S. 111(12) FX losses realized on USD debt on an acquisition of control cannot be carried forward to offset the related s. 40(11) gain realized post-AoC on the debt’s settlement

If a restructuring of USD debt (with an accrued FX loss) of a Canadian debtor entails an acquisition of control ("AoC") of the debtor before the debt is settled for a payment of, say, 20% of the USD amount owing, then an unsheltered capital gain under s. 40(11) very well may arise. In concept, on the debt settlement, s. 40(11) will deem the debtor to realize a capital gain to match the FX capital loss previously realized on the USD debt under s. 111(12) on the AoC (except that this capital gain will be reduced somewhat by the FX loss actually realized on the 20% repayment).

The problem is that the s. 111(12) loss would be extinguished for various purposes on the AoC, and would not be available to be carried forward to offset the s. 40(11) gain. “Finance should consider amending the Act to permit the subsection 111(12) loss to be carried forward after the AoC to offset a later related subsection 40(11) gain.”

A similar problem can arise, for example, on the acquisition of a target owing USD debt, which has appreciated, to an affiliate, and the debt is settled under s. 80.01(3) on an amalgamation occurring, say, a day later.

Neal Armstrong. Summary of Carrie Smit, "Foreign Currency Debts and Acquisitions of Control: Beware the Unexpected Gain," International Tax (Wolters Kluwer CCH), February 2017, No. 9, p. 6 under s. 111(12).