3 October 1990 Administrative Letter 59816 F - Exchange Loss or Gain

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.

19(1)

October 3, 1990

Dear Sirs:

This is in reply to your letter dated March 19, 1990 wherein you request our opinion regarding the application of subsection 39(2) and subparagraph 53(2)(b)(ii) of the Income Tax Act (the "Act") in the following circumstances:

1.     The taxpayer is a corporation (the "Shareholder") incorporated in and a resident of Canada for the purposes of the Act.

2.     The issuer (the "Issuer") is a wholly owned subsidiary of the Shareholder incorporated in end resident in a jurisdiction other than Canada for the purposes of the Act.

3.     The Shareholder's equity investment in the Issuer is represented by two classes of shares (i) a class of preferred shares with a par value of U.S. $1,000 per share, and (ii) a class of nominal par value common shares also denominated in U.S. dollars.

4.     The Shareholder acquired 1,000 preferred shares from the Issuer (the "Preferred Shares") for a subscription price of U.S. $1,000 for each such share. It is assumed that at the time that the Shareholder acquired the Preferred Shares, Canadian and U.S. dollars traded at par. Accordingly, the Shareholder's aggregate adjusted cost base of the Preferred Shares is Cdn. $1,000,000. The current Canadian dollar equivalent of the total par value of the Preferred Shares is approximately Cdn. $1,180,000 (assuming an exchange rate for Canadian into United States dollars of 1.18).

5.     The Issuer will undertake a transaction whereby it will reduce the par value of each Preferred Share by U.S. $500. This amount (U.S. $500,000) will be paid to the Shareholder as a return of capital.

In our opinion the following income tax consequences occur as a result of the foregoing:

(i)     the Canadian dollar equivalent ($590,000) of the amount paid to the Shareholder as a consequence of the reduction in the par value of the Preferred Shares would not be included in the Shareholder's income but would reduce the Shareholder's adjusted cost base of the Preferred Shares pursuant to subparagraph 53(2)(b)(ii) of the Act;

(ii)     the return of capital on the Preferred Shares would not be considered to be a "disposition" for the purposes of the Act; and

(iii)     subsection 39(2) of the Act would not apply to the Issuer or the Shareholder as a consequence of the reduction of the par value of the Preferred Shares or the return of capital to the Shareholder in respect of such shares.

We would add the following comments:

(a)     Section 40 of the Act determines whether or not a taxpayer has made a gain or sustained a loss as the result of the disposition of a property.

(b)     A deemed gain and a deemed disposition of property pursuant to subsection 40(3) will occur as a result of a reduction of the paid-up capital of shares of a non-resident corporation if the adjusted cost base of such shares becomes negative by virtue of such reduction.

(c)     If the gain on the reduction of the paid-up capital of the shares calculated pursuant to subsection 40(3) of the Act arises solely by virtue of a fluctuation in the value of a currency then subsection 39(2) would be used to compute the capital gain. If the gain is not solely attributable to the fluctuation in the value of a currency then subsection 39(1) would be used to compute the capital gain.

We trust the foregoing is satisfactory.

Yours truly,

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