27 June 2001 External T.I. 2001-0083135 - Foreign Exchange Gain

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 a foreign exchange gain realised upon maturity of Ontario strip bonds denominated in US currency can be deferred until the funds are converted into Canadian dollars.

Position: The foreign exchange gain cannot be deferred until the funds are converted into Canadian dollars. It must be calculated upon maturity of the bonds.

Reasons: Subsection 39(2) of the Income Tax Act and paragraph 13 of Interpretation Bulletin IT-95R.

XXXXXXXXXX 							2001-008313
								Éric Allard-Pouliot
June 27, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request - Government of Ontario Strip Bond

This is in reply to your letter of April 27, 2001, regarding the above-noted subject. More specifically, you have requested our opinion as to whether a foreign exchange gain realised upon maturity of securities denominated in U.S. currency can be deferred until the funds are converted into Canadian dollars.

The facts submitted in your request are the following:

a) On June 16, 2000 you purchased a Government of Ontario Strip Bond denominated in U.S. currency (the "Bond");

b) At the time of purchase of the Bond the exchange rate for U.S. currency was $1.47 Canadian;

c) The maturity date of the Bond is October 17, 2001; and

d) Upon maturity of the Bond you intend to retain the proceeds in U.S. dollars and reinvest such proceeds in a similar type of bond.

In light of these facts, you require our opinion as to whether any foreign exchange gain realised upon maturity of the Bond could be deferred until you actually convert the U.S. funds into Canadian dollars.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments which may be of assistance to you.

Foreign exchange gains and losses are dealt with under subsection 39(2) of the Income Tax Act (the "Act"). This provision applies to any fluctuation after 1971 of a foreign currency relative to Canadian dollars that results in a gain being made or a loss being sustained. In the case of individuals, subsection 39(2) of the Act provides that only the amount in excess of $200 of an individual's net gain or loss on the disposition of foreign currency is taxable or deductible as a capital gain or loss.

The Canada Customs and Revenue Agency's (the "CCRA") position with respect to the application of subsection 39(2) to transactions in which foreign currency funds are invested in negotiable instruments such as bonds is to be found in paragraph 13 of Interpretation Bulletin IT-95R:

" [...] Transactions in which foreign currency funds are invested in negotiable instruments such as notes, bonds, mortgages, debentures, U.S. government treasury bills and notes and U.S. commercial paper, will require a foreign exchange gain or loss calculation at the time the foreign currency funds are used to purchase these investments and as well, each time such investments mature or are otherwise disposed of, whether or not the funds are rolled over into like securities. "

Therefore, it is our view that any foreign exchange gain realised upon maturity of the Bond would have to be calculated at that time and could not be deferred until the U.S. funds are actually converted into Canadian dollars.

The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Yours truly,

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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