19 January 2011 External T.I. 2010-0353291E5 - Foreign Exchange/Superficial 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: Comments on currency transactions, margin accounts and superficial loss rules

Position: Comments provided

Reasons: IT-95R, par 13

XXXXXXXXXX 							2010-035329
								C. Tremblay, CMA
								(819) 281-6906
January 19, 2011

Dear XXXXXXXXXX :

US currency capital gains/losses

This is in reply to your letter of January 2, 2010, and further to information submitted in e-mail correspondence on October 18, November 1, 22, December 13, 14, and 17, 2010, wherein you asked about US dollar currency capital gains and capital losses and the application of the superficial loss rules with respect to currency capital losses. You have also asked many other questions, some seeking assistance with specialized algebraic calculations which are not within our mandate (nor that of any area of the Canada Revenue Agency). Generally, our answers are restricted to technical interpretations of specific provisions of income tax law, as described in paragraph 22 of Information Circular IC-70R5, dated May 17, 2002.

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, "Advance Income Tax Rulings", dated May 17, 2002. 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.

Based on email correspondence and discussions (Tremblay/XXXXXXXXXX ), during which some comments have already been provided, we understand that you are familiar with our Interpretation Bulletins and with our written documents which are available to the public. You have asked about our document 2005-0150811E5 which discusses superficial losses. A severed copy of that document is available from this Directorate and is also published by an outside publisher. At this time, there are no more recent documents on the subject.

The superficial loss provision requires an acquisition of substituted property that is identical to a property disposed of during the period that begins 30 days before and ends 30 days after the disposition and, at the end of the period, the taxpayer or a person affiliated with the taxpayer owns or has a right to acquire the substituted property. Accordingly, a capital loss realized from securities sold by a taxpayer and then immediately repurchased by the taxpayer would be considered a superficial loss, and the amount of the capital loss would be nil. If the taxpayer or a person affiliated with the taxpayer does not own the same property or an identical property (the "substituted property"), or does not have a right to acquire such property, at the end of the 30-day period following the disposition, the loss would not be a "superficial loss".

Interpretation Bulletin IT-95R, entitled 'Foreign Exchange Gains and Losses', covers some of your other concerns. Paragraph 13 of IT-95R states

"...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"....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. Foreign currency funds on deposit are not considered to be disposed of until they are converted into another currency or are used to purchase a negotiable instrument or some other asset, i.e. foreign funds on deposit may be moved from one form of deposit to another as long as such funds can continue to be viewed as "on deposit". Term deposits, guaranteed investment certificates and other similar deposits which are in fact not negotiable, are considered funds on deposit. Transactions in which foreign currency funds are invested in negotiable instruments such as notes, bonds, mortgages, debentures, U.S. government treasury bills and notes and U.S. commercial paper, will require a foreign exchange gain or loss calculation at the time the foreign currency funds are used to purchase these investments and as well, each time such investments mature or are otherwise disposed of, whether or not the funds are rolled over into like securities..."

The word "property" is defined in subsection 248(1) for purpose of the Act. Paragraph (b) of the definition provides that money is property, unless a contrary intention is evident.

1) Order of currency transactions:

We refer you to subsection 261(2) of the Act which clarifies that if a particular amount is expressed in a currency other than Canadian currency, the particular amount is to be converted to an amount expressed in Canadian currency using the relevant spot rate for the day on which the particular amount arose. (We also refer you to the court cases of Gaynor 91 DTC 5288 and Rezvankhah 2002 DTC 3928.)

Further, we have generally taken the view that there is a pro-rata disposition of all identical property upon a partial disposition; however, we have expressed the view that the FIFO ("first-in, first-out") ordering rule should be applied in certain specific situations.

2) Identifying currency transactions on US treasury bills:

A foreign exchange gain or loss may be realized when US treasury bills mature or are sold. The capital gain is based on the amount expressed in Canadian currency. The capital gain realized is the "amount" by which the proceeds of disposition of the securities expressed in Canadian currency at the time of disposition exceed the adjusted cost base expressed in Canadian currency at the time the securities are acquired.

In our view, a new US treasury bill would generally not be considered an identical property to a matured US treasury bill, such that the superficial loss rules would not apply.

3) Margin Loans:

As you point out, the margin account is a loan from your broker. Any repayment of the margin account should reflect a foreign exchange gain or loss. At the end of the year, the total of such gains or losses are included as a capital gain or a capital loss in accordance with subsection 39(2) of the Act. The superficial loss rules do not apply on the payment of a loan since the loss does not arise from the disposition of a particular property by the debtor that is, or is identical to, property acquired by the creditor. The loan is a liability of the debtor and, as such, is not property of the debtor.

We are aware that the comments that we have provided do not address each of your specific concerns, however, we trust that our comments will be of assistance.

Yours truly,

R. Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch