Principal Issues: 1. Whether subsection 80.01(9) applies in the situation described? 2. Whether the note is settled?
Position: 1. No. 2. General comments.
Reasons: 1. Related persons. 2. 80(2)(a). It depends on the facts and applicable civil law.
Federal Tax Roundtable, 5 October 2012
2012 APFF Conference
Question 14
Subsection 80.01(9) – Note issued to a related person
Subsection 80.01(9) provides that where at any particular time a commercial debt obligation issued by a debtor that is payable to a person (other than a person with whom the debtor is related at the particular time) becomes unenforceable in a court of competent jurisdiction because of a statutory limitation period and the obligation would, but for s. 80.01(9), not have been settled or extinguished at the particular time, for the purpose of applying the provisions of the Act to the debtor, the obligation shall be deemed to have been settled at the particular time.
By virtue of Quebec civil law, a promissory note becomes unenforceable three years from the date the obligation arose, being the date of its issue.
Consider the following facts:
1. EM and his father are individuals residing in Quebec. EM is an adult. EM borrowed $100,000 from his father to acquire a rental property.
2. In exchange, EM issued a $100,000 non-interest bearing promissory note payable on demand (the "Note") to his father.
3. The Note was a "commercial debt obligation" as defined in subsection 80(1).
4. Four years after the issue of the Note, EM had not repaid any amount of the Note and had done nothing to suspend the limitation period.
5. The Note was thus prescribed and unenforceable in court.
Questions to the CRA
a) In the situation described above, is it correct to conclude that subsection 80.01(9) would not apply in order to deem the debt settled because the debt is payable to a person who is related to the debtor?
b) If the answer to the previous question is positive, could the CRA also consider that the Note is settled or extinguished and still apply the provisions of section 80 et seq.?
CRA Response
Subsection 80.01(9) could not effectively apply in the situation as described above, because the debtor and the creditor are related persons (as defined in subsection 251(2)).
For the purposes of the application of section 80, paragraph 80(2)(a) provides, in particular, that an obligation issued by a debtor is settled at any time where the obligation is settled or extinguished otherwise than by way of a bequest or inheritance.
The CRA is of the view that a debt is settled or extinguished if there is an extinguishment or settlement of the debt at law. The question as to whether the Note could otherwise be extinguished in the situation described above depends on the relevant facts and the applicable civil law.
Robert Gagnon
(613) 957-9768
2012-045408