XXXX
October 7, 1985
Dear Sirs:
This is in reply to your letter of July 12, 1985 in which you requested our opinion on the application of section 80 of the Income Tax Act (the "Act") in a situation as described in the following paragraph.
Company A owns 707 of the issued and outstanding voting shares of Company B which is indebted to Company A in the amount of $5,000,000. Interest is payable on the debt which arose on the disposition of depreciable property from Company A to Company B. At the time of disposition the depreciable property had a fair market value of $5,000,000. The receivable presently has a fair market value of $1,000,000. The instrument evidencing the debt will be amended to change the obligation from interest bearing to non-interest bearing. The fair market value of the non-interest bearing debt will be $1,000,000.
In circumstances as described in the preceding paragraph where the debt is amended to change the obligation from interest bearing to non- interest bearing the Department considers that for purposes of section 80 of the Act such an amendment to a debt instrument would not result in a settlement or extinguishment of the debt.
With respect to your second question, where the debt has been settled or extinguished by the debtor giving the creditor any property having a fair market value less than the principal amount of the debt, it is our opinion that section 80 of the Act would apply irrespective of the fact that the property received by the creditor has a face value equal to the principal amount of the debt.
We trust this is the information you require.
Yours truly,
for Director Specialty Corporations Rulings Division Legislation Branch