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.
We refer to our conversation of April 7 in connection with the above matter.
As discussed, the Department has generally taken the position that subsection 39(2) of the Act would apply to tax the capital gain on settlement of a debt for the reason that on the settlement of a debt there is no disposition of property which gives rise to the gain and therefore subsection 39(1) of the Act does not apply. Unlike subsection 39(1) subsection 39(2) does not require that there be a disposition of property.
For FAPI purposes, however, it would seem that only gains related to the disposition of property may be caught. See subparagraph 95(1)(b)(ii) of the Act as amended by Bill C-139 and so it read prior thereto. In addition, refer to paragraph 95(2)(f) which deals with the method of calculating capital gains and, prior to the amendment in Bill C-139, you will that there was no mention of a disposition of property in the general charging portion although there is such a reference in the exception set out therein. However Bill C-139 revised the paragraph to include a reference to a disposition of property in the general charging section.
On the other hand, by virtue of the provisions of paragraphs 95(2)(g) and (h) it seems clear that the foreign exchange gains on settlement of a debt, where there is no disposition of property, were always intended to be included in FAPI. Paragraphs 95(2)(i) as enacted by Bill C-139 is further evidence of this intention.
An argument can be made that paragraph 95(2)(f) requires a capital gain or less to be computed as though the foreign affiliate were resident in Canada and thus by virtue of section 3 of the Act, which refers to gains from the disposition of property, and the provisions of 39(2), where certain gains are deemed to be capital gains from the disposition of currency, foreign exchange gains arising on the settlement of a debt are included in FAPI.
This may be an arguable position to take. On the other hand while it is clear that under 39(2) gains from the fluctuation of currency are deemed to be a capital gain it is not so clear whether there is a deemed disposition of currency under that provision. If there is no deemed disposition under 39(2) then this argument would seem to be weakened.
This particular problem has arisen in connection with a subsidiary of Caminco and at this time they have disputed the FAPI gain but not on the basis set out herein. It is our intention to continue to maintain that gains on the settlement of debts will be included in FAPI - provided they otherwise qualify - but we may not be successful if the former argument set out herein is brought to bear on the matter.
Submitted for your consideration.
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