17 February 1995 External T.I. 9500935 - DEBT FOREGIVENESS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether our previous administrative position concerning section 80 and 69(1)(a) is still applicable in view of the draft legislation on debt forgiveness

Position TAKEN:

It may not be relevant with respect to the Draft Legislation

Reasons FOR POSITION TAKEN:

Since the Draft Legislation does not provide for the series of transactions outlined in the 1981 Round Table, it may be necessary to apply GAAR to recharacterize the transactions as a direct share for debt conversion. Under a direct conversion, the shareholder will generally not be subject to a reduction in the ACB of his shares and there is no resulting tax inequity.

		950093
XXXXXXXXXX	F. Francis

Attention: XXXXXXXXXX
February 17, 1995

Dear Sirs:

Re: Administrative position on section 80

This is in reply to your letter of January 5, 1995, wherein you enquired as to whether the administrative position presented in response to question 3 at the 1981 Revenue Canada Round Table is still applicable with respect to the proposed revisions to the debt forgiveness rules contained in the December 20, 1994, revised draft legislation on debt forgiveness (the "Draft Legislation").

We note that while the Draft Legislation provides rules for direct share for debt conversions it does not specifically provide for a series of transactions involving cash transactions as outlined in your letter. In our view, it would appear that such a series of transactions would be undertaken in order to avoid the tax consequences of a direct share for debt conversion and consequently section 245 of the Income Tax Act (the "Act") may apply to redetermine the tax consequences. Pursuant to subsection 245(2) of the Act, where a transaction is an avoidance transaction, the tax consequences must be determined as is reasonable in the circumstances. It would therefore appear that the administrative position referred to above is no longer appropriate, given the specifics of the Draft Legislation.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch