4524 911307
Dear Sirs:
We are writing in response to your letter dated May 2, 1991 wherein you requested our views on whether subsection 85(1) of the Income Tax Act (Canada) (the "Act") would apply to an exchange of a debenture previously issued by a corporation for shares of that corporation in the course of a debt/equity restructuring.
Provided that the debt instrument constitutes eligible property within the meaning of subsection 85(1.1) of the Act, the transferee corporation is a taxable Canadian corporation and the taxpayer and the transferee corporation file the prescribed form within the time limits specified in subsection 85(6) of the Act, it is our general view that subsection 85(1) would apply where a debenture or other debt obligation issued by a corporation is exchanged for shares of the capital stock of that corporation.
Generally, in our opinion, if the property disposed of by the taxpayer is debt owing by the corporation and it constitutes capital property to the taxpayer it would qualify as eligible property within the meaning of subsection 85(1.1) of the Act.
In our view the provisions of section 80 would also need to be considered in the above situation. Where the fair market value of the shares issued by the debtor corporation is less than the principal amount of the debt instrument then outstanding, the provisions of section 80 of the Act would apply to the settlement of the debt.
The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to different conclusions. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch