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:
Can foreign exchange losses be deducted pursuant to paragraph 20(1)(f) of the Act?
Position: No.
Reasons:
Foreign exchange losses incurred on the settlement of debt denominated in a foreign currency
cannot be deductible under paragraph 20(1)(f).
November 26, 2002
MONTRÉAL TSO HEADQUARTERS
Larry Jacobsen C. Tremblay
Large File Case Manager (613) 957-2139
Audit Services
2002-016269
Recharacterization of Foreign Exchange Losses to Amounts
Deductible Under Paragraph 20(1)(f) of the Income Tax Act (the "Act")
We are writing in reply to your memo of September 12, 2002, in which you requested our opinion regarding the recharacterization of foreign exchange losses from capital in nature to amounts deductible under paragraph 20(1)(f) of the Act.
As we understand it, the taxpayer in question, XXXXXXXXXX has incurred foreign exchange losses on long-term debt (debentures) denominated in US currency for the XXXXXXXXXX taxation years. It is our understanding that the debentures were used for capital purposes and therefore, in each of those years, the taxpayer filed its returns on the basis that the losses incurred on repayment of the US denominated debt were on capital account and reported those amounts as capital losses on its corporate income tax returns. The taxpayer has requested reassessments such that the losses be deducted under paragraph 20(1)(f) of the Act. You have also enclosed the calculations prepared by the taxpayer regarding this issue.
We refer you to similar correspondence sent to Michel Hamelin (2002-014249) of your office regarding XXXXXXXXXX and to Tom Markota of the Vancouver TSO (20002-013579) regarding XXXXXXXXXX. where we set out our position on the subject. We also refer you to Draft Technical News No. 25, dated October 30, 2002. At page 9 of the Draft Technical News under the Heading Foreign Exchange Losses, we stated the following:
"It is the CCRA's position that for purposes of paragraph 20(1)(f) of the Act, the time at which the "principal amount" is to be determined should be at the time of issue and this is the relevant time at which the discount, if any, should be ascertained. The "97% test" and the "yield test" should also be applied at the time of issue of the debt. Any loss should be governed by subsection 39(2) of the Act."
We note that there is one difference in your situation as compared to the files referred to above, that is, there is an original issue discount that can qualify for the deduction under paragraph 20(1)(f) of the Act. For example, in XXXXXXXXXX, this amount comprises the XXXXXXXXXX% discount on the XXXXXXXXXX% Debentures, and the XXXXXXXXXX% discount on the XXXXXXXXXX% Debentures.
As stated in the correspondence referred to above, in our opinion, recharacterizing a foreign exchange loss on debt denominated in a foreign currency to an amount deductible from income under paragraph 20(1)(f) of the Act cannot be supported. It has been our long-standing position that such foreign exchange losses that are capital in nature are capital losses to which subsection 39(2) of the Act applies. It is our view that paragraph 20(1)(f) was not intended to apply to foreign exchange losses particularly since subsection 39(2) is the more specific provision.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content