Principal Issues: Where the court approves a proposal under Part III of the BIA and annuls the bankruptcy of a corporate debtor such that the corporation's debts are restored but at reduced amounts, will the CRA confirm that paragraph (i) contained in the definition of forgiven amount would apply to the amount of the debt reduction?
Position: No.
CTF
Sixty-Second Annual Tax Conference
November 28 30, 2010
Debt Forgiveness
Question 1
Pursuant to the definition in subsection 80(1) of the Income Tax Act, the forgiven amount, at any time, in respect of a commercial obligation is the amount determined by the formula "A - B"
- where A is the lesser of the amount for which the obligation was issued or the principal amount of the obligation, and
- where B, in a situation where the debtor is a bankrupt at that time, is the principal amount of the obligation.
Therefore, if a bankrupt's commercial obligation is settled, the forgiven amount would be zero, resulting in no reduction in the tax attributes of the bankrupt under section 80.
Assume that the following steps take place:
1. A Companies Creditors' Arrangement Act (note 1) (CCAA) plan of compromise is prepared and sent to creditors of a corporate debtor.
2. The creditors vote on and accept the plan.
3. The corporate debtor assigns itself into bankruptcy under the authority of the court.
4. The court issues an order that stays all statutory steps in the bankruptcy proceedings and authorizes the corporate debtor to file a proposal under part III of the Bankruptcy and Insolvency Act (BIA).(note 2)
5. The proposal is filed and the monitor immediately approves the plan (that is, the creditors do not vote because the monitor is in place, so the time delays are avoided).
6. The court approves the proposal and annuls the bankruptcy.
7. The debts are restored with the annulment, but at the amounts compromised in the proposal.
Can the Canada Revenue Agency (CRA) confirm that when the court approves a proposal under part III of the BIA as noted above and annuls the bankruptcy of a corporate debtor such that the corporation's debts are restored (but at the compromised amounts), paragraph (i) of the definition of "forgiven amount" will apply to the amount of the debt reduction such that there is no reduction in the tax attributes of the corporate debtor under section 80?
Response 1
No. We call your attention to our comments in subparagraph 15(a) and paragraph 16 of Interpretation Bulletin IT-293R:
15. In accordance with paragraphs 80(c) to (f), the rules described in 1 above do not apply where
(a) the debtor is a bankrupt at the time of settlement (see 16 below) . . .
16. Section 2 of the Bankruptcy Act defines a "Bankrupt" as "a person who has made an assignment or against whom a receiving order has been made or the legal status of such a person." When a bankrupt (the debtor) makes a proposal under Part III of the Bankruptcy Act and this proposal is approved by the court, the bankruptcy is rendered void; thus such a debtor does not come within the exclusion in 15(a) above, and the provisions in [section 80] may apply. These provisions may also apply to an insolvent person who has a gain on settlement of a debt by virtue of an approved proposal under Part III of the Bankruptcy Act since such a person is not a bankrupt.(note 3)
Although IT-293R was issued in 1979, it continues to reflect our view that paragraph (i) of the definition of "forgiven amount" does not apply in circumstances in which a bankruptcy is annulled as the result of a proposal under part III of the BIA.
Furthermore, any adjustment required under section 80 is made at the time during the taxation year when the commercial obligation is settled. Your question is premised on the notion that the corporate debtor's debts were settled at some time after step 3 and before step 7 above; however, the time at which an obligation is settled is a question of mixed fact and law and cannot be determined without an examination of all the circumstances of a given situation. In order to determine the section 80 consequences of the annulment of a corporate bankruptcy, the specific circumstances and legal steps involved in that annulment and related proposal would have to be examined.
Notes:
(1) RSC 1985, c. C-36, as amended.
(2) RSC 1985, c. B-3, as amended.
(3) Interpretation Bulletin IT-293R, "Debtor's Gain on Settlement of Debt," July 16, 1979, at paragraphs 15-16. Note that the reference to paragraphs 80(c) to (f) in the extract should be read as a reference to paragraph (i) contained in the definition of "forgiven amount." Similarly, the reference to the Bankruptcy Act should now be read as a reference to the Bankruptcy and Insolvency Act.
Carruthers, Lori
2010-038745