13 May 2026 IFA Roundtable Q. 5, 2025-1078201C6 - Computation of a gain or loss for purposes of subsection 39(2) on the settlement of a foreign currency denominated debt

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: How should the gain or loss be computed for purposes of subsection 39(2) where the principal amount of a debt is only partly repaid, with the remaining principal amount being forgiven?

Position: The gain or loss should be calculated by comparing: (i) the part of the amount borrowed that is repaid, converted into Canadian currency on the issuance date; and (ii) the amount repaid by the borrower, converted into Canadian currency on the repayment date. If the amount in (i) is less than the amount in (ii), there is a loss. If the amount in (i) exceeds the amount in (ii), there is a gain.

Reasons: In a situation involving debt forgiveness, the calculation formula in Agnico-Eagle needs to be modified to isolate the forgiven amount governed by section 80.

2026 IFA Annual Conference – CRA Roundtable

Question 5 – Computation of a gain or loss for purposes of subsection 39(2) on the settlement of a foreign currency denominated debt

Question 11 at the 2009 APFF Conference CRA roundtable (CRA document 2009-0327061C6) commented on how a gain or loss should be computed for purposes of subsection 39(2) of the Income Tax Act(footnote 1)on a repayment of the balance of a U.S. dollar denominated debt, where monthly payments are made reducing the principal throughout the period preceding the ultimate full repayment, without any amount being forgiven.

CRA document 2010-0386881E5 also commented on the computation of a foreign exchange gain or loss where a U.S. dollar denominated debt is fully forgiven without any payment.

These documents do not specifically address how a gain or loss is computed for purposes of subsection 39(2) where a foreign currency denominated debt is only partly repaid, with the remaining principal amount being forgiven.

For the purposes of this question, assume the following:

• Taxpayer issues debt (the “Debt”) for US$1,000,000, with a principal amount of US$1,000,000 payable on maturity.
• On maturity, US$300,000 of the principal amount is repaid and the remaining principal amount of US$700,000 is forgiven.
• On the issuance date, the U.S. dollar to Canadian dollar exchange rate is US$1 to CAD$1.25.
• On the maturity date, either: (i) the U.S. dollar appreciates (US$1.00 is equal to CAD$1.50); or (ii) the U.S. dollar depreciates (US$1.00 is equal to CAD$1.00).

Based on the Federal Court of Appeal (“FCA”) decision in The Queen v. Agnico-Eagle Mines Limited (“Agnico-Eagle”)(footnote 2), determining whether a taxpayer has made a gain or sustained a loss under subsection 39(2) requires a comparison of the following amounts converted into Canadian currency using the applicable foreign currency exchange rate on the date upon which each such amount arose: (i) the amount of foreign currency received by the taxpayer upon the issuance of the indebtedness (the “Issuance Amount”); and (ii) the amount of foreign currency paid by the taxpayer upon the repayment of such indebtedness (the “Repayment Amount”)(footnote 3).

How is the gain or loss under subsection 39(2) determined where the principal amount of the Debt is only partly repaid and the remaining principal amount forgiven?

CRA Response

Subsection 39(2) applies where “because of any fluctuation after 1971 in the value of a currency other than Canadian currency relative to Canadian currency, a taxpayer has made a gain or sustained a loss”, among other requirements. Where subsection 39(2) applies, the amount of the gain (or loss) is deemed to be a capital gain (or capital loss) of the taxpayer from the disposition of currency other than Canadian currency.

The following formula sets out the method described in Agnico-Eagle for computing the gain or loss of a debtor for purposes of subsection 39(2):

A – B, where

“A” is the Issuance Amount converted into Canadian currency on the issuance date; and

“B” is the Repayment Amount converted into Canadian currency on the repayment date.

A positive amount represents a gain, and a negative amount represents a loss, for purposes of subsection 39(2).

The conclusions in Agnico-Eagle were based on a reading of the terms of the particular convertible debenture at issue.

In Agnico-Eagle, the FCA did not consider the interaction between subsection 39(2), “forgiven amount” as defined in subsection 80(1) and the debt forgiveness rules (including paragraph 80(2)(k)).

The CRA has previously stated that, where the full amount of a debt is forgiven without any payment, the debtor has not “made a gain” or “sustained a loss” under subsection 39(2), since there is no transaction that can give rise to a gain or loss for purposes of subsection 39(2).

However, when an indebtedness is partially repaid and partially forgiven, subsection 39(2) and the debt forgiveness rules each apply to their respective portions of the indebtedness.

In the case where an indebtedness is partially repaid and partially forgiven, variable “A” in the formula “A – B” would read as follows:

“A” is the portion of the amount of foreign currency received by the taxpayer upon the issuance of the indebtedness that is repaid, converted into Canadian currency on the issuance date.

This modification limits the application of subsection 39(2) to the amount actually repaid, carving out the forgiven amount to be dealt with separately under the debt forgiveness rules.

In the scenario described in the question, the amount of gain or loss for purposes of subsection 39(2) would be as follows:

• If the US dollar to Canadian dollar exchange rate on the repayment date is US$1.00 to CAD$1.50, there is a loss of (CAD$75,000) for purposes of subsection 39(2):

“A” is CAD$375,000 (US$300,000 x 1.25)

“B” is CAD$450,000 (US$300,000 x 1.50).

A – B = (CAD$75,000)

• If the US dollar to Canadian dollar exchange rate on the repayment date is US$1.00 to $1.00, there is a gain of CAD$75,000 for purposes of subsection 39(2):

“A” is CAD$375,000 (US$300,000 x 1.25)

“B” is CAD$300,000 (US$300,000 x 1.00).

A – B = CAD$75,000.

In both cases, the forgiven amount is CAD$875,000 (principal amount of US$1,000,000 converted using the issuance date exchange rate less the Repayment Amount of US$300,000 converted using the issuance date exchange rate). No gain or loss is realized for purposes of subsection 39(2) in connection with the portion of the principal amount that was forgiven. The forgiven amount is subject to the debt forgiveness rules in section 80.

The amount in variable “B” in the revised formula above will depend on the particular circumstances, including the particular terms of the obligation and the manner in which it is settled and extinguished. For example, the formula as stated in Agnico-Eagle and as amended above does not contemplate a debt obligation issued at a discount or premium to its face or par value.

Generally, in computing the gain or loss for purposes of subsection 39(2), one would not expect that the foreign currency amount for purposes of “B” in the formula above would exceed the foreign currency Issuance Amount, such that any amount paid by the issuer (debtor) in excess of the Issuance Amount would be excluded from “B” in computing under subsection 39(2) the gain of the debtor attributable to fluctuations in the value of the foreign currency relative to Canadian currency and would instead be subject to other relevant provisions of the Act.

Ina Eroff and Gina Yew
2025-107820
May 13, 2026

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. R.S.C 1985, c. 1 (5th Supp.), as amended. Unless otherwise specified, all statutory references are to the Income Tax Act.

2. 2016 FCA 130.

3. Agnico-Eagle, at paragraph 86.