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.
Principal Issues: Would foreign exchange fluctuations affecting the Canadian dollar value of a non-convertible, non-exchangeable, foreign currency denominated obligation, originally issued without a discount, result in the obligation not being an "excluded obligation" described in paragraph 214(8)(c) of the Act?
Position: No.
Reasons: In our view, pursuant to subsection 261(2) of the Act, the discount and yield tests for a non-convertible, non-exchangeable, foreign currency obligation as set out in paragraph 214(8)(c) of the Act are to be carried out by converting each of "the amount for which the obligation was issued" and the "principal amount" into Canadian currency using the relevant spot rate for the day of issue.
XXXXXXXXXX 2004-009860
Shelley Lewis
(613) 957-2118
January 14, 2011
Dear XXXXXXXXXX :
Re: Subsection 214(7) of the Income Tax Act
We are writing in response to your request for our views in respect of the application of subsection 214(7) and paragraph 214(8)(c) of the Income Tax Act (the "Act") in a situation where a Canadian resident borrower is required to repay a non-convertible, non-exchangeable, foreign currency denominated obligation owing to a non-resident lender. In particular, you are concerned with the circumstances where the Canadian dollar has weakened relative to the loan currency, such that more Canadian dollars are required to repay the debt principal than the Canadian dollar equivalent at the time the loan proceeds were received under the original non-discounted loan.
Our Comments
Our response is premised upon our understanding that:
- the obligation is not an "excluded obligation" pursuant to either paragraph 214(8)(a) or paragraph 214(8)(b) of the Act;
- the obligation is not an indexed obligation for the purposes of paragraph 214(8)(c) of the Act;
- the non-resident lender is not carrying on a business in Canada through a permanent establishment; and
- the obligation was not acquired by the non-resident in circumstances described in subsection 214(7.1) of the Act.
Where a non-resident assigns (which, pursuant to subsection 214(14) of the Act, includes settlement on maturity) an obligation issued by a Canadian resident, to a Canadian resident, subsection 214(7) of the Act applies to deem the amount, if any, by which the price for which the obligation was assigned at the particular time, exceeds the price for which the obligation was issued, to be a payment of interest on that obligation made by the person resident in Canada to the non-resident person at that time.
In our view, pursuant to subsection 261(2) of the Act, "the price for which the obligation was assigned..." is to be converted into Canadian currency using the relevant spot rate for the day of the assignment whereas "the price for which the obligation was issued" is to be converted into Canadian currency using the relevant spot rate for the day of issue. Therefore, in our view, fluctuation in the value of a foreign currency relative to the Canadian dollar can cause a holder of a foreign currency denominated obligation to be deemed to have received a payment of interest pursuant to subsection 214(7) of the Act.
The exception in paragraph 214(7)(b) of the Act provides that an "excluded obligation", as defined in subsection 214(8) of the Act, is not subject to the deeming provision in subsection 214(7). Pursuant to paragraph 214(8)(c) of the Act, an obligation, other than an indexed debt obligation, is an excluded obligation if it was issued for not less than 97% of its principal amount and the yield from the obligation, expressed as an annual rate on the amount for which the obligation was issued, is not more than 4/3 of the interest rate stipulated to be payable on the obligation.
In our view, pursuant to subsection 261(2) of the Act, the discount and yield tests set out in paragraph 214(8)(c) of the Act for a non-convertible, non-exchangeable, foreign currency denominated obligation are to be carried out by converting each of "the amount for which the obligation was issued" and the "principal amount" into Canadian currency using the relevant spot rate for the day of issue. Therefore, in our view, fluctuation in the value of a foreign currency affecting the Canadian dollar value of a non-convertible, non-exchangeable, foreign currency denominated obligation, originally issued without a discount, would not result in the obligation not being an excluded obligation under paragraph 214(8)(c) of the Act.
We trust that these comments will be of assistance.
Yours truly,
Olli Laurikainen
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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