CRA rules that the s. 40(2)(e.1)/53(1)(f.1) basis preservation rule applies in the face of the loss denial rule in s. 40(2)(g)(ii)

A Canadian-holding company (Holdco2) made a non-interest-bearing demand U.S-dollar loan to the Canadian subsidiary of another Canadian family-owned corporation (Holdco1).  The accrued FX loss to Holdco2 would be denied under s. 40(2)(g)(ii) if realized, as the loan was not made for an income-producing purpose.

CRA ruled that the capital loss realized by Holdco2 on its disposition of the loan to Holdco1 (following the loan’s amendment to be interest-bearing) will be deemed to be nil by s. 40(2)(e.1) (so that the denied capital loss will be added to Holdco1's ACB for the US Loan under s. 53(1)(f.1)) notwithstanding that s. 40(2)(g)(ii) also applies.

Neal Armstrong. Summary of 2014 Ruling 2013-0479701R3 under s. 40(2)(e.1).