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: Determination of FAPI on repayment of debt.
Position: Foreign exchange gain or loss will arise on repayment.
Reasons: Operation of subsection 39(2) and subparagraph 95(2)(f)(i).
XXXXXXXXXX Suzanie Chua
613-957 2115
Atten: XXXXXXXXXX 2003-005120
December 3, 2003
Dear XXXXXXXXXX:
Re: Determination of FAPI on Repayment of Debt
This is in your reply to your letter wherein you requested our views with respect to the application of subsection 39(2) and paragraph 95(2)(f) of the Income Tax Act (the "Act") in the following hypothetical fact situation:
1) Canco is a corporation incorporated and resident in Canada.
2) FA1 is a wholly-owned foreign affiliate of Canco incorporated and resident in the United States.
3) FA2 is a second foreign affiliate of Canco incorporated and resident in the United States. FA1 owns 100% of the shares of FA2.
4) FA1 is primarily a holding company, and FA2 is an operating company carrying on an active business in the United States.
5) FA2 borrows US-dollar denominated debt from arm's length third-parties, and uses the proceeds to make an interest-bearing loan to Canco denominated in US dollars.
6) The arm's length third-party borrowing by FA2, and the loan from FA2 to Canco, are on capital account.
You request our views regarding the determination of foreign accrual property income ("FAPI"), should FA2 repay the third party borrowing in US currency.
Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.
In our view, subsection 39(2) and subparagraph 95(2)(f)(i) would apply on a repayment of the arm's length third-party debt by FA2 in the above circumstances, with the result that FA2 would have a taxable capital gain or allowable capital loss, relevant for the determination of foreign accrual property income as that term is defined in subsection 95(1) of the Act, based on the fluctuation in value of the US dollar relative to the Canadian dollar.
On the repayment of the third party debt, FA2 would have made a gain or sustained a loss by virtue of any fluctuation in value of the US dollar and in this regard, subsection 39(2) of the Act would deem FA2 to have a capital gain or capital loss from the disposition of a currency of a country other than Canada. The definition "property" in subsection 248(1) includes money, i.e. currency. Accordingly, any gain or loss determination in subsection 39(2) would give rise to the calculation of either a taxable capital gain or allowable capital loss from the disposition of property under the provisions of either paragraph 38(a) or 38(b). The preamble to paragraph 95(2)(f) provides that each taxable capital gain and each allowable capital loss (or, as proposed by the December 20, 2002 Technical Bill, each capital gain, capital loss, taxable capital gain and allowable capital loss) of a foreign affiliate of a taxpayer from the disposition of property shall be computed in accordance with Part I of the Act.
As the borrowed money in the above circumstances does not relate to the acquisition of "excluded property" as that term is defined in subsection 95(1) of the Act, by FA2, paragraph 95(2)(i) of the Act is inapplicable and the taxable capital gain or allowable taxable capital loss on the repayment thereof would be determined in accordance with the provisions of subparagraph 95(2)(f)(i) rather than subparagraph 95(2)(f)(ii).
We trust that the foregoing will be of assistance to you.
Yours truly
Olli Laurikainen
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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