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.
Principal Issues: Could the GAAR apply to the settlement of a debt where the debtor corporation's non-capital losses have already been claimed in a loss consolidation arrangement?
Position: Yes. GAAR could apply so favourable ruling cannot be provided in such situation.
Reasons: Two losses would be claimed with respect to the same investment, contrary to the scheme of the Act, and in particular, section 80.
2025 CTF Annual Conference
CRA Roundtable
Question 1 - Avoidance of subsection 80(3) on settlement of debt.
Consider the following situation:
1. A corporation resident in Canada (“Parentco”) owns all of the issued and outstanding shares of another corporation resident in Canada (“Subco”). Parentco and Subco have the same taxation year-end.
2. In Parentco’s 20X3 taxation year, Parentco made a $1,000 interest free loan to Subco to fund Subco’s business operations (the “Subco Loan”).
3. Subco used the proceeds from the Subco Loan in its business and incurred a $1,000 non-capital loss (the “NCL”) in its 20X3 taxation year.
4. In 20X4, it was determined that the business of Subco would need to be wound down.
5. Subco claimed the NCL in its 20X4 taxation year by implementing a loss consolidation arrangement (the “LCA”) with Parentco.
6. In 20X5, Parentco forgave the Subco Loan (the “Settlement”) and, immediately after the Settlement, Subco was wound-up into Parentco under subsection 88(1).
7. Immediately before the Settlement, Subco held property with nominal cost amount and fair market value and its only liability was the Subco Loan. Subco did not have any other tax attributes.
As a result of the Settlement, Parentco claimed a capital loss of $1,000 (the “Capital Loss”) in relation to the Subco Loan and Subco claimed a deduction for insolvency under subsection 61.3(1) that fully offset the amount that was included in its income pursuant to subsection 80(13).
Does the CRA have any concerns with this situation?
CRA Response
The CRA recently received an advance income tax ruling request with respect to similar proposed transactions and it was determined that a favourable ruling would not be issued in that situation based on the following considerations:
1. The Settlement forms part of the same series of transactions as the LCA. When viewed separately, the LCA and the Settlement would not result in abusive tax avoidance. It is their combined effect that makes the result achieved contrary to the scheme of the Act with regard to, in particular, section 80.
In Pièces Automobiles Lecavalier Inc. v. The Queen, 2013 TCC 31 (“Lecavalier”), the Tax Court of Canada held that the general anti-avoidance rule (the “GAAR”) applied to a series of transactions that frustrated the object, spirit and purpose of section 80, which was stated to be to ensure that the tax consequences for debtors who benefited from a gain on the forgiveness of a debt, and who also benefited from expenses or deductions, are adjusted accordingly. (footnote 1) As a result of the series of transactions, Subco was able to benefit from a gain on the forgiveness of the Subco Loan and from expenses or deductions related to the Subco Loan (i.e., the NCL). In our view, such a result is contrary to the scheme of section 80.
This position is consistent with the views expressed in Example 23 of Information Circular IC88-2 Supplement 1, “General Anti-Avoidance Rule,” July 13, 1990 (the “IC Example”). The IC Example provides that the CRA would consider applying the GAAR to a situation where transactions are undertaken to avoid the tax consequences related to the application of section 80. Specifically, prior to the settlement of its debt, the debtor corporation would transfer all of its property to a wholly-owned subsidiary ensuring that the amounts elected under subsection 85(1) result in the recognition of income from which its losses can be deducted. The debt would be forgiven and the debtor would then amalgamate with its wholly-owned subsidiary with the result that all of the property of the subsidiary (which was formerly property of the debtor) becomes property of the amalgamated company. Section 80 would apply to reduce the adjusted cost base of the shares of the subsidiary, but since these shares are cancelled on the amalgamation, it would have no real effect. This is akin to the current situation because, like the transfer of property from the debtor to its wholly-owned subsidiary in the IC Example, the LCA enables Subco to use the NCL before it would otherwise be eliminated pursuant to the application of section 80.
2. Two losses are claimed with respect to the same investment within a related corporate group. Specifically, Parentco realized the Capital Loss and Subco was able to claim the NCL as part of the LCA. Both losses arose from the same investment made by Parentco into Subco, by means of the Subco Loan.
Had the LCA not been entered into, section 80 would have worked as intended, with the result that the NCL would have been eliminated pursuant to the application of subsection 80(3). Parentco and Subco could have also entered into transactions to preserve the NCL and settle the Subco Loan without Parentco realizing a capital loss on the settlement. For example, the Subco Loan could have been settled on an amalgamation of Subco and Parentco or as a consequence of the winding-up of Subco into Parentco. Each of these situations would have resulted in, ultimately, only one loss being available for the related corporate group, being the NCL. This result would be consistent with the result of the proposed transactions described in ATR-66 (cancelled) and would comply with the scheme of the Act applicable in the circumstances.
For these reasons, the CRA would not rule favourably in respect of the current situation and would consider the application of the GAAR. Furthermore, please note that CRA Document No. 2011-0426051R3 no longer reflects the CRA’s position on the application of section 80 and the GAAR in such circumstances.
Matthew K.X. Weaver
2025-108078
December 2, 2025
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1. Lecavalier, at paras. 103 and 123
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