CRA finds that “sustaining” a s. 39(2) loss on a USD obligation requires more than locking-in the equivalent Canadian-dollar amount

A USD loan owing by Canco 1 to its parent Canco, has an accrued FX loss to it and an accrued FX gain to Canco. Canco 1 would like to “sustain” a loss under s. 39(2) in circumstances where there is no disposition of the debt by Canco. In particular, its FX exposure on the loan would be crystallized if a wholly-owned sub of Canco 1 agreed to undertake to repay the loan on maturity in consideration for issuing an equivalent Canadian-dollar note to Canco 1.

In finding that this did not result in Canco 1 sustaining a loss under s. 39(2), CRA stated that FX gains or losses respecting a debt obligation are realized or sustained only on the settlement or extinguishment of the debt, i.e., on their repayment or legal novation or legal rescission and substitution.

Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.7 under s. 39(2).