3 February 2000 External T.I. 1999-0012155 - Limited Recourse Amount

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.

Principal Issues:

Whether the test in paragraph 143.2(7)(a) would be determined without regard to exchange rate fluctuations where the Canadian dollar appreciated and the Canadian-dollar amount of a foreign loan repayment would be less than the original loan.

Position:

Fluctuations in the Canadian dollar would not be relevant for the purposes of the test where bona fide arrangements were made at the time the indebtedness arose for repayment of the loan and interest thereon within a reasonable time not exceeding 10 years. However, where the requirements of paragraphs 143.2(7)(a) and (b) were not met, certain ramifications would result. This would result in the loan being a limited recourse amount which would be subject to exchange rate fluctuations.

Reasons:

The specific wording of the definitions of "limited recourse amount" and "principal amount" in subsection 143.2(1) and subsection 248(1), respectively; the requirements of subsection 143.2(10) and the requirement that, for accounting and tax purposes, foreign exchange transactions be converted to Canadian currency.

XXXXXXXXXX 						F.B. Fontaine
							990688
Attention:  XXXXXXXXXX 

February 3, 2000

Dear Sirs:

Re: Limited Recourse Amounts

This is in reply to your letters dated March 15 and April 16, 1999 in which you requested a technical interpretation of paragraph 143.2(7)(a) of the Income Tax Act (the "Act").

The situation described concerns a loan that was obtained in a foreign currency and used in an activity carried on by a Canadian taxpayer in a foreign jurisdiction. You asked whether the test in paragraph 143.2(7)(a) of the Act would be determined without regard to exchange rate fluctuations where the Canadian dollar appreciates and the Canadian-dollar amount repaid would be less than the original loan.

The test in paragraph 143.2(7)(a) of the Act is whether or not bona fide arrangements were made at the time an indebtedness arose for repayment of the indebtedness and interest thereon within a reasonable time not exceeding ten years. It is our view that fluctuations in the Canadian dollar would not be relevant for the purpose of that test where such bona fide arrangements were made at that time. However, in a situation where the requirements of paragraphs 143.2(7)(a) and (b) were not satisfied in respect of an unpaid indebtedness of a taxpayer, certain ramifications would result. For the purposes of section 143.2 of the Act, such indebtedness would become a limited recourse amount which, in our opinion, would be subject to exchange rate fluctuations in the case of foreign obligations. Our reasons for this opinion are as follows:

(a) Under subsection 143.2(1) of the Act, a "limited recourse amount" is defined as the unpaid principal amount of any indebtedness for which recourse is limited either immediately or in the future and either absolutely or contingently.

(b) Pursuant to subsection 248(1) of the Act, the "principal amount" of any obligation is the maximum amount or maximum total amount payable by the issuer of the obligation under the terms of, or any agreement relating to, the obligation. Where an obligation is described in a foreign currency, it is also our view that the unpaid principal amount of the obligation, for the purposes of section 143.2 of the Act, would be the maximum amount or the total maximum amount payable in terms of Canadian currency in respect of such obligation.

(c) The fundamental principle regarding foreign exchange transactions for Canadian taxpayers is that, for accounting and tax purposes, such transactions must be converted into Canadian currency. In this regard, where a foreign-currency obligation that was a limited recourse amount has been repaid in full or in part, at a particular time, subsection 143.2(10) of the Act would apply to determine, for the purposes of subsection 143.2(6), the "expenditure" deemed to have been made at that time. In addition, where the Canadian dollar had appreciated against the foreign currency at the time of repayment, a foreign exchange gain would be recognized on conversion at that time.

(d) The words in the definition of "limited recourse amount" under subsection 143.2(1) and also in subsection 143.2(7) of the Act are specific and do not provide for any exceptions in the case of foreign borrowings. Accordingly, for these purposes, we would conclude that any exchange rate fluctuations on such borrowings would not normally be ignored.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of Information Circular 70-63R, written opinions are not advanced rulings and, accordingly, are not binding on the Canada Customs and Revenue Agency.

We trust this information will be helpful to you.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 3 -