What is the consequence of debt forgiveness?

If you have a commercial debt obligation—a debt on which interest would have been deductible in computing income from a business or property—and that loan is forgiven, you’ll have a tax consequence.

This may affect other provisions on the tax return. Professional help is recommended because the consequences can affect your tax filings for many years to come. What’s important is you have enough knowledge to ask good questions should this happen to you.

Where the forgiven amount cannot be allocated to a specific asset (which is often the case for a commercial loan) the forgiven amount is used to reduce the debtor’s other “tax preferences” in the following order:

• Non-capital loss balances (except for allowable business investment losses)
• Farm losses
• Restricted farm losses
• Net capital losses
• Depreciable property’s capital cost and undepreciated capital cost (UCC) balances
• Cumulative eligible capital
• Resource expenditure balances
• Adjusted cost base (ACB) of certain capital properties
• Current year capital losses

In the case of Business Investment Losses from small business corporations, reductions due to debt forgiveness are applied to the earliest such loss first. It is also possible to transfer unused balances of forgiven debt to another taxpayer.