11 March 2010 Internal T.I. 2009-0352551I7 - Foreign exchange losses

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: Whether transfers of funds, as described below, give rise to a foreign exchange loss under subsection 39(2) of the Act.

Position: Yes

Reasons: The transfers would constitute a "purchase or payment" as described in paragraph 13(b) of Interpretation Bulletin IT-95R and hence transactions pursuant to which a taxpayer can be said to have "sustained a loss".

      XXXXXXXXXX  						HEADQUARTERS

      Tax Auditor 							S. Sivarulrasa

XXXXXXXXXX Tax Services Office (613) 957-2104
Canada Revenue Agency

      XXXXXXXXXX 				

2009-035255

Foreign Exchange Losses

We are writing in response to your email dated December 22, 2009 in which you seek our views on the application of subsection 39(2) of the Income Tax Act ("the Act") in the fact situation described below. Specifically, you have asked whether the transactions described below would fall within the meaning of "a purchase or a payment" as described in paragraph 13(b) of Interpretation Bulletin IT-95R.

Facts

The taxpayer, an individual resident in Canada, has a bank account in the United States in which he holds U.S. dollars ("USD"). During the relevant taxation year:

(1) The taxpayer transferred USD XXXXXXXXXX ("transaction A") from his U.S. bank account to a related individual (a resident of Canada) who used the funds to satisfy an obligation owing by the related individual. The taxpayer provided cancelled cheques as proof of the transfer.

(2) The taxpayer transferred USD XXXXXXXXXX ("transaction B") to the U.S. investment account of a related individual (a resident of Canada) who used the funds to purchase investments. The taxpayer provided the related individual's investment account statement to prove that the money was transferred to that person.

The taxpayer is claiming capital losses on transactions A and B under subsection 39(2) of the Act, based on the decrease in value of the U.S. dollar relative to the Canadian dollar between the time he originally purchased the USD and the time of each transaction.

Our Comments

To determine whether there is a capital loss under subsection 39(2) of the Act, a number of issues need to be considered:

1. Are the transactions in question on account of income or capital?

2. Is there a transaction pursuant to which the taxpayer has "sustained a loss"?

3. Is the loss denied under a stop loss rule?

Whether a gain or loss is on account of income or capital is a question of fact. It is our understanding that you have accepted the taxpayer's assertion that the transactions in his USD account were on account of capital, and we have assumed for the purpose of our comments below that the losses being claimed are on capital account.

With respect to whether the taxpayer has "made a gain" or "sustained a loss", paragraph 13 of IT95R states, in part, as follows:

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. As a result the "accrual" method of accounting for foreign exchange gains or losses is not acceptable for purposes of reporting foreign exchange gains or losses on capital account. The following are examples of the time when the Department considers a transaction resulting in the application of subsection 39(2) to have taken place.

(a) at the time of conversion of funds in a foreign currency into another foreign currency or into Canadian dollars,

(b) at the time funds in a foreign currency are used to make a purchase or a payment (in such a case the gains or loss would be the difference between the value of the foreign currency expressed in Canadian dollars when it arose and its value expressed in Canadian dollars when the purchase or payment was made), and

(c) at the time of repayment of part or all of a capital debt obligation.

In transaction A, the taxpayer claims to have purchased USD at a point in time and later transferred those funds to another individual. Assuming these facts, it is our view that the transfer to the other individual would constitute "a purchase or payment" as described in paragraph 13(b) of IT-95R and hence a transaction pursuant to which the taxpayer can be said to have "made a gain" or "sustained a loss". The taxpayer would be entitled to calculate the foreign exchange gain or loss, as the case may be, based on the value of the USD, as converted to Canadian currency, at two points in time: the time the USD was purchased and the time at which the transfer was made to the other individual.

A similar analysis can be applied to transaction B. In our view, the transfer of USD XXXXXXXXXX by the taxpayer to the investment account of the related individual would constitute "a purchase or payment" as described in paragraph 13(b) of IT-95R and hence a transaction pursuant to which the taxpayer can be said to have "made a gain" or "sustained a loss".

We would note, however, that if the loss is deemed to be nil under section 40 of the Act, then, for the purposes of subsection 39(2), the taxpayer has not "sustained a loss". Subparagraph 40(2)(g)(i) of the Act deems a loss to be nil if it is a "superficial loss". The term "superficial loss" is defined in section 54 to be, essentially, a loss from the disposition of a property where the taxpayer or an affiliated person acquires the property or an identical property within the period that begins 30 days before and ends 30 days after the disposition and, at the end of that period, owns or has a right to acquire the property or an identical property. Section 251.1 defines "affiliated persons" to include an individual and that individual's spouse or common law partner, but does not include other relatives of the individual.

We trust our comments are of some assistance.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch