Principal Issues: A private corporation ("Holdco") has sustained foreign exchange losses by reason of various dispositions of securities and commercial papers during a certain taxation year. Holdco has also sustained foreign exchange losses by reason of the disposition, upon maturity, of commercial papers. Holdco held the securities and commercial papers as capital properties. Whether subsection 39(1) or subsection 39(2) applies with respect to these foreign exchange losses. What is the impact of these foreign exchange losses on Holdco's capital dividend account ("CDA")?
Position: CRA's position is that in reference to a gain or loss from the disposition of property, subsection 39(2) will apply only if the gain or loss is solely attributable to the fluctuation of the currency of a country other than Canada relative to Canadian currency. If the gain or loss is not solely attributable to the fluctuation in the value of currency, then subsection 39(1) should be used in computing the capital gain or capital loss. Considering the above, subsection 39(1) should have applied with respect to the dispositions of securities and commercial papers (other than those disposed upon maturity). Consequently, the capital gain (or loss) realized (sustained) by Holdco by reason of such dispositions would have affected Holdco's CDA at the time of the disposition, and not at the end of the relevant taxation year. However, it seems that subsection 39(2) should have applied with respect to the foreign exchange losses sustained by Holdco on the disposition, upon maturity, of commercial papers. If this is the case, such foreign exchange losses will only affect Holdco's CDA at the end of the taxation year in which the relevant dispositions occurred.
Reasons: Wording of the Act and previous positions.
