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.
Principal Issues: Would the forgiveness of a debt obligation result in a foreign exchange gain or loss pursuant to 39(2) to the debtor?
Position: Not in the hypothetical situation provided.
Reasons: There was no repayment or any deemed repayment of the debt obligation in the facts of the situation. Therefore, the taxpayer would not have "made a gain" or "sustained a loss" for the purposes of 39(2) of the Act.
XXXXXXXXXX M. Gauthier
(613) 948-1143
2010-038688
Attention: XXXXXXXXXX
July 20, 2011
Dear XXXXXXXXXX ,
Re: Forgiveness of Debt and Foreign Exchange Gain
We are writing in reply to your letter dated November 11, 2010 in which you inquired into the application of subsection 39(2) of the Income Tax Act (the "Act") when debt denominated in a currency other than Canadian dollars is forgiven.
Facts:
1. Company A is a corporation incorporated under the laws of Canada and is resident in Canada for the purposes of the Act. Company A has not made an election under subsection 261(3) of the Act and therefore files its Canadian income tax returns in Canadian dollars.
2. In year 1, Company A borrowed US $1,000,000 on an interest bearing basis. The interest was deductible under paragraph 20(1)(c) of the Act. At the time the debt obligation was issued, the US $1,000,000 was equal to CDN $1,500,000.
3. In year 5, the US $1,000,000 debt referred to in Note 2 is forgiven without any payment being made. At the time the debt is forgiven, the US $1,000,000 is equal to CDN $1,000,000.
4. According to paragraph 80(2)(k) of the Act, the forgiven amount shall be determined with reference to the relative value of that currency and Canadian currency at the time the obligation was issued. The forgiven amount, as defined in subsection 80(1), was calculated as CAD $1,500,000.
Our comments:
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
As stated in paragraph 13 of IT 95R Foreign Exchange Gains and Losses, "the Department considers that a taxpayer has "made a gain" or "sustained a loss" in a foreign currency only where there has been a transaction resulting in a gain or loss. Subsection 39(2) does not apply where a loss has been made "on paper" but no transaction has taken place." The Department considers a transaction has taken place at the time of repayment of part or all of a capital debt obligation. In the hypothetical situation provided, the debt is forgiven without any repayment and therefore, it is our opinion that the debtor would not have "made a gain" or "sustained a loss" for the purposes of 39(2) of the Act.
In the event that a payment was made in satisfaction of the debt at the time the debt is being forgiven, the amount of the repayment could give rise to a gain or loss for the purposes of subsection 39(2). Also, where the Act deems a payment to be made by the debtor, such as in the case of subparagraph 80(2)(h)(i) applying where the debt is replaced with debt or in the case of subsection 80.01(3) applying (deemed settlement on amalgamations), the deemed payment could also give rise to a gain or loss for the purposes of subsection 39(2).
We hope this information is of assistance to you.
Yours truly,
Alain Godin
Section Manager for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
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