Debt forgiveness rules (s. 80)

Section 80 of the Income Tax Act can matter when a loan or vendor note that is a commercial obligation is settled for less than its face value. A buyer who owes less may see tax consequences it did not expect. The CRA’s bulletin IT-293R, archived and no longer updated, says a debtor’s gain on a debt settled otherwise than by payment in full of the principal amount is subject to section 80, unless listed exclusions apply.

How the Act applies the forgiven amount

Where a commercial obligation is settled, the forgiven amount is applied to reduce the debtor’s loss balances in the order subsections 80(3) and 80(4) set out. Under subsection 80(5), the remaining unapplied portion is applied, as the debtor designates in a prescribed form filed with its return, to reduce the capital cost or undepreciated capital cost of depreciable property. Later subsections cover other balances, and subsection 80(13) adds an amount, set by formula, in computing the debtor’s income. The section is intricate, so read it with an accountant.

What to ask

• Whether the debt is a commercial debt obligation as the Act defines it
• Which tax balances the debtor holds that the amount would reduce
• Whether a designation must be filed with the return

See the tax consequences of forgiving a vendor take-back note and vendor take-back.