12 January 1999 06338M8 - CONVERSION TO EURO

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX

Dear Sirs:

Thank you for your letter of October 13, 1998, wherein you request an official statement by Revenue Canada as to the tax consequences under the Income Tax Act (Canada), the Excise Tax Act and related legislation of the replacement of existing European currencies by the “euro” currency as a result of the implementation of the European Economic and Monetary Union (the “EMU”).

The third stage of the implementation of the EMU begins on January 1, 1999. It involves the adoption of a single currency, the “euro”. On that date, the exchange rates between the national or “legacy” currencies of the 11 countries participating in the conversion and the euro will be irrevocably fixed. During a transitional period running from January 1, 1999 to the year 2002, taxpayers are free to use the euro unit but are under no compulsion to do so. However, on January 1, 2002, the legacy currency units will cease to exist as subdivisions of the euro. References to legacy currency units in legal instruments at the end of the transitional period will be required to be read as references to euro, according to the conversion rates.

As a result of the adoption of the euro, legacy-denominated obligations may be converted into euro-denominated obligations. As noted in your letter, the main issue for Canadian tax purposes is whether the conversion to euro of a legacy-denominated obligation results in the creation of a new obligation and the disposition of the former obligation.

There are three main types of changes which an obligation may undergo as a result of its conversion to euro:

• The legacy currency unit in which the obligation is stated may simply be changed to the euro unit (“redenomination”).
• A fraction of the obligation may be repaid by the debtor or, possibly, forgiven by the creditor, in order to round-off the obligation to the nearest whole number or decimal fraction in terms of euros. For example, a debt that is redenominated from 1000 Deutsche Marks to 104.251 euros may be rounded to 104.25 euros (“renominalization”).
• Some of the terms of the obligation may be changed to reflect the different market conventions prevailing for euro-denominated obligations (“reconventioning”).

The determination of whether a legacy-denominated obligation has been disposed of for Canadian tax purposes by virtue of its redenomination, renominalization or reconventioning depends on whether these events are considered to result in the settlement, extinguishment, cancellation, rescission, novation or termination of the obligation under the law governing the obligation. Where the governing law is Canadian law, the Department is prepared to offer the following, specific guidance based on Canadian legal principles:

• The redenomination of an obligation from a legacy currency to the euro currency will not be considered a disposition of the obligation for Canadian tax purposes. Similarly, the conversion of a foreign affiliate’s surplus accounts from a legacy denomination to the euro denomination will not be considered a taxable event.
• Where, following its redenomination, a legacy-denominated obligation is renominalized, it will not be considered to be disposed of on that basis alone. However, the actual repayment or forgiveness of an amount on an obligation’s renominalization may have Canadian tax consequences.
• Where the original terms of an obligation contemplate its amendment in the event of the adoption of a single currency by the EMU, any amendments to the terms of the obligation that are strictly consequential on and relate solely to the adoption of the euro currency by the EMU will generally not, in and by themselves, be considered to result in the disposition of the obligation.

In any case not dealt with above, the issue of whether there has been a disposition of a legacy-denominated obligation, that is governed by Canadian law, by virtue of the alteration of its terms depends on the application of Canadian legal principles, notably the law of rescission or novation, to the facts and circumstances of each case.

Where the law that governs an obligation is foreign law, the determination of whether the obligation has been disposed of for Canadian tax purposes by virtue of its redenomination, renominalization or reconventioning will depend, in part, on foreign legal principles. Put another way, the legal effect of these events on such an obligation under the relevant foreign law must be considered in order to determine if the obligation has been disposed of for Canadian tax purposes.

Finally, the Department does not expect the adoption of the euro currency to have any significant impact on the administration of excise taxes, including the Goods and Services Tax.

The above-described tax treatment of the conversion to euro will be published in the Department’s next technical newsletter in order to achieve the wide distribution that this important issue deserves. If additional guidance is required in this area, taxpayers may request a ruling or a technical interpretation.

I trust that the you will find the above helpful and thank you for bringing this important matter to my attention.

		Sincerely,

		Herb Dhaliwal, P.C., M.P.

B. Bloom
957-9796
December 7, 1998