13 February 1989 Income Tax Severed Letter 7-3316 - [Foreign Exchange—Capital Gain v. Income]

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.

FEB 13 1989 Head Office Specialty Rulings Directorate D.Y. Dalphy (613)957-2117

Advance Income Tax Ruling 3-3551 Foreign Exchange - Capital Gain v. Income

This is in reply to your memorandum of September 8, 1988 concerning the above-referenced corporation.

In particular you have enquired about the accounting of foreign exchange gains by XXXX in respect of short and long term debt payable to XXXX and either repaid to XXXX prior to the XXXX reorganization or assumed by Newco as non-share consideration in respect of that reorganization and then repaid.

In our view it appears that the $XXXX in foreign exchange gains of XXXX described in your aforementioned memorandum are on account of capital. We offer the following comments for your consideration:

1. a debt is a property to the creditor (e.g. XXXX) but is merely a liability to a debtor (e.g. Newco);

2. although the settlement of a debt may be on income account to a debtor, there is not necessarily matching and it may, on the facts, be on capital account to the creditor; and

3. XXXX does not appear to be in the business of money-lending; loans issued by XXXX do not appear to be inventory but instead appear to be capital property (both short and long term debts) of XXXX

Finally, the classification of foreign exchange gains is a question of fact, and, as is indicated in paragraph 1 of Interpretation Bulletin IT-95R , the basic principles of income determination apply.

We hope our comments will assist you.

for director Reorganization and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch