2006 Ruling 2005-0156921R3 - XXXXXXXXXX ATR - 39(2) and CDA

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: (i) Whether a corporate taxpayer has made a gain by virtue of any fluctuation of the US currency relative to the Canadian currency pursuant to subsection 39(2) when it extinguishes its US dollar denominated debt obligation ("AcoDebt") to its wholly-owned subsidiary by assuming a US dollar denominated debt ("Bco Debt") of that subsidiary of the same US dollar principal amount? (ii) Whether the non-taxable portion of the deemed capital gain under subsection 39(2) would be included in computing the amount of the capital dividend account of the taxpayer which is a private corporation?

Position: (i) Yes.

Reasons: (i) Since the Aco Debt has been settled and extinguished, subsection 39(2) would apply and the taxpayer is considered to have made a gain or sustained a loss by virtue of any fluctuation of the US currency relative to the Canadian currency in respect of the settlement of the Aco Debt. (ii) The capital gain under subsection 39(2) is deemed by that provision to be a capital gain from the disposition of a foreign currency which is a property for the purposes of the definition of "property" in subsection 248(1). Hence the non-taxable portion of such capital gain should be included in the computation of the amount of the capital dividend account of the taxpayer which is a private corporation.

XXXXXXXXXX 								2005-015692

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Aco")
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

Aco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number XXXXXXXXXX.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

In this letter the following terms have the meanings specified:

(a) "Aco" means XXXXXXXXXX;

(b) "Aco Debt" means the U.S. dollar denominated loans made by Bco to Aco in the net amount of US$XXXXXXXXXX as follows: On XXXXXXXXXX Bco loaned US$XXXXXXXXXX to Aco; on the same date Aco repaid US$XXXXXXXXXX to Bco; and on XXXXXXXXXX Bco loaned US$XXXXXXXXXX to Aco;

(c) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(d) "Bco" means XXXXXXXXXX;

(e) "Bco Debt" means the U.S. dollar denominated loan made by Cco to Bco in the amount of US$XXXXXXXXXX;

(f) "Cco" means XXXXXXXXXX., a corporation incorporated and resident in the U.S. and a wholly-owned subsidiary of Aco;

(g) "CDA" means capital dividend account as defined under subsection 89(1);

(h) "CRA" means the Canada Revenue Agency;

(i) "Dco" means XXXXXXXXXX. (Account Number XXXXXXXXXX ); and

(j) "Eco" means XXXXXXXXXX.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

1. Aco is a corporation incorporated and resident in Canada and a private corporation within the meaning assigned under subsection 89(1).

2. Aco, through its wholly-owned subsidiaries in Canada and the United States and its investment in XXXXXXXXXX, is primarily engaged in the business of XXXXXXXXXX

3. Bco is a corporation incorporated and resident in Canada and a wholly-owned subsidiary of Aco.

4. Dco is a corporation incorporated and resident in Canada and a wholly-owned subsidiary of Aco.

5. Bco loaned the Aco Debt to Aco with funds from the Bco Debt and money in the amount of US$XXXXXXXXXX borrowed from XXXXXXXXXX.

6. Aco used all the borrowed funds from the Aco Debt to invest in the share capital of Dco in XXXXXXXXXX.

7. In XXXXXXXXXX, Dco used all the funds contributed by Aco to its share capital, together with other funds of Dco, to acquire an interest in Eco, XXXXXXXXXX.

8. Aco made the following repayments of principal:

(a) US$XXXXXXXXXX of the Aco Debt on XXXXXXXXXX;

(b) US$XXXXXXXXXX of the Aco Debt on XXXXXXXXXX;

(c) US$XXXXXXXXXX of the Aco Debt on XXXXXXXXXX by way of an assumption of the Bco Debt from Bco (the "Debt Assumption Transaction"; and

(d) US$XXXXXXXXXX of the Bco Debt on XXXXXXXXXX.

As a result of the above repayments, Aco has realized a foreign exchange gain by virtue of the fluctuation in value of the U.S. currency relative to Canadian currency in respect of each of the first three repayments and a foreign exchange loss in respect of the last repayment.

Proposed Transactions

9. Aco will distribute to its shareholders a dividend which will include the non-taxable portion of the net capital gain realized on the repayments by Aco of the Aco Debt and a portion of the Bco Debt as described in 8 above.

10. Aco will elect under subsection 83(2) to have such dividend treated, to the extent of its CDA as a capital dividend.

Purpose of the Proposed Transactions

11. Aco desires to distribute to its shareholders the non-taxable portion of the net capital gain realized by virtue of the fluctuation in value of the U.S. currency relative to the Canadian currency as a result of the above-noted repayments of debts in the form of a capital dividend.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The gains or losses realized by Aco on the repayments of the Aco Debt and the portion of the Bco Debt as referred to in 8 above are considered to be on account of capital.

B. By virtue of subsection 39(2), the capital gain in respect of each of the first three repayments referred to paragraph 8 above is equal to the amount by which the U.S. dollar amount paid, converted to Canadian dollars based on the exchange rate in effect at the date the Aco Debt was issued, exceeds the U.S. dollar amount paid, converted to Canadian dollars based on the exchange rate in effect at the date such payment was made.

C. The capital gains referred to in Ruling B above will result in the non-taxable portion of such gains being added to the balance of Aco's CDA.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:

(a) the principal amount of the Aco Debt or the principal amount of the Bco Debt at the time of its issue or at the time of its settlement or assumption;

(b) the application or non-application of subsections 20(1)(f) and section 80 in respect of the various repayments of debts referred to in 8 above including the Debt Assumption Transaction;

(c) any tax consequences arising from the Debt Assumption Transaction other than those described in the rulings given; and

(d) any tax consequences arising from the debt repayments other than those described in the rulings given.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch