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.
April 6, 1992
SUBJECT: CAPITAL GAIN ON FOREIGN EXCHANGE OF U.S. CORP.
Question by: Calgary D.O.
QUESTION
A U.S. corporation (U.S. Co.) is a subsidiary of U.S. corporation (U.S. Parent) which is a subsidiary of a British corporation (British Grandparent). U.S. Co. borrows money from U.S. Parent and uses the loan proceeds in its Canadian branch operations. Subsequently, for various reasons, the loan from U.S. Parent is replaced by a loan from British Grandparent. This loan from British Grandparent is then subsequently replaced by a loan from U.S. Parent. The loan from U.S. Parent is non-interest bearing whereas the loan from the British Grandparent was interest bearing. Each loan and repayment of loans was accomplished by wire transfer of funds and the necessary notes payable were executed to document the loans. In each case, the Canadian branch realized a foreign exchange gain on the repayment of the loan.
The loans are on account of capital as the loans formed part of the capital structure of the Canadian branch. Would the foreign exchange gains realized by the non-resident be taxable in Canada? Would subsection 39(2) impact on this issue?
COMMENTS
Foreign exchange gains on account of capital incurred by a non-resident on repayment of foreign debt is not taxable and similar losses are not deductible. See attached copy of a memorandum dated March 27, 1992 from the Foreign Section, Rulings Directorate. The subsection 39(2) issue is addressed in another question from the Calgary D.O. in which it is stated that subsection 39(2) would not apply in the above circumstances. A copy of this question and answer is attached.
ISSUE SHEET
1992 Calgary D.O EnquiriesIssue: Foreign Exchange Gains
April 6, 1992
The issue here is whether a non-resident can be taxed in Canada on a foreign exchange gain on a foreign debt. This issue was examined in another question from the Calgary D.O. in which the answer is that foreign exchange gains on account of capital incurred by a non-resident on repayment of foreign debt is not taxable and similar losses are not deductible. File # 7-920766. See also March 27, 1992 memo from the Foreign Section to J. Gauvreau confirming 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.
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