Tax issues during hard times

"During hard times, the focus on tax issues makes a slight change in direction. Mining companies contemplate the tax treatment of transactions and circumstances which are the product of a difficult financial environment. Some of these issues are discussed in this month's edition of Tax Notes.Every industrial sector in Canada is undergoing a major restructuring of some form, and the mining industry is not an exception. The longest recession since the Great Depression continues to affect the economy. Mining firms seek to bring their debt/equity ratios into line, and try to replenish depleted retained earnings by selling assets. This month, Tax Notes briefly examines some of the tax issues which are generally encountered during the course of such a restructuring process.Debt SettlementOne question which commonly arises during hard times concerns the tax treatment of a "" gain "" realized by a debtor on the settlement of a debt. Consider, for example, a simple situation where a creditor wants to protect itself from further losses, and makes a deal with the mining company to accept a cash payment of $8 million in full settlement of a $10 million loan. In financial terms, the debtor has made a $2 million gain on the settlement of the debt. What is the tax treatment of that gain?The Income Tax Act (the Act) contains provisions in section 80 of the Act and in section 5400 of the Income Tax Regulations which deal specifically with this question. First of all, it is noted that the $2 million gain is not brought directly into income for tax purposes. However, as indicated below, the gain could affect the debtor's income indirectly to the extent that certain of the debtor's tax pools must be reduced by the amount of the gain."