24 July 1990 Ministerial Correspondence 59674 F - No Deemed Capital Loss on Debt Obligation of Corporation on Change of Control

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.

Attention: 19(1)

July 24, 1990

Dear Sirs:

Re:  Subsection 111(4) of the Income Tax Act (the "Act")

We are writing in response to your letter of February 22, 1990 wherein you requested our view as to whether paragraph 111(4)(d) of the Act would apply to deem a corporation to have realized a capital loss in respect of the following hypothetical fact situation outlined in your letter.

Situation

1.     A corporation has a capital debt obligation (payable) denominated in a foreign currency.

2.     Control of the corporation has recently been acquired.

3.     There were unrealized foreign exchange losses with respect to the capital debt obligation at the time control of the corporation was acquired.

Our Comments

To the extent that the facts outlined above represent actual proposed transactions, your enquiry should be the subject of a request for an advance income tax ruling.  However, we can offer the following general comments.

As stated in the response to Question 8 at the Revenue Canada Round Table at the 1988 Canadian Tax Foundation Conference, the Department's position on foreign exchange gains or losses on capital account is found in paragraphs 12 and 13 of Interpretation Bulletin IT-95R, issued on December 16, 1980 by Revenue Canada, Taxation.  The Department considers that a taxpayer has "made a gain" or "sustained a loss" within the meaning of subsection 39(2) of the Act only where there has been a transaction resulting in a gain or loss.

Paragraph 111(4)(c) of the Act would apply only if the adjusted cost base to the corporation of capital property, other than depreciable property, exceeds its fair market value immediately before the time control of the corporation is acquired, and paragraph 111(4)(d) would apply only if paragraph 111(4)(c) applies.  To have paragraph 111(4)(c) apply, a capital property must be involved.  It is the Department's view that a debt obligation (payable) of a corporation (i.e: a debtor) is not "property" within the meaning assigned by subsection 248(1) of the Act. Consequently, in the hypothetical situation outlined in your letter, paragraph 111(4)(d) would not apply to deem a capital loss to arise with respect to the debt obligation of the corporation for the taxation year that ends immediately before the time control of the corporation was acquired.

We trust the above will be of assistance.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch