IT-293R, para. 25 indicates that where the forgiveness of a trade debt occurs in a taxation year subsequent to that in which it was incurred, any portion of the forgiven debt that did not relate to inventory of merchandise on hand at the beginning of that taxation year of forgiveness will not be included in computing income pursuant to s. 9 and instead will be subject to the statutory debt-forgiveness rules summarized in para. 1 of the Bulletin. Is this position (supported by British Mexican) still held by CRA? CRA responded:
That position is no longer valid.
… There is no established principle (or rule of law) in Canadian jurisprudence that provides that the nature of a debtor's trade debt or of a debtor's gain from the forgiveness of a trade debt changes automatically merely because of the passage of time in a taxation year or a number of taxation years.
… British Mexican has been distinguished in a number of subsequent Canadian decisions, including Alco Dispensing … [indicating that] the release of the liability to pay the bonuses could not be treated as having changed the character of the liability, … [and] it was contrary to common sense … to assert that the passage of a year end effects some sort of a magical conversion of executive compensation operations from current account transactions to capital account transactions.
The change in position is applicable to debts settled or extinguished on or after November 2, 2023.