27 March 1992 Administrative Letter 9208706 F - Non-Resident - Foreign Exchange Gain Or Loss

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.

March 27, 1992

J. GauvreauA/DirectorForeign SectionManufacturing Industries, Reorganizations and Partnerships and Trusts DivisionForeign Division

Taxation of Foreign Exchange Gains of Non-residents

This is with regard to your enquiry whether a non-resident is taxable in Canada on a foreign exchange gain arising on the settlement of a liability denominated in a currency of a country other than Canada.  You provided the following example:

A Canadian branch of a company resident in the United States is financed by a U.S. $10 million loan from a third party.  The loan was taken out in 1986 and is repaid in 1990.  Over this period, the Canadian dollar has increased in value relative to the U.S. dollar.  As the loan is a U.S. dollar loan, fewer Canadian dollars are required to repay the loan in 1990 than was the case in 1986.  There is a book gain.  Is it taxable?  We were asked to assume that the foreign exchange gain is on capital account.

It is our view that a foreign exchange gain realized by a non-resident debtor on the settlement of a liability on capital account is not taxable under the Act.  By virtue of paragraph 115(1)(b) of the Act, a taxable capital gain of a non-resident is only taxable in Canada if it arises on the disposition of a taxable Canadian property.  A debt may represent taxable Canadian property to the creditor (holder thereof) but not the debtor.  On the same basis, a foreign exchange loss realized by a non-resident debtor on the settlement of a liability on capital account would not be an allowable capital loss.

It is our view that capital treatment will result only where it can be shown that the loan proceeds were directly used by the debtor to acquire capital property.  Any foreign exchange gain that is realized by a debtor on the settlement of a debt that was used to fund property other than capital property would be on

income account and therefore would be subject to subparagraph 115(1)(b)(ii) of the Act.  In cases where the loan proceeds were used to acquire more than one asset, the gain may be partially on capital account and partially on income account.

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch