Forgiven Debts Considered Bad Debts

From: Canada Revenue Agency

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-084R

Date of Issue

September 2, 1993
Revised March 8, 1999

Subject

Forgiven Debts Considered Bad Debts

Legislative Reference(s)

Subsections 231(1) and 232(2) of the Excise Tax Act (the ETA)

National Coding System File Number(s)

11610-4, 11783-2/231(1), 232(2)

Effective Data

January 1, 1991 for GST;

April 1, 1997 for HST

Text

This policy statement addresses the tax treatment of forgiven debts.

For purposes of the Excise Tax Act (the "ETA"), forgiven debts pursuant to an arrangement under the Companies' Creditors Arrangement Act are considered to be bad debts as opposed to reductions of consideration. As such, the provisions of section 231 of the ETA apply to forgiven debts as opposed to the provisions of section 232 of the ETA.

Once creditors have written off the amount in their books in accordance with generally accepted accounting principles, the creditors are eligible to claim a deduction in determining their net tax for an amount in accordance with the formula set out in subsections 231(1) of the ETA provided the other requirements of that subsection are met, as well as, the time limitation set out in subsection 231(4) of the ETA.

 

SAMPLE RULING

Statement of Facts

1. In 1997, Opco purchased goods from suppliers A, B, and C.

2. Suppliers A, B and C filed their returns accounting for the GST/HST payable under Division II of Part IX of the ETA by Opco in respect of the supplies and remitted their net tax accordingly.

3. Opco could not pay the consideration nor the GST/HST payable in respect of the supplies. Opco made an arrangement pursuant to the Companies' Creditors Arrangement Act to reduce the debt owed to suppliers A, B and C.

4. Under the plan of arrangement, a portion of the debt owed by Opco to its creditors (i.e., suppliers A, B, and C) would not be collectible; such portion was to be forgiven. For accounting purposes, the creditors would be writing off as a bad debt that portion of the debt that was forgiven.

5. Suppliers A, B, and C meet all of the conditions necessary to qualify for a bad debt deduction in accordance with subsection 231(1) of the ETA.

Ruling Given

Suppliers A, B and C may deduct an amount in determining their net tax in respect of the forgiven amounts in accordance with the formula and conditions outlined in subsections 231(1) and (4) of the ETA.

Rationale

Suppliers A, B and C filed their returns accounting for the GST/HST payable under Division II in respect of the supplies, remitted their net tax and a portion of the debt consisting of both consideration and tax owed by Opco became uncollectible. Forgiven debts pursuant to an arrangement under the Companies' Creditors Arrangement Act, are considered to be bad debts for purposes of the ETA. Therefore, suppliers A, B and C may deduct an amount in determining their net tax in accordance with the formula and cnditions outlined in subsection 231(1) and (4) of the ETA.

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