Financially Troubled Businesses

Question 1

What loss carryovers does the ITA require companies to apply forgiven debt to?

Answer 1

Note: This is the order that is required to be used up
Non-capital losses
ABILs
Farm Losses
Restricted Farm Losses
Net capital losses

Question 2

What happens if there are still amounts of debt that still remain after reduction of loss carryovers?

Answer 2

Other amounts may also be reduced:
Capital cost of depreciable property
UCC of depreciable property
Resource pools
ACB of non-depreciable capital properties
Current-year capital losses

Question 3

If there are still amounts remaining…

Answer 3

One half can be included in income in the year debt is forgiven

Question 4

In what order does the ITA require companies to apply forgiven debt to?

Answer 4

1) Loss carry overs
2) (At the option of the taxpayer) and in the following order:
- CCA
- UCC
- Resource pools
- ACBs of non-depreciable capital properties
- current-year capital losses realized.

Question 5

What happens it the debt forgivess was related to an employee or shareholder?

Answer 5

Forgiven amount is included in the income of the employee o shareholder - debt forgiveness rules stated above do not apply to personal debt

Question 6

What happens to unpaid amounts?

Answer 6

To prevent a deferral of tax when one taxpayer has deducted an amount, but the creditor has not - the transaction is not included in income.

Amounts associated with a deductible outlay or exense owning to a non-arms length person that remainds at the end of the second taxation year - expenses incurred need to be added back in the following year.

An amount that is required to be added back to income as a result of these rules may not be deducted if it’s paid off later.

But the debtor and creditor may elect a joint election deeming the unpaid amount to be paid on the first day of the 3rd taxation year. Debtor is then not required to include the maount in income, but the creditor would need to.