30 April 1993 Income Tax Severed Letter 9309445 - Foreign Exchange Losses

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                   930944
XXXXXXXXXX                                         A.M. Brake
                                                   (613) 957-2133

Attention: XXXXXXXXXX

April 30, 1993

Dear Sirs:

Re: Foreign Exchange Losses Subsections 39(2), 40(2) and 85(4)

This is in reply to your letter of March 2, 1993, to the Toronto District Taxation Office, a copy of which was faxed to us for our reply. Your concern is with the tax treatment arising on the repayment by a corporation of a foreign currency denominated loan owed to a related corporation.

In particular, you have requested our views on the application of subsections 39(2), 40(2) and 85(4) of the Income Tax Act (the "Act") in the hypothetical situation described as follows:

Xco and Yco are both taxable Canadian corporations as defined in the Act and are both indirectly controlled by the same non- resident corporation and therefore do not deal with each other at arm's length.

Yco is in the business of acquiring and providing financing for operating corporations within its corporate group and accounts for foreign exchange gains and losses with respect to this business on the accrual basis. Xco's foreign exchange gains and losses are on capital account and are accounted for when realized.

In year 1, Yco made a loan to Xco in US funds. In year 2, Xco repays the loan at a time when the US dollar is higher in value, relative to the Canadian dollar, than it was at the time the loan was made. Accordingly, Xco incurred a foreign exchange loss to which you feel subsection 39(2) of the Act has application.

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including company names and identification numbers) to the appropriate District Taxation Office for their comments.

We are, however, prepared to provide some general comments.

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

- In our view, a liability is not a property and therefore the repayment of the loan is not a disposition of property by Xco. As such, the provisions of subsections 40(2) and subsection 85(4) of the Act would not apply to deny the foreign exchange loss. Subsection 39(2) of the Act would, therefore, apply to Xco's loss.

You also asked for confirmation that no other provision of the Act will apply to deny recognition of the foreign exchange loss suffered by Xco. Without knowing your particular concerns, at this time, we are unable to make any comment in this regard.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments helpful.

Yours truly,

R. Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch