of the Act. Subsection 39(3) of the Act overrides any of the more general provisions. Accordingly, in our view, section 80 would not apply in the situation described.