CRA finds that no s. 39(2) gain arises on a CFA distribution of U.S.-dollar stated capital

Canco used U.S. dollars to subscribe for common shares of a non-resident sub ("Foreignco"), having a U.S.-dollar stated capital.  CRA confirmed that no s. 39(2) FX gain arose when (prior to 2011 and after appreciation in the U.S. dollar), Canco received a U.S.-dollar distribution of a portion of this stated capital.  It reasoned that the U.S.-dollar appreciation increased the resulting ACB grind under s. 53(2)(b)(ii), thereby also increasing the ultimate capital gain when the Foreignco shares were disposed of (or when a negative ACB gain arose under s. 40(3).)  Therefore, recognizing a s. 39(2) FX gain on the distribution would result in double taxation.

A similar approach would have applied if there had been a (post-2011) qualifying return of capital.

Neal Armstrong.  Summary of 22 January 2015 Memo 2014-0560571I7 under s. 39(2).