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: (1) Whether capital property that is US currency which is transferred under 85(1) remains capital in nature since it is used in the transferee's operations. (2) whether the exchange gain incurred by the transferee on the use of the US funds in its day-to-day operations is on account of capital or income.
Position: (1) no. (2) income
Reasons: (1) It is a question of fact whether the property retains its capital nature which reflects position of court in Hickman. (2) Based on paragraph 2 of IT-95R and courts (see cases below), exchange gain is on account of income.
January 29, 1999
E. Routledge, Director D. Yuen
Edmonton Tax Services Office 957-8953
Attention: Sandra Foy
7-990047
US Dollars transferred pursuant to subsection 85(1) of the Income Tax Act
XXXXXXXXXX
We are writing in response to your memorandum dated January 7, 1999 wherein you requested our comments on a situation where a taxpayer’s parent corporation transferred US dollars to the taxpayer pursuant to subsection 85(1). The US dollars represented capital property, as defined in section 54, to the parent. You have proposed to treat the exchange gain on the US dollars as an income gain to the taxpayer since they were used by the taxpayer to acquire inventory and to pay for operating expenses. The taxpayer has taken the view that, notwithstanding the fact that the US dollars were used in its day-to-day operations, the foreign exchange gain should be a capital gain because the US dollars were held by the parent as capital property. The taxpayer has indicated that it is supported by positions taken by the Department in our replies to the following questions at the Revenue Canada Round Table discussions at the annual conferences of the Canadian Tax Foundation: question #8 in 1980; question #24 in 1983; question #49 in 1984; and question #20 in 1986. The questions involved the transfer of capital property with an inherent capital gain by a parent corporation to a subsidiary corporation with unused tax losses which would then sell the property to an arm’s-length party and offset the realized gain with its unused losses. The Department indicated that, notwithstanding the short holding period of the property by the subsidiary, the subsidiary can report the transaction as a capital gain. You believe that the situation that you are reviewing differs from that presented in the Round Table questions in that the taxpayer has used the property in its operations rather than selling it immediately to the third party. You have referred us to 2 opinion letters (E9128135 and E9103675) issued by this Directorate which indicate that it is a question of fact whether following a rollover under section 85, real estate that was a capital property will continue to be a capital property.
Your Questions
1. “Does E9128135 reflect the Department’s current position on the status of property acquired under section 85 (i.e. that capital property transferred to a subsidiary under section 85 does not automatically retain its “capital property” label. Rather, the property can be either a capital or inventory/income item depending on the intentions of and use by the transferee)?”
2. “Have there been any other rulings given that better match the facts in our situation?”
3. “Would you agree that the exchange gain should be reported as income?”
1. It remains our view, as indicated in E9128135 and E9103675, that it is a question of fact whether the transferred property retains its capital nature. This, we believe, is consistent with comments of the Supreme Court of Canada in the case of Hickman Motors Limited v. The Queen 97 DTC 5363 (S.C.C.) (“Hickman”). The three judges in dissent stated, at page 5385, the following “What s. 88(1) does not do is to fix the character of the transferred property immutably...” and L’Heureux-Dubé J stated, at page 5368, the following “The nature of the property and the nature of its income are not forever fixed as a result of a s. 88(1) rollover.” The use of “does not..fix the character...immutably” and “not forever fixed “ in these quotes suggests that the property may retain its character immediately following a winding-up (or any other rollover between related corporations) but the nature of that property may change subsequently.
2. We have not been able to locate any rulings or other documents issued by this Directorate in which comments were provided on a comparable situation. You may wish to refer to the following Canadian Tax Journal articles on Hickman and the characterization of transferred property: “Current Cases” 1997, Volume 45, Number 4 and “Character Rolls: Property Transfers and Characterization Issues” 1996, Volume 44, Number 3, respectively.
3. We agree that a foreign exchange gain in respect of foreign currency used by the taxpayer in its day-to-day operations would be considered to be on account of income. This position is reflected in paragraph 2 of Interpretation Bulletin IT-95R and is supported by the case law, including Tip Top Tailors v. M.N.R. 57 DTC 1232 (S.C.C.), Aluminum Union Limited v. M.N.R. 60 DTC 1138 Ex C.R. affd. 63 DTC 1254 (S.C.C.), and Ethicon Sutures Ltd. v. Her Majesty The Queen 85 DTC 5290 (F.C.T.D.).
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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