When a commercial obligation is settled or extinguished for an amount less than the principal amount of the debt, Section 80 applies the debt forgiveness rules. CRA notes that the forgiven amount is applied to reduce “tax balances” or is included in the debtor’s income under Subsection 80(2) or (13).


In  a  June  21,  2017  French  Technical Interpretation  (2016-0678361E5,  Seguin, Marc), CRA opined that a  deemed gain  due to a limited partner’s negative adjusted cost base  (under Subsection 40(3.1)) could  not  be added  to  that  limited  partner’s  capital dividend  account.  CRA  opined  that partnership  income  generally  retains  its  nature  and  character  when allocated out to partners.


When  a  commercial  obligation  is  settled  or  extinguished  for  an amount less  than the  principal amount  of the debt, Section 80 applies the  debt  forgiveness  rules.  CRA  notes  that  the  forgiven  amount  is applied to reduce “tax balances” or is included in the debtor’s income under Subsection 80(2) or (13).

Section 80 requires that the forgiven amount be applied in the following order:

  • non-capital losses (Paragraph 80(3)(a));
  • farm losses (Paragraph 80(3)(b));
  • restricted farm losses (Paragraph 80(3)(c));
  • allowable business investment losses (Paragraph 80(4)(a)); and
  • net capital losses (Paragraph 80(4)(b)).

After the mandatory application of the forgiven amount, the debtor may elect to apply the remaining forgiven amount to reduce the capital cost of  depreciable property  (Subsection 80(5));  cumulative eligible capital  (Subsection 80(7));  resource expenditures  (Subsection 80(8)); capital  properties  (Subsection  80(9));  certain  shares  and  debts(Subsection  80(10));  certain  shares,  debts  and  partnership  interests (Subsection  80(11));  and  current  year  net  capital  losses  (Subsection 80(12)).  If  there  is  still  a  residual  balance,  half  of  the  amount  will  be added  to  the  taxpayer’s  income  (Subsection  80(13)).  The  rules  are modified slightly for partnerships.

In  a  March  22,  2017  Technical  Interpretation  (2016-0666481E5, Gibbons, Jim), CRA considered the impact of the debt forgiveness  rules on a forgiven amount in a tiered partnership.  While general comments were  provided,  CRA  specifically  opined  on  the  implications  where  a bottom partnership (BP) is wound up into the top partnership (TP) in the  same year a forgiven amount is included in the BP’s income(Subsection 8(13)).

CRA  noted  that  the  BP  would  have  a  deemed  year-end  immediately before the time it ceased to exist.  Therefore, the BP’s income  inclusion would occur in the deemed fiscal period, and, as a partner of the BP, the TP could deduct an amount in respect of the relevant limit which would then be deemed to be a commercial debt obligation that the TP issued  and  was  settled  at  the  end  of  the  BP’s  deemed  fiscal  period (Subsection 80(15)).  The TP  could then apply the forgiven amount  to their own tax attributes (under Subsections 80(5) to (10)).

CRA also noted that the forgiven amount  could only be  applied  against the adjusted cost base of the TP’s interest in the BP if the BP and theTP were not related  (e.g. the TP only had a minority interest in the BP) under Subsection 80(9).

The balance of any forgiven amount, after applying Subsections 80(5) to (10), would be included in the TP’s income (Subsection 80(13)) and allocated to its members.

As  the  TP  would  be  deemed  (Subparagraph  80(c)(i))  to  have  issued  a commercial debt obligation that was settled at the end of the BP’s deemed fiscal period, Subsection 8(15) would also apply to the partners.  Thus, the partners would be able to claim a deduction  (Subparagraph 80(15)(a)) up  to  the  relevant  limit  which  could  then  be  treated  as  a  forgiven amount and applied against the taxpayer’s own tax attributes