Re: Forgiveness of Loan - Bankruptcy/Receivership
This is in reply to memorandum dated August 28, 1991 wherein you requested our opinion on the operation of subsection 6(15) of the Income Tax Act (the "Act") relative to the receivership or bankruptcy of an employer or former employer, or the bankruptcy of an employee or former employee. We will address each question in the order in which they were presented.
Where an employee has declared bankruptcy subsequent to receiving a loan or incurring a debt with his employer or former employer, and later receives a discharge, it is our opinion that the loan or debt to his employer that is settled or extinguished without payment or by payment by the employee of an amount that is less than the amount of the obligation outstanding must be included in income under paragraph 6(1)(a) of the Act by virtue of subsection 6(15) of the Act.
21(1)(b)
It is our view that the discharge of a loan or debt does not discharge the resulting liability for income tax which is a separate and distinct liability. Therefore, the liability for income tax forms part of an employee's total unpaid debts for bankruptcy purposes.
With respect to the receivership or bankruptcy of an employer, you stated in your memorandum that it would appear that a benefit continues to accrue to the employee or former employee under section 80.4 of the Act until such time as the loan or debt is otherwise paid, settled or extinguished.
21(1)(b)
We agree with your statement that a benefit under subsection 80.4(1) of the Act will continue to accrue to an employee or former employee until such time as the loan or debt is in fact paid, settled or extinguished. However, pursuant to subsection 206(2) of the Income Tax Regulations, if the employer or former employer has failed to satisfy the appropriate filing requirements, it is the trustee in bankruptcy or receiver that is responsible for reporting the benefits in question.
As for your last question, you stated in your memorandum that where the affairs of a corporate employer have been wound-up subsequent to bankruptcy and loans made to employees prior to bankruptcy remain outstanding, it would appear that the loan or debt owing to the former employer can be said to be settled or extinguished and therefore required to be brought into the income of the employees as at the date of winding-up.
In our opinion, it would seem logical to expect an employer or a trustee to make all reasonable efforts to collect any outstanding loans or debts receivable from employees before the affairs of the corporate employer are wound-up. In the absence of full payment of the loan or debt by an employee, there should be some evidence as to the employer's forgiveness of a particular loan or debt. It is therefore a question of fact when a particular loan or debt has been settled or extinguished for purposes of subsection 6(15) of the Act.
B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch