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:
A Canadian corporation has a loan payable to its German parent and the loan is denominated in German currency. When the German currency is replaced by the Euro dollar, will their be a realization of foreign exchange gain or loss at that time?
Position:
Subject to German law, no.
Reasons:
The involuntary change to the terms of the debt instrument, which is completely outside the control of the original parties to the debt instrument, would not generally constitute a settlement or extinguishment of the debt obligation and a creation of a new obligation.
972149
XXXXXXXXXX Jim Wilson
(613) 957-2123
Attention: XXXXXXXXXX
January 23, 1998
Dear Sirs:
Re: Foreign Exchange Gains and Losses
We are writing in response to your letter of August 6, 1997 wherein you requested our comments with respect to subsection 39(2) of the Income Tax Act (the "Act"). Specifically, you have described a situation where a Canadian corporation has a number of outstanding loans payable to its German parent which are presently denominated in German currency. You wish to know that when the German currency is replaced by the Euro dollar, will there be "a deemed realization of the existing debt pursuant to Section 54(c) on the basis that the underlying terms of the debt will have changed significantly to result in a deemed disposition".
For the purposes of subsection 39(2) of the Act, a debtor who has issued a debt instrument denoted in a foreign currency may make a foreign exchange gain or sustain a loss upon the settlement of the debt instrument. If the terms of a debt instrument are changed, such changes may be considered so fundamental to the holder's economic interest that a gain may be made or a loss sustained. In these circumstances the debt instrument has been settled and a new debt issued in substitution. The same criteria as to whether there has been a disposition apply. Paragraph 7 of Interpretation Bulletin IT-448 gives examples of changes which almost invariably give rise to a disposition (unless these changes were provided for in the original terms of the agreement).
Generally, we would not consider a change in a foreign jurisdiction from one national currency to another national currency as a fundamental change to a debt instrument the terms of which were based on the former currency. In our opinion, the involuntary change to the terms of the debt instruments, which is completely outside the control of the original parties to the debt instrument, would not generally constitute a settlement or extinguishment of the debt obligation and the creation of a new obligation. However, it should be pointed out that German law would have to be considered with respect to the issue of whether a change in national currency would result in a disposition, novation, settlement, extinguishment, etc., as the case may be, of those properties or liabilities affected by such a change. We have not been provided any information in this regard.
As a final matter, the definition of “disposition” in section 54 of the Act would not be relevant, from the perspective of the debtor, since a “liability” is not a “property”.
The foregoing comments represent our general views with respect to the subject matter of your letter. These comments do not necessarily reflect the Department’s position with respect to foreign currency funds on deposit that would be converted into the new foreign currency. The latter scenario would have to be looked at in more detail in light of the Department’s comments in paragraph 13 of Interpretation Bulletin IT-95R. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.
We trust that our comments will be of some assistance.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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