CRA finds that the FX loss denial rule in s. 261(21) cannot apply to an FX hedging contract between a Canco which has the Canadian dollar as its functional currency and its parent which uses another currency

S. 261(21) denies FX losses incurred by a taxpayer in transactions with related persons who do not have the same tax-reporting currency at any time while those losses accrued.

CRA considered that this rule did not apply to deny an FX loss sustained by a Canadian subsidiary (“Holdco”) of a non-resident parent (“Parent”) on hedging agreements it entered into with Parent to hedge its FX exposure on a U.S. dollar loan it had made to a Canadian subsidiary of Holdco which, unlike Holdco, had the U.S. dollar as its reporting currency.

The key point is that “tax reporting currency” is defined as the currency in which the taxpayer’s “Canadian tax results” are determined. Although, in ordinary parlance, the functional currency of Parent presumably was something other than the Loonie, any of its Canadian tax results would have been determined in Canadian dollars. Thus, the tax reporting currency of Holdco and Parent was the same, so that s. 261(21) could not apply – or, “alternatively, if Parent did not have any Canadian tax results for the taxation years in which the Hedging Agreements were outstanding, it would not have had a tax reporting currency for those years,” which would point to the same conclusion.

Neal Armstrong. Summary of 9 March 2016 Memo 2015-0612501I7 under s. 261(20)(b).