In 2016-0628741I7, CRA headquarters was asked by a CRA tax services office whether s. 143.4 would apply in respect of a debt-restructuring plan (the Plan) at a point in time before the unpaid interest owing by the taxpayer was actually settled (forgiven) under the Plan steps. CRA headquarters answered yes. The takeaway: this view can potentially result in income in the course of debt restructuring before the debt is actually settled. Here are the main points:
- The provision: Under s. 143.4(4), a taxpayer can be deemed to realize income under s. 12(1)(x) if the taxpayer incurred an expenditure (for example, interest expense) in one year and acquires a “right to reduce” an amount in respect of that expenditure in a later year.
- Right to reduce: A “right to reduce” is defined in s. 143.4(1) as including a right to reduce that is contingent upon the occurrence of an event, or in any other way contingent, if it is reasonable to conclude, having regard to all the circumstances, that the right will become “exercisable”.
- Contingent rights acquired under the Plan: Having regard to its ordinary meaning, the CRA interpreted the word “exercisable” to mean "capable of being made effective in action" or "capable of being implemented". On this basis, the CRA concluded that the taxpayer’s contingent rights under the Plan – i.e., to automatically settle the unpaid interest upon satisfaction of the conditions – constituted a “right to reduce” an amount in respect of that interest. This meant that the taxpayer had deemed income under s. 12(1)(x) at the time the taxpayer acquired these rights under the Plan (see page 9).
- No double tax: The CRA further concluded that double taxation would not arise under s. 80 if the unpaid interest was actually settled (forgiven) at a later time. In the CRA’s view, the settled interest would be considered an “excluded obligation” for s. 80 purposes by reason of (a)(i) in the definition of that term in s. 80(1) (see page 10).