11 October 1991 Income Tax Severed Letter

October 11, 1991 24(1)

                                        Business and General
                                          Division
                                        W.P. Guglich
                                        (613) 957-2102

                                        912558

SUBJECT: Forgiven Interest

This is in reply to your memorandum of August 28, 1991 concerning
the timing of the application of paragraph 80(1)(b) and
subsection 20(16) of the Income Tax (the "Act")
               24(1)
We agree that because of the words "where at any time in a
taxation year" in the preamble of subsection 80(1) the adjustment
to reduce the capital cost under paragraph 80(1)(b) would be made
on      24(1)      We also agree that because of the words "where
at the end of a taxation year" in the preamble of subsection
20(16) a terminal loss can only be deducted       24(1)   (the
taxation year-end).  Consequently at the end of the taxation year
on  24(1)     the taxpayer, in computing the amount of the
terminal loss which may be deducted for the year, must take into
consideration the amount of the   24(1)24(1)        capital
cost reduction under paragraph 80(1)(b).

As regards the taxpayers position, It is our view that as a general rule if at the time of settlement the taxpayer does not own any capital property no adjustment can be made to the cost of such property under section 80 of the Act. However, section 80 does apply where property is transferred to the creditor prior to the forgiveness or settlement as part of the same transaction or series of transactions in settlement of the debt.

We trust our comments will be of assistance to you.

for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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