18 August 1989 Income Tax Severed Letter AC58408 - Debtor's Gain on Settlement of Debt

5-8408
                                             A.A. Cameron
                                             (613) 957-2115

Dear Sirs:

Re: Subsection 80(1) and 88(1) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter of July 21, 1989 in which you requested a technical interpretation with respect to the application of subsections 80(1)and 88(1) of the Act.

You questioned whether the provisions of subsection 80(1) of the Act apply to a situation where a wholly-owned subsidiary, whose third party liabilities exceed the fair market value ("FMV") of its assets, is wound up into its parent company.

Generally, where by virtue of paragraph 88(1)(e.2) of the Act, the provisions of subsection 87(7) of the Act apply to arm's length debt on the winding-up of a corporation (assuming that the requirements of that subsection are satisfied), it is our view that the provisions of subsection 80(1) of the Act would not be applicable.

As an alternative you outlined a situation where the subsidiary was further capitalized by the parent with such funds being utilized to pay the third party liabilities in full prior to the wind-up. In this situation you asked whether the provisions of subsection 80(1) of the Act would apply to the extent that the FMV of the shares issued on this additional capitalization was less than the funds contributed to acquire those shares.

Assuming a bona fide repayment of arm's length debts, this situation would appear differ from those where a debtor corporation issues its shares or utilizes a daylight loan, etc. to settle as debt. In those situations it is our view that the provisions of subsection 80(`1) of the Act will apply as detailed in paragraph 11 of Interpretation Bulletin IT-293R contained in the Special Release thereto dated September 19, 1983. Generally, in the situation you describe, we would not expect the provisions of subsection 80(1) of the Act to be applicable. It is also our view that the provisions of subsection 69(1) of the Act would be applicable to the additional capitalization.

As explained in paragraph 24 of Information Circular 70-6R any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation in respect of any taxpayers.

Yours truly, for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch