Claiming Debt Forgiveness

Previously undeducted resource allowances carried forward may have to be reduced under the debt forgiveness rules.

When commercial debts are forgiven, no asset is lost by the debtor and no asset is acquired by the creditor. From the creditor’s point of view, the debt is disposed of for nil proceeds. This will result in a capital loss or business deduction, depending on the nature of the debt and the creditor’s business.

From the debtor’s point of view, goods, services or assets may have been acquired at a significant discount. The cost of these goods or services may have already been deducted from income or the acquired assets may already have been disposed of.

Since the forgiven amount cannot be allocated to a specific item, the debt forgiveness rules require a reduction in certain “tax preferences” like loss applications. This is a complicated area of tax law and professional advice should be sought.