5-903280
Dear Sirs:
Re: Paragraph 20(1)(e) of the Income Tax Act (the "Act")
We are writing in response to your letter of November 15, 1990 in which you requested a clarification of the meaning of the words "extinguished" and "settled" with respect to subparagraph 20(1)(e)(v) of the Act. We regret that other workload prevented us from replying earlier.
In the situation you described, a vendor disposes of 50 percent of the interest in a rental property and 50 percent of the debt on the property is assumed by the purchaser. The purchaser deals at arm's length with the vendor and is not a partnership or a trust that is described in subparagraph 20(1)(e)(v). You wish to know whether the vendor may deduct 50 percent of the full unamortized borrowing cost relating to the debt, pursuant to subparagraph 20(1)(e)(v) of the Act.
The circumstances referred to in your letter may relate to an actual transaction. The review of the tax consequences of completed transactions is the responsibility of the district taxation offices of Revenue Canada, Taxation. Although we can not comment directly on the transactions described in your letter, we have set out below our general observations on the interpretation issue which you have raised.
The determination as to whether a debt or other obligation is settled or extinguished is a question of common law. It is our view that a debt is settled or extinguished when all liability for its payment is terminated, as stated in paragraph 6 of Interpretation Bulletin IT-293R which deals with section 80 of the Act.
Subparagraph 20(1)(e)(v) applies "...where in a taxation year all debt obligations in respect of a borrowing are settled or extinguished..." Accordingly, it is our view that the quoted requirement of subparagraph 20(1)(e)(v) would not be satisfied by the settlement or extinguishment of a portion of a debt obligation, or of one or more but not all of the debt obligations in respect of a borrowing. In our view, "... debt obligations in respect of a borrowing ..." as used in subparagraph 20(1)(e)(v) refers to the debt obligations comprising the borrowing first referred to in subparagraph 20(1)(e)(ii).
Our comments are provided pursuant to the practice referred to in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate