Forgiven debt — tax consequences of debt relief
Consequences of debt forgiveness
Section 80 provides rules for when a debt is forgiven or settled for less than its face value. Forgiven amounts generally reduce tax attributes (losses, ACB, CCA) rather than being immediately included in income.
Plain-language explanation
When a lender forgives some or all of a debt, section 80 prevents a windfall — the debtor must apply the forgiven amount to reduce their tax attributes, and any excess may be taxable.
How s.80 works (the "debt forgiveness rules"): When a commercial obligation is settled for less than its principal, the "forgiven amount" is applied in a specific order to reduce: 1. Non-capital losses from prior years (the most flexible) 2. Net capital losses 3. Undepreciated capital cost (UCC) of depreciable property 4. Adjusted cost base of capital property 5. Cumulative eligible capital
If the forgiven amount exceeds all attributes: Any excess is included in income at 50% (half of it becomes taxable income) — similar to the capital gains inclusion rate.
Common scenarios: - Corporate debt restructuring (lender writing down a loan) - Negotiated debt settlement (debtor pays less than owed) - Commercial arrangements where creditor accepts shares in lieu of debt
The "excluded obligations" list: Some debts are excluded from s.80 — debts between non-arm's-length parties (family), government grants, and debts forgiven as part of a commercial reorganization may have different treatment.
Example
BuildRight Corp owes $500,000 to its bank. In a workout, the bank forgives $200,000. S.80: $200,000 first reduces BuildRight's non-capital loss carryforward ($150,000). Remaining $50,000 is applied to reduce UCC of assets. If UCC reaches zero, 50% of any remaining amount ($0 in this case) would be income.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
New rules for "debt parking" and related transactions. When a creditor "parks" a distressed debt by transferring it to a person related to the debtor at a discount, the debtor is treated as if the debt was forgiven at the time of the transfer — preventing avoidance of s.80 through related-party debt transfers.
Before
Related-party debt transfers at a discount sometimes escaped s.80 treatment
After
Debt parking rules: related-party transfer at a discount triggers s.80 consequences at transfer time
Common questions
If my bank forgives part of my mortgage, do I pay tax? +
Not necessarily on your personal residence (outside a business context). S.80 primarily applies to commercial debt. A personal mortgage forgiveness may also trigger different rules, but for purely personal situations it often does not result in tax (though specific facts matter).
How does s.80 interact with my business losses? +
Forgiven debt reduces your loss carryforwards first — so if you have large non-capital losses, debt forgiveness consumes them before any income is recognized. This can neutralize the tax benefit of those losses.
Key terms
Related sections
CPA recommendation
Debt restructurings involving s.80 can be complex. A CPA or tax lawyer should model the tax attribute reduction to avoid unexpected consequences.
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 80. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.