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:
Is an exchange loss on the realization of the payment of a loan resulting from a US borrowing to refinance current and long term liabilities deductible under 20(1)(e)?
Position TAKEN:
No
Reasons FOR POSITION TAKEN:
The losses on the exchange of currencies do not meet the definition of amounts payable in the course of borrowing. The losses are incurred in respect of the repayment of the borrowing and not in the course of borrowing.
952095
XXXXXXXXXX C. Tremblay
Attention: XXXXXXXXXX
August 30, 1995
Dear Sirs:
Re: Subparagraph 20(1)(e)(ii) of the Income Tax Act (the "Act')
This is in reply to your letter of July 25, 1995, requesting our comments regarding the deductibility of any exchange loss under the provisions of subparagraph 20(1)(e)(ii) of the Act where a corporation refinances both current and long term liabilities by way of a U.S. loan.
In our view, foreign currency gains or losses that arise on the realization of the exchange conversion would not be an expense under paragraph 20(1)(e) of the Act. We have difficulty characterizing either a gain or a loss as an expense incurred in the course of borrowing money.
Furthermore, losses on the exchange of currencies do not meet the definition of an amount that is not otherwise deductible that is an expense incurred by the taxpayer in the course of borrowing for the purposes of subparagraph 20(1)(e)(ii) of the Act. In our view, the losses are really incurred in respect of the repayment of the borrowing and not necessarily in the course of borrowing, thus falling outside the scope of paragraph 20(1)(e) of the Act.
Where a borrowing is used for a capital purpose, in our view, and further to the comments in IT 95R, subsection 39(2) of the Act applies. Accordingly, any fluctuation of a foreign currency relative to Canadian dollars results in a capital gain being made or a capital loss being sustained.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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