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.
XXX
Principal issues
Paragraph 1 of IT-95R outlines the major issue which must be addressed, that being, whether foreign exchange gains or losses are income or capital in nature. The major problem is the determination of the nature of the underlying transaction or the use of the funds borrowed. Once this has been determined, IT-95R and the courts have developed the following summary of general propositions:
- (a) Where a taxpayer acquires foreign exchange, borrows foreign exchange on current account or becomes indebted in a foreign currency as a result of trading transactions, any resulting foreign exchange gain or loss will be on income account. (Tip Top Tailors Limited v. MNR [[1957] C.T.C. 309] (1957) CTC 309; Aluminum Union Ltd. v. MNR [[1960] C.T.C. 206] (1960) CTC 206, confirmed (1963) DTC 1254)
- (b) A gain or loss on a loan forming part of the fixed capital of a business is on capital account. (Columbia Records of Canada Ltd. v MNR [[1971] C.T.C. 839] (1971) DTC 5486)
- (c) Where the proceeds of a foreign currency loan are used to acquire capital assets, there is a strong presumption that any resulting foreign exchange gain or loss is on capital account. (Alberta Gas Trunk Line Company Limited v MNR [[1971] C.T.C. 723] (1971) DTC 5403; Neonex International Ltd. v the Queen [[1978] C.T.C. 485] (1978) CTC 485)
- (d) Funds derived from a company's trading activities may acquire a capital character if they have been clearly set aside for capital purposes. (Ethicon Sutures Ltd. v the Queen [[1985] 2 C.T.C. 6] (1985) 2 CTC 6)
- (e) Gains and losses on capital may not be recognized for income tax purposes until realized. Gains and losses on income account my be recognized on either a realized or accrual basis provided one such method is followed consistently. (Canadian General Electric Co. Ltd. v MNR [[1961] C.T.C. 512] (1961) DTC 1300)
Applying (a), (c) and (e) to XXX we offered guidance to the North York D.O. as to the correct treatment of foreign exchange gains and losses incurred on loans taken out by the company in Suisse francs.
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