New tax rules affect debt financing

"New tax rules that can apply to the repayment, extinguishment, or other settlement of a company's debt are finally taking shape. These new rules are far-reaching in their application, and can affect mining companies in a serious, negative way.IntroductionIn his February 1994 budget, Finance Minister Paul Martin announced changes to the Income Tax Act that could have an adverse impact on a company that restructures its debt. Since then, the new rules have undergone considerable transformation during their fetal stage: draft legislation was introduced in July 1994; revised draft legislation was introduced December 1994; and a third version of draft legislation was introduced February 1995. It seems that the new rules have now been pretty well finalized, and they contain some serious traps that the unwary could fall into. The new rules are of particular importance to mining companies, because a mining company's resource pools will be caught under the new rules, whereas these pools escaped the wrath of the old rules. The following commentary summarizes the new rules that are generally referred to as the ""debt forgiveness"" rules."