Mr. X was a limited partner of a partnership (LP) that realized a gain on the settlement of a commercial debt obligation, and reduced the forgiven amount by the maximum permitted by ss. 80(5), (7), (8), (9) and (10). Mr. X included his share of the income inclusion under s. 80(13) in computing his income, and elected to deduct this amount under s. 80(15)(a), thereby resulting in the issuance of a deemed debt (the X Debt) that was deemed to be settled by him.
Can Mr. X apply a portion of his deemed forgiven amount under s. 80(15) to reduce the ACB of capital property to him, or a non-capital loss previously sustained by him, that had no connection to LP or its business and, in this regard, is s. 80(15)(c)(v) intended to limit the application of the X Debt forgiven amount only against tax items whose source of income is the same as the source in respect of which the underlying LP debt was issued?
The Directorate responded:
… Mr. X's application of the forgiven amount in respect of the X Debt against the ACB of the capital assets he held immediately after the time of settlement of the X Debt is consistent with the Act.
… Mr. X could have applied the forgiven amount in respect of the X Debt against a non-capital loss for a taxation year ending before the particular year pursuant to subsection 80(3) if he had had such a loss, even if that loss had not been a loss from the business carried on by LP.
… [S]ubparagraph 80(15)(c)(v) does not prevent Mr. X from applying the forgiven amount in respect of the X Debt against the ACB of capital property under subsection 80(9). In fact, the purpose of subparagraph 80(15)(c)(v) is to deem the source in respect of which the X Debt was issued. Thus, if Mr. X had been required to add an amount in computing his income pursuant to subsection 80(13) in respect of the X Debt, that amount would have been added to his income for the year from the source in respect of which the LP Debt was issued.