22 October 2007 External T.I. 2007-0234001E5 - Conversion of Currency

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: Are there tax implications in respect of conversion at maturity the proceeds from one currency to another?

Position: YES

Reasons: The provisions of subsection 39(2).

								2007-023400
XXXXXXXXXX 							C. Tremblay, CMA
(613) 957-2139
October 22, 2007

Dear XXXXXXXXXX,

We are writing in response to your correspondence of April 30, 2007, wherein you requested our comments with respect to situation involving investments. In particular, a Canadian resident opens an interest bearing account in a foreign deposit currency. The proceeds at maturity of the account may be paid out in the original foreign currency or in another foreign currency depending on some variables established when the account was opened. You enquire as to the tax implications from the conversion of the maturity proceeds from one currency to another.

Our Comments:

Written confirmation of the tax implications inherent in particular 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, Advance Income Tax Rulings, dated May 17, 2002. This Circular is available on our website at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office.

The determination of the income tax treatment of investment proceeds at maturity, such as those described in this letter, involve questions of fact that can only be determined after reviewing all of the relevant documentation and agreements related to a particular investment program. However, based on the limited information provided to us, we are prepared to offer the following general comments, which may be of assistance.

It appears that the investor is a Canadian resident reporting his transactions in Canada. Accordingly, the amount paid for the purchase of an investment product should be converted in Canadian dollars at the time of purchase and regardless of what currency the investor chooses to receive at maturity, that currency is also converted in Canadian dollars. The interest stream is also converted in Canadian dollars. Thus a gain or loss is reflected at maturity based on the movement in the currency relative to the Canadian dollar and the interest is reported in Canadian dollars based on the return received. The provisions of subsection 39(2) of the Income Tax Act (the "Act") would apply to the gain or loss received at maturity and paragraph 12(1)(c) of the Act would apply to the interest income received.

In Gaynor v. MNR, 91 DTC 5288 (FCA), the court found that, with respect to securities purchased and sold by a Canadian resident in a foreign currency, the computation of a capital gain from the transaction is to be carried out under the Act in terms of Canadian dollars. Gaynor, stands for the proposition that, if a foreign currency transaction is an element of any computation required by a statutory formula, the amount of the foreign currency must be converted to Canadian dollars at the conversion rate prevailing at the time of the transaction. 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, 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, the cost of the securities to the customer 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.

We trust the above comments will be of some assistance.

Yours truly,

R. Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch