I came across an interesting (older) technical interpretation a few days ago while looking at another matter. In TI 2009-0338911E5, the CRA commented on the rules in section 80 of the Income Tax Act applicable to a CCPC that was winding-up voluntarily where, as a result of the winding-up, debt owed in equal amounts to the 50/50 shareholders of the corporation would be forgiven.
The CRA provided the following comments:
In the given scenario, in order to facilitate the dissolution of Opco, if the Shareholders of Opco consent to its dissolution, it would result in the extinguishment of all debts that Opco owed to the Shareholders for no consideration such that the debt forgiveness rules under section 80 would become applicable. The forgiven amount would be the principal amount of the debt and, as you had noted, Opco has no tax balances so that none of the applications or designations that are available under subsections 80(3) to (12) would be available. In such a situation, Opco would have an income inclusion pursuant to subsection 80(13) of the Act equal to 50 percent of the forgiven amount.
However, subsection 61.3(1) of the Act provides a deduction for corporations resident in Canada (other than corporations exempt from tax under Part I of the Act) with respect to amounts
included in income under subsection 80(13) because of the application of the debt forgiveness rules. In general terms, section 61.3 requires a debtor corporation to compute the amount of its
net assets (i.e., the fair market value of its assets, net of its liabilities) at the end of a taxation year. Subsection 61.3(1) allows an offset against the income inclusion under subsection 80(13) equal to the amount of that income inclusion minus two times the net asset amount. The effect of the offset is that a corporation will be required to recognize income as a consequence of
subsection 80(13) only to the extent of twice the corporation’s net assets. In a situation where there are no assets, the deduction under subsection 61.3(1) should equal the income inclusion under subsection 80(13) of the Act.It should be noted that subsection 61.3(3) is an anti-avoidance provision, which provides that the deduction under, inter alia, subsection 61.3(1) is not available to a corporation for a taxation year if property was transferred (or the corporation became indebted) in the 12-month period preceding the end of the year and one of the reasons for the transaction was to increase the amount that the corporation would be entitled to deduct under, inter alia, subsection 61.3(1).
The last paragraph, in particular, caught my eye. It’s a reminder that, when considering the application of the debt forgiveness rules in these circumstances, one will need to review important capital transactions in the year prior to the dissolution to determine whether subsection 61.3(3) might apply (or whether the CRA might take the position that it ought to).
Neal Armstrong, at taxinterpretations.com, comments on a more recent CRA technical concerning subsection 61.3(3).
