12 April 2002 External T.I. 2002-0118355 - CAPITAL GAINS

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 CCRA.

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

Principal Issues: In a situation where shares that are capital property are bought with US funds and are sold for US proceeds of disposition, is the capital gain from the shares computed by applying the average rate of exchange prevailing in the year of disposition to the gain computed in US dollars?

Position: No

Reasons: In Gaynor (91 DTC 5288) the FCA indicated that the capital gain is computed using the cost of the securities expressed in Canadian currency at the exchange rate prevailing at the time of their acquisition and the proceeds of disposition of the same securities expressed in Canadian currency at the rate of exchange prevailing at the time of the disposition.

XXXXXXXXXX 2002-011835
S. Parnanzone
April 12, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Capital Gains

This is in reply to your letter of January 15, 2002 and is further to your telephone conversation with Mr. S. Parnanzone on February 15, 2002, regarding the above-noted subject.

You described the following situation:

Mr. A purchases 100 shares of USCO, a publicly traded company, on January 1, 20xx for US $10.00 at a time when US $1.00 can be purchased for C $1.50. He sells the shares on December 31, 20xx for US $20.00 at a time when US $1.00 can be purchased for C $1.667. The average Canadian/US exchange rate for the year 20xx is C $1.60 per US $1.00.

During our telephone conversation you asked us to assume that the shares acquired are capital property. You have suggested two possible ways to calculate the capital gain as follows:

Method #1

Purchase 	100 shares x US $10.00  x  1.50 (exchange rate)  =	C$1,500
Sale 		100 shares x US $20.00  x  1.667 (exchange rate)= 	C$3,333
Resulting capital gain							C$1,833

Method #2

Purchase 	100 shares 	x	US $10.00		=	US $1,000
Sale		100 shares 	x	US $20.00		=	US $2,000
Resulting capital gain							US $1,000
	X average exchange rate				  	          1.6
								  	  C $1,600 

It is your understanding that, while the above two methods give different results, the Canada Customs and Revenue Agency (CCRA) will accept either method for purposes of computing a capital gain.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

The situation you described is similar to that reviewed by the Federal Court of Appeal in Gaynor (91 DTC 5288), which involved a taxpayer who had used US funds to purchase US securities. In computing the capital gain or capital loss resulting from the dispositions, the taxpayer calculated the adjusted cost base and proceeds of disposition of the securities in Canadian dollars at the average exchange rate prevailing in the year the securities were sold. The Court disagreed with the taxpayer's method and commented as follows regarding the proper computation of the capital gain or loss from the disposition of the securities:

Paragraph 40(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") makes it clear that the capital gain realized by the appellant in each case was the "amount" by which the proceeds of the disposition of her securities exceeded the adjusted cost base of those securities. When that provision speaks of the "amount" of the capital gain, it obviously refers to an amount expressed in Canadian currency. As that amount is the result of a comparison between two other amounts, namely the amount representing the cost of the securities and the amount representing the value of the proceeds of disposition, it necessarily follows that both the cost of the securities and the value of the proceeds of disposition must be valued in Canadian currency which is the only monetary standard of value known to Canadian law. Once this is realized, it becomes clear that the cost of the securities to the appellant must be expressed in Canadian currency at the exchange rate prevailing at the time of their acquisition while the valuation of the proceeds of disposition of the same securities must be made in Canadian currency at the rate of exchange prevailing at the time of the disposition.

(...) That method of assessing the amount of capital gains may, as counsel for the appellant said, produce undesirable results in certain cases. It is nevertheless the only method that is in harmony with the provisions of the Act.

Based on the Court's decision in Gaynor, the calculation of the capital gain in the situation you described would require the use of method #1 in your example.

We trust that this information will be of assistance to you.

Yours truly,

Milled Azzi, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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