Consider a trust that loans money to a beneficiary, who uses the loaned funds for investment purposes. If the trust later transfers the loan to the beneficiary as a distribution of capital, it will be considered to have forgiven the loan under the doctrine of “merger”, which could give rise to a forgiven amount for the purposes of section 80. The CRA commented as follows:
In some specific situations, when a “commercial obligation” is extinguished under the doctrine of “merger” (or “confusion” as applicable) and it does not constitute a payment under the applicable law, the CRA adopts a long-standing position to consider that those situations will not give rise to a “forgiven amount” for the purposes of section 80. Based on the facts and assumptions as we understand them, we are of the view that the CRA’s long standing position would apply to the extinguishment of the Loan described in the present question.
Finally, we would like to point out that the taxpayer could structure the transactions in such a way that the legal documentation clearly demonstrates the payment of the Loan, so that the transactions do not raise uncertainty as to the application of section 80 in similar situations.
STEP Round Table 2022, question 5, summarized in CCH Tax Topics no 2656 (January 31, 2023)
