17 November 1994 Internal T.I. 9219187 F - Strong Currency Borrowings

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:

Are losses on hedged strong currency borrowings deductible?

POSITION TAKEN:

No

REASONS FOR POSITION TAKEN:

Does not meet the legal definition of interest, nor is a loss deductible as an expense under 20(1)(e). Where underlying transaction is on account of capital, there is a presumption that the loss on the exchange is also on account of capital.

November 17, 1994

XXXXXXXXXX

We are writing in response to your memorandum of June 12, 1992, wherein you requested our views on the forward exchange transactions concerning the above named corporation.

                     XXXXXXXXXX

FACTS

                     XXXXXXXXXX

Our Comments

In our view, not all the outlays and expenses meet the definition of interest; the losses on the exchange of currencies are not deductible under paragraph 20(1)(c) of the Act as they do not result from an obligation to pay interest. The words in paragraph 20(1)(c) of the Act limit the deduction of interest to a reasonable amount and refer to interest as an amount paid in the year or payable in respect of the year pursuant to a legal obligation to pay interest on...or a reasonable amount in respect thereof, whichever is the lesser. Although, the foreign currency interest, stated in Canadian dollars, is a deductible expense in the year paid or payable, the fixed foreign exchange loss incurred on the exchange of currencies is not interest.

The taxpayer contends the Foreign Exchange contracts were never actually entered into, however, copies of notification sent from the XXXXXXXXXX which you attached, indicate that such contracts did indeed exist and the loan agreement also specified such an option being chosen by XXXXXXXXXX.

The hedging loss at issue is the foreign exchange loss on the repayment of the US dollar borrowing. The characterization of this loss as on account of income or capital depends on the underlying use of the funds. In the case at hand, the loans being hedged are for financing XXXXXXXXXX a long term capital asset. Accordingly, the loss on the exchange of currencies (noted in column 12 of the working papers submitted) are on capital account and are not deductible. The courts have supported this Department policy. For Example, see Alberta Gas Trunk Line Company Limitedv. Minister of National Revenue 71 DTC 5403, where the Exchequer Court concluded that the building of a pipeline was a capital outlay and the borrowing for that purpose was equally a capital outlay and as a result, the loss on the exchange of the currencies was a loss on account of capital.

Furthermore, the losses on the exchange of currencies do not meet the definition of amounts payable by the taxpayer in the course of borrowing for the purposes of paragraph 20(1)(e) of the Act. In our view, the losses are really incurred in respect of the repayment of the borrowing and not necessarily in the course of borrowing, thus falling outside the scope of paragraph 20(1)(e) of the Act.

We trust that our comments are of assistance to you.

for DirectorFinancial Industries DivisionRulings DirectoratePolicy and Legislation Branch