4 February 2009 External T.I. 2008-0295641E5 - 39(2) accrued FX on mortgage of the deceased

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: Treatment of accrued foreign exchange gain on mortgage when U.S. residential property and mortgage are assumed by (1) spouse of the deceased taxpayer or (2) other beneficiaries of the deceased.

Position: Mortgage is considered to be repaid or replaced with newly issued mortgage at time of assumption by either the spouse of the deceased taxpayer or other beneficiaries and would be considered to be a transaction which may result in a gain. Subsection 39(2) applies and the estate may realize a capital gain with respect to the foreign exchange gain in the mortgage.

XXXXXXXXXX 							2008-029564
								Vivian Shih, CA
(613) 957-2103
February 4, 2009

Dear XXXXXXXXXX :

Re: Accrued foreign exchange gain in a mortgage held on death

This is in response to your letter of September 28, 2008 requesting our comments with respect to the above-noted matter. In particular, you ask what is the appropriate treatment with respect to the accrued foreign exchange gain with respect to a mortgage ("Original Mortgage") in U.S. currency payable by a deceased taxpayer that is secured by a U.S. residential property when the property and the mortgage are: (1) assumed by the deceased taxpayer's spouse or (2) assumed by the other beneficiaries of the deceased taxpayer. At the time of death, there will likely be an accrued gain with respect to the property.

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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

We assume that the deceased taxpayer was a resident of Canada immediately before the time of death and that the U.S. residential property was not the deceased taxpayer's "principal residence" as defined in section 54 of the Act. We are also assuming that the Original Mortgage is considered to be repaid or replaced with a newly issued mortgage when the Original Mortgage is assumed by either the deceased taxpayer's spouse or by another beneficiary.

Subsection 39(2) deems a taxpayer to realize a capital gain or loss where the taxpayer has made a gain or sustained a loss that is not on account of income by virtue of any fluctuation of a foreign currency relative to the Canadian dollar. Paragraph 13 of IT-95R, Foreign exchange gains and losses, states that a taxpayer is considered to have "made a gain" or "sustained a loss" in a foreign currency only where there has been a transaction resulting in a gain or loss. In our view, the assumption of a mortgage denominated in a foreign currency by either the spouse of the deceased taxpayer or by another beneficiary would generally constitute a transaction that could result in a gain or loss for purposes of subsection 39(2).

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

Yours truly,

Robin Maley
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch