19 December 2003 External T.I. 2003-0051915 - F/X loss on repayment of a loan

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether subsections 40(3.3) and (3.4) of the Income Tax Act (the "Act") apply to the repayment of a loan?

Position:     		No.

Reasons: The repayment of a loan is not the disposition of "a particular capital property".

XXXXXXXXXX 2003-05191
T. Cook
December 19, 2003

Re: Subsections 39(2), 40(3.3), 40(3.4)

Dear XXXXXXXXXX:

We are writing in reply to your letter of November 28, 2003, in which you requested our comments with respect to the following situation:

1. In XXXXXXXXXX, a corporation resident in Canada ("Aco") borrowed US$XXXXXXXXXX from a third party to finance an acquisition.

2. By XXXXXXXXXX, Aco had repaid US$XXXXXXXXXX of the loan.

3. In XXXXXXXXXX, Aco obtained a new US dollar credit facility and paid off the US$XXXXXXXXXX remaining on the loan. This resulted in a foreign exchange loss of approximately CAN$XXXXXXXXXX.

In particular you wish confirmation that subsections 40(3.3) and (3.4) of the Income Tax Act (the "Act") do not apply to the foreign exchange loss realized upon the repayment of the outstanding balance of the loan in XXXXXXXXXX.

Our Comments

Your letter describes factual situations involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on the tax consequences applicable to a specific taxpayer in respect of particular circumstances other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.

Subsection 40(3.3) defines the circumstances under which subsection 40(3.4) will apply. It provides, in part, that subsection 40(3.4) applies if "a corporation ... disposes of a particular capital property (other than depreciable property of a prescribed class)[.]" As set out in Question 42 of the Revenue Canada Roundtable (1990 Canadian Tax Foundation Conference), it is our view that "A debt (that is, a liability) of a corporation is not 'property' within the meaning of subsection 248(1)." Since a debt is not property, it is our view that the repayment of a loan would not constitute the disposition of "a particular capital property" for purposes of subsection 40(3.3). As a result, subsection 40(3.4) would not apply either.

Given the specific nature of your question we have not considered the application of any other provision of the Act in the context of your query; but we would note that the requirements of subsection 39(2) of the Act would need to be met before a taxpayer in this situation would have a capital loss. We trust that our comments will be of assistance.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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