S80 application in T2 (DEBT FOREGIVENESS)

Taxpayer had three debts forgiven totaling $25,000.00 in 2020 (Promissory note $15,000.00, two A/P’s $5,000.00 & $5,000.00)

$25,000.00 was booked to income.

Taxpayer has $20,000.00 in non capital losses from preceding years (2018 & 2019)
In Schedule 4 (Corp Loss continuity) I inputted a deduction of $20,000 in box 140 [S80(3)]

In Schedule 4N (Non-Capital Loss continuity workchart) I inputted adjustments equal to the preceding year’s losses ($20,000).

After using $20,000.00 in loss carry forward from previous years $5,000 remains so I reduced equipment UCC by $5,000.00 [S80(5)]

Lastly, on S1 I input a deduction of $25,000.00 (Box 705 & 395). Description is: Deduction under 80(3) & 80(5)

(Also, I completed elections T2153 & T2154)

Is this how others have treated debt forgiveness/comments would be appreciated.

I haven’t done one like this, but I think you have a few issues:

  1. A/P write offs should be included in income (as indicated). As such, nothing else needs to be done about them on the T2. This is what ITA 80(1) means.
  2. After the above, you have only one item to deal with, so you don’t need a T2153.
  3. UCC should be reduced only if the promissory note was related to a particular asset. If you reduce UCC by $15,000 then I don’t think you can use a T2154. Particularly since S80 requires you to apply the $15,000 to loss carry-forwards FIRST.
  4. If you you leave the $15,000 in income and apply the non-cap-losses from prior years, this is effectively the same as filing the T2154. If you do this, you wouldn’t reduce UCC.
  5. In any case I don’t think you should be entering the deduction on S1 line 705.

I’m not sure how or when you would ever use a T2154 - perhaps if the debt forgiveness was recorded to OCI rather than income? Or if you reduced the cost of the asset by $15,000 in accounting records - then you could leave the related UCC balance unaltered, and just have CRA reduce the non-cap-loss amount in their records?

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Had a chance to go over actual #'s and the only one mentioned previously correctly was debt forgiveness of $25k - Accounted all to 2020 income for accounting. (my apologies)

Debts forgiven:

  • $8,000 A/P (Subcontractor)
  • $11,000 Promissory note (to purchase asset)
  • $6.000 A/P (to purchase asset)

Non-capital losses from preceding years (2018 & 2019) total $8,000.

In Schedule 4 (Corp Loss continuity) I inputted a deduction of $8,000 in box 140 [S80(3)]
That takes care of the $8,000 A/P

Of the remaining $17,000.00 ($11k + $6k) I reduced UCC of asset (CCA workchart I inputted -$17k in box 205)

I completed both elections:

  • T2153 to state priority (A/P, Note, A/P)
  • T2154 to state $8,000 - forgiven amount applied under S80(3) and $17k designated amount of depreciable properties of a prescribed class.