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EZ 39: Forgiveness of debt
or “What happens when someone cancels a debt you owe”
You could also call this:

“How to claim a deduction for unpaid income you've written off as a bad debt”

You can get a deduction for money you’ve written off as a bad debt in a financial arrangement. This applies in two main situations:

  1. If you’ve earned income from the financial arrangement under certain sections of the law, and the amount you’re writing off is related to that income.

  2. If you’re in the business of dealing with these kinds of financial arrangements, or if it’s a trade credit and you’re in the business of selling the goods or services that the credit is for. In this case, you can’t be associated with the person who owes the money.

If you get a security payment for a loss, and you’re not allowed to claim a deduction for that loss for other reasons, you can still claim a deduction. However, it can’t be more than the amount of the security payment.

To claim these deductions, you need to meet the requirements set out in section DB 31(1) and (5).

If you’re claiming a deduction for a share loss, you need to follow the rules in section DB 24.

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Next up: EZ 41: Disposal of debt to associate of debtor

or “Rules for selling debts to people connected with the borrower”
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Part E Timing and quantifying rules
Terminating provisions: Definitions

EZ 40Accrued income written off

  1. A deduction is allowed to a person for an amount written off by the person as a bad debt in respect of a financial arrangement where and to the extent that—

  2. the person derives income in respect of the financial arrangement under any of sections EZ 35, EZ 37(4), EZ 38, and EZ 42; and
    1. the amount written off is attributable to that income.

      1. A deduction is allowed to a person for an amount written off by the person as a bad debt in respect of a financial arrangement (not being an amount allowed as a deduction under subsection (1)) where—

      2. the person—
        1. carries on a business which comprises holding or dealing in such financial arrangements; and
          1. is not associated with the person owing the amount written off; or
          2. the financial arrangement is a trade credit and the person carries on a business of dealing in the goods or services for which the trade credit is a debt.

            1. Where a person receives a security payment in relation to a loss and a deduction is denied to the person for the loss other than under this subsection, the person is allowed a deduction for the loss no greater than the amount of the security payment.

            2. A deduction for bad debts is allowed under this section only where the requirements of section DB 31(1) and (5) have been met.

            3. A deduction for a share loss (within the meaning of section DB 24) is allowed under subsection (3) only where the requirements of section DB 24 have been met.

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