| File No. 5-902852 | |
| J. Stalker | |
| (613) 957-9796 | |
| June 11, 1991 |
Dear Sirs:
Re: Section 80 of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter of October 11, 1990 requesting our interpretation of the application of section 80 of the Act in a situation where interest on a debt obligation owing by a corporation resident in Canada to its non-resident parent is forgiven. We regret that other workload prevented an earlier reply. You have asked if, in our opinion, subsection 80(1) would override section 9 in determining the tax treatment of the forgiveness of the interest deducted by the corporation in a previous year.
Where interest payable was deducted or, but for subsection 18(2) or (3.1) or section 21, would have been deductible in computing a Canadian corporation's income, it is our opinion that the tax consequences to the debtor of a forgiveness of interest would be determined under subsection 80(1) rather than under the general inclusion of profits under subsection 9(1). If a section of the Act specifically required the inclusion of an amount of interest in computing income for tax purposes for the year or a preceding year (such as the application of subsection 78(1)), the exception to the forgiveness of debt rules in paragraph 80(1)(f) would apply.
Subsection 80(1) would not apply to interest forgiven which, as a result of the application of subsection 18(4), was not previously deducted or deductible as required by subsection 80(4).
You have further asked whether an amount of forgiven interest, the deduction of which had previously been restricted by subsection 18(4), would be includable in a Canadian corporation's income for tax purposes in the year of forgiveness, to the extent that it is included in income for accounting purposes. In our opinion, if the currently proposed amendment to subsection 4(4) is enacted, the amount subject to the application of subsection 18(4) in an earlier year would not be includable in income a second time in the year of forgiveness. The proposed draft legislation to amend subsection 4(4) was tabled in the House of Commons on May 28, 1991 and is as follows:
2. (1) Subsection 4(4) of the said Act is repealed and the following substituted therefor:
Limitation respecting inclusions and deductions
"(4) Unless a contrary intention is evident, no provision of this Part shall be read or construed to require the inclusion or to permit the deduction, either directly or indirectly, in computing the income of a taxpayer for a taxation year or the taxpayer's income or loss for a taxation year from a particular source or from sources in a particular place, of any amount to the extent that amount has been directly or indirectly included or deducted, as the case may be, in computing such income or loss for the year or any preceding taxation year under, in accordance with or by reason of any other provision of this Part."
(2) Subsection (1) is applicable to the 1990 and subsequent taxation years.
Our comments are provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2 and consequently are not binding upon Revenue Canada, Taxation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate