Due to the recent economic shock of the COVID-19 pandemic, many
businesses are considering various options to weather the economic
shock. One commonly considered option is to ask existing creditors
to forgive all or part of a debt. However, this strategy is subject
to a complex regime commonly known as the "debt forgiveness
rules". These rules can trigger important income tax
implications that should be considered in evaluating such a
strategy.
These debt forgiveness rules can ultimately cause an amount to
be included in the taxpayer's income. Before seeking to have
all or a portion of your debt forgiven or discharged, you should
consider the applicability and implications of the debt forgiveness
rules, summarized below.
