5 December 1994 Internal T.I. 9422047 - FOREIGM EXCHANGE 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.

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.

Principal Issues:

Loss on foreign exchange conversion capital or income.

Position TAKEN:

Capital and therefore deductible only when incurred.

Reasons FOR POSITION TAKEN:

Ascquisiton of capital property with US$ borrowed.

				December 5, 1994

	Toronto District Office		Head Office
G. E. Taylor		Rulings Directorate
	Director		S.J. Tevlin
(613) 957-2746
	Attention:  Alex Kiss
	            Basic Files 443-2-6
				942204

XXXXXXXXXX

We are writing in response to your memorandum dated August 19, 1994, wherein you requested our opinion with respect to whether an unrealized foreign exchange gain\loss can be deducted in the calculation of taxable income.

Our understanding of the facts is as follows:

XXXXXXXXXX

Issue

Should the unrealized FX loss on the related USD debt be added back to accounting income for income tax purposes?

Toronto DO Position

It is your position that the debt was used to finance the acquisition of capital assets. Therefore, the 1992 unrealized FX losses in respect of the related USD debt were incurred on account of capital. Furthermore, since the FX losses are unrealized, the losses are not deductible for tax purposes until they are realized.

Taxpayer Representation

XXXXXXXXXX contends the funds were borrowed "in the ordinary course of a taxpayer's business operations" as that phrase is used in Interpretation Bulletin IT-95R. Therefore, it contends that the unrealized foreign exchange losses recorded for accounting purposes should be deductible for tax purposes. XXXXXXXXXX also contends that any gains\losses in its records would be offset by an equal amount of losses\gains in XXXXXXXXXX records. Therefore, the result would be symmetrical with no risk of leakage to Revenue Canada.

Comments

As stated in paragraph 3 of IT-95R, the use of the borrowed funds will determine whether such gains or losses should be on income account or on capital account.

We believe the decision, in Alberta Gas Trunk Line Company v. Minister of National Revenue, 71 DTC 5403, that where capital assets are acquired with borrowed money, any loss by reason of converting the debt into Canadian dollars is a loss incurred on account of capital, can be used to support the case involving XXXXXXXXXX

You have advised us that XXXXXXXXXX borrowed the USD debt in order to exclusively acquire assets that were capitalized for capital cost allowance purposes.

As such, we agree with your opinion that the FX losses on the USD debt are on account of capital and therefore are only deductible for tax purposes when the FX loss has been realized.

We trust our comments are of assistance to you.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch