Selected US Tax Developments: Perhaps Forgiveness Truly Is Divine

Pursuant to the common law in the United States, a sole shareholder that purports to transfer assets to a corporation for no consideration may be deemed to have received stock of the corporation for US tax purposes. The Internal Revenue Service has taken the view that stock of the corporation similarly should be deemed to have been issued to a sole shareholder that purports to forgive, for no consideration, accrued but unpaid interest owed to it by the corporation. While this approach may avoid abuse in certain circumstances, it may also present an opportunity for Canadian parent corporations that are owed interest by their US subsidiaries.