4 July 1997 External T.I. 9635255 - FOREIGN EXCHANGE GAIN OR LOSS ON FOREIGN TAX

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:

What is the tax treatment for foreign exchange gain or loss arising as a result of using the weighted average exchange rate for claiming foreign tax credit where the exchange rate at the time the foreign taxes are paid is different from that weighted average exchange rate.

Position:

Rules of subsection 39(2) apply

Reasons:

As stated in paragraphs 19 and 20 of IT-270R2

963525
XXXXXXXXXX S. Leung

Attention: XXXXXXXXXX

July 4, 1997

Dear Sirs:

Re: Taxation of Foreign Exchange Gain or Loss on Foreign Income Taxes

We are writing in reply to your letter of September 9, 1996 to the Director of Client Assistance of London Tax Services Office with respect to the above-noted subject matter. Your letter refers to the case of The Bank of Nova Scotia v. Her Majesty the Queen (80 DTC 6009 (FCTD); affirmed 81 DTC 5115 (FCA)) where the Federal Court of Appeal decided that for Canadian foreign tax credit purposes the amount of the foreign tax be translated into Canadian dollars using the weighted average exchange rate for the taxation year in question rather than the exchange rate at the time the foreign tax was paid1. Where the foreign tax was paid subsequent to the taxation year in which the foreign tax credit using the weighted average exchange rate was claimed, you requested our comments as to whether the foreign exchange gain or loss thus realized is subject to tax in Canada, and if so, whether such gain or loss would be considered to be on account of income or capital. You also requested our comments on the tax treatment of foreign exchange gain or loss arising as a result of the receipt of a foreign tax refund due to an overpayment of foreign tax.

Our Comments

The tax treatment of foreign exchange gain or loss in the situations described above is outlined in paragraphs 19 and 20 of Interpretation Bulletin IT-270R2 Foreign Tax Credit, dated February 11, 1991 (a copy of which is enclosed). It is stated in those paragraphs that such foreign exchange gain or loss would be treated as a gain or loss on exchange to which the rules in subsection 39(2) of the Income Tax Act apply. Accordingly, such gain or loss would be considered to be on account of capital which may give rise to capital gain or loss for income tax purposes in the taxation year in which the payment occurs.

We trust that you will find the above to be of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl
ENDNOTES

1 see also Leonard Reeves Incorporate v. MNR (91 DTC 425 (TCC)) in this regard.