Tidying a company for sale means clearing the odd entries: the shareholder loan nobody expects back, the balance owing to a sister company, the vendor note from an earlier deal. Section 80 of the Income Tax Act runs what is forgiven through a fixed order of reductions — loss pools first, then cost bases — and adds whatever survives to income.
Key takeaways
SECTION 01 OF 10
A company relieved of a debt it deducted or borrowed against has been enriched, and the Act recovers that — first by taking away tax attributes it has not used, then by taxing what is left.
A company with large accumulated losses may pay no tax on a forgiveness and still be much worse off, because the losses are gone. One with nothing left to grind takes the whole amount into income under s. 80(13).
One caution. Section 80 is far longer and more technical than this article covers — eighteen subsections, cross-referenced into the resource and partnership rules and sections 80.01 to 80.04. What follows is the part a seller or buyer meets.
SECTION 02 OF 10
Subsection 80(1) gives a formula: the forgiven amount “is the amount determined by the formula A - B where A is the lesser of the amount for which the obligation was issued and the principal amount of the obligation”. B is a list from (a) to (l).
A debt issued at a discount is measured by the lesser figure. B subtracts, among much else, any amount “paid… in satisfaction of the principal amount”, amounts “included under paragraph 6(1)(a) or subsection 15(1)” in anyone’s income because of the settlement, and, where “the debtor is a bankrupt at that time, the principal amount of the obligation”.
SECTION 03 OF 10
A “commercial debt obligation” is one “(a) where interest was paid or payable by the debtor… pursuant to a legal obligation, or (b) if interest had been paid or payable…” an amount for it “was or would have been deductible in computing the debtor’s income”.
Limb (b) surprises people. Charging no interest does not put a debt outside the section; the test is hypothetical, and on money lent into a business interest generally would have been deductible. The interest-free shareholder advance is inside these rules. Treadstone Law covers documenting one by promissory note.
There is a carve-out: an “excluded obligation” is one where, among other things, the proceeds “were included in computing the debtor’s income” or “were deducted in computing the capital cost or cost amount… of any property”.
SECTION 04 OF 10
Paragraph 80(2)(a) says an obligation “is settled at any time where the obligation is settled or extinguished at that time (otherwise than by way of a bequest or inheritance” or for certain shares). The verb doing the work is “extinguished”: a release, a waiver, a resolution writing the balance off.
Two neighbours matter. Paragraph (h) deems the principal of a replacement obligation “to be paid… in satisfaction of the principal amount of the particular obligation” — refinancing is not forgiveness. Paragraph (i) treats simultaneous settlements “as if they were settled at different times in the order designated by the debtor”, failing which by the Minister.
Clearing five inter-company balances in an afternoon is five settlements, and the order is yours only if you designate it.
SECTION 05 OF 10
Here the section is gentler than owners fear. Paragraph 80(2)(g.1) provides that where a corporate debt payable to a person is settled, “the amount… that can reasonably be considered to be the increase… in the fair market value of shares… owned by the person… is deemed to be an amount paid… in satisfaction of the debt”.
Release your own solvent company from a debt it owed you and your shares rise by roughly that amount, which counts as payment — so the forgiven amount can come out near nil. Paragraph (g) does the same where debt is settled by issuing shares, deeming the amount paid equal to “the fair market value of the share at the time it was issued”.
The relief vanishes where it is most needed. In an insolvent company the release does not lift share value, nothing is deemed paid, and the full amount runs through. Treadstone Law’s loan against capital contribution sets out the structuring choice, but not the write-off.
SECTION 06 OF 10
A shareholder who owes the company is in a different provision. Subsection 15(1.2) deems “the value of the benefit where an obligation issued by a debtor is settled or extinguished at any time… to be the forgiven amount at that time”, and s. 15(1.21) imports the section 80 definition to measure it.
Treadstone Law states the effect plainly: “When a corporation forgives or cancels a loan owed by a shareholder, the forgiven amount is generally treated as a benefit conferred on the shareholder and included in their personal income,” and “Unlike a dividend, there is no corresponding corporate deduction” (forgiving a shareholder loan), citing the Act generally rather than by section.
This is why element B(b) subtracts amounts “included under paragraph 6(1)(a) or subsection 15(1)”: the benefit is taxed once. It is a separate trap from the repayment deadline and prescribed-rate benefit in shareholder loan tax traps, which does not cover forgiveness.
SECTION 07 OF 10
Paragraph 80(2)(c) fixes the sequence: “subsections (3) to (5) and (8) to (13) apply in numerical order to the forgiven amount”. You do not choose which attribute is spent first.
Subsection (3) goes first and is mandatory: the forgiven amount “shall be applied to reduce at that time, in the following order,” non-capital loss, farm loss, restricted farm loss, for each year ended before settlement. Subsection (4) applies the “applicable fraction of the remaining unapplied portion” against further non-capital and net capital losses.
Only then does anything reach assets. Subsection (5) reduces “the capital cost to the debtor of a depreciable property” and undepreciated capital cost; (8) resource expenditures; (9) adjusted cost bases, excluding shares and debts of corporations of which the debtor is a specified shareholder — those go to (10) and (11).
SECTION 08 OF 10
What survives lands in income. Subsection (13) adds, “in computing the debtor’s income for the year from the source in connection with which the obligation was issued, the amount determined by the formula (A + B - C - D) × E”.
The reductions from (5) onward are elective. Each applies only “to the extent designated in a prescribed form filed with the debtor’s return of income” for the year of settlement — CRA’s form T2154. Miss it and the mandatory loss grind still happens while the cost-base reductions do not.
The safety net is uncomfortable. Under s. 80(16), where relief under section 61.2 or 61.3 would otherwise apply and the debtor “has not designated amounts under subsections 80(5) to 80(11) to the maximum extent possible”, the Minister may designate instead — the CRA choosing which asset is written down.
SECTION 09 OF 10
Balances between related companies are the most commonly cleaned-up item, and have their own mechanism. Section 80.04 lets a debtor and an “eligible transferee” — broadly “a taxable Canadian corporation or eligible Canadian partnership related… to the debtor” — file an agreement moving a forgiven amount, which the transferee absorbs against its own attributes.
It is available only where the debtor has designated under (5) to (10) “to the maximum extent permitted”, and it has a price: s. 80.04(10) makes the debtor liable “to the extent of 30% of the amount specified in the agreement” for the transferee’s taxes, and (11) makes them “jointly and severally, or solidarily, liable” — a real cross-liability.
For a company genuinely underwater, section 61.3 gives a resident corporation a deduction computed from the s. 80(13) inclusion less a formula built on the value of its assets. It relieves the inclusion, not the losses already consumed.
SECTION 10 OF 10
Because subsection (3) spends the loss pool, and that pool is often part of what the buyer is paying for. Treadstone Law: “A seller’s own summary of available losses is not the same as a tax professional confirming what portion is actually usable by a new owner” (losses in a share purchase).
The alternatives need lead time: repay in cash, convert to shares under s. 80(2)(g), or leave the balance and handle it in the purchase agreement. All are live while the deal is being structured; none survive the entry being made. Treadstone Law on repaying shareholder loans before a sale asks whether the cash exists and whether repayment “doesn’t leave other creditors unpaid or breach any lender covenants”.
In diligence the question is the same on both sides: has anything here been forgiven, and what did it cost? A company can show clean accounts and a reduced carryforward at once. See non-capital loss carryforwards and winding up a corporation, which notes a wind-up “assumes debts are settled first” — the moment section 80 waits for.
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