Section 39

Subsection 39(1) - Meaning of capital gain and capital loss

Paragraph 39(1)(a)

See Also

Staltari v. The Queen, 2015 DTC 1130 [at 818], 2015 TCC 123

exclusion of gains that are ordinary income

A commercial real estate broker donated land to the City of Ottawa, received a charitable receipt for its appraised value and claimed that his (substantial) gain was exempted under s. 38(a.2). Before affirming this treatment, Owen J stated (at para. 67):

[P]aragraph 39(1)(a) identifies whether there is a capital gain by asking whether the proceeds of disposition from the property would be included in income if section 3 were read without reference to the inclusion of taxable capital gains net of allowable capital losses. Although the parenthetical language in paragraph 39(1)(a) may appear at first blush to create a circularity in the definition of capital gain, in fact the language simply draws upon the body of jurisprudence that had developed under the pre-1972 income tax statutes and which provided the basis for distinguishing between "income from a source" and "capital".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence uncorroborated testimony 80
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business no business where no business organization 155
Tax Topics - Income Tax Act - Section 38 - Paragraph 38(a.2) land donated in order to achieve tax benefit was still a gift to a qualified donee 119
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate secondary intention to develop land irrelevant if land donated instead 484

Rogers v. The Queen, 2015 DTC 1029 [at 124], 2014 TCC 348

capital gain can arise from property which is not capital property

Pursuant to a share appreciation right ("SAR") attached to stock options granted by a public corporation which he controlled and of which he was the CEO, the taxpayer surrendered the options for a cash payment equal to their value, and reported the "Surrender Payment" received as a capital gain.

After finding that the Surrender Payment was not a taxable employment benefit (see summary under s. 7(3)(a)), Hogan J noted that he had previously dismissed the taxpayer's motion to amend the Notice of Appeal to argue that the Surrender Payment was a tax-free receipt, and stated obiter (at paras. 75-77):

[I]n Mathieu, the Court did not address the question whether the surrender of the options by the appellant therein gave rise to a capital gain. …[A] capital gain is not defined in the Act as a gain arising or resulting from the disposition of capital property. Instead, subsection 39(1) defines a capital gain broadly as "the taxpayer's gain . . . from the disposition of any property" other than property specifically excluded under that provision ("Excluded Property"). Recognizing the potential for overlap with other sections of the Act, the legislator chose to specifically exclude gains that are otherwise included in income under section 3.

...Mr. Rogers realized a gain from the disposition of the Options. The Options are property. They are not Excluded Property. Because of subsection 7(3) of the Act, no part of the gain was otherwise included in income under section 3. Therefore, the gain is a capital gain for the purpose of section 39.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) cash surrender of employee stock options for their value was not shareholder benefit 116
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) exercise of stock option surrender plan for FMV was not "remuneration" 111
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(a) s. 7 a complete code for taxation of stock option benefits 214
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Options holding one's employee stock options until just before they expire is not typical of an adventure in the nature of trade 171

Administrative Policy

4 November 2008 External T.I. 2008-0264181E5 - Income Recognition and ACB - Trust Units

Where a corporation with an October 31 year end receives income distributions from an income trust in February and March 2007 and sells its units in April 2007, the distributions so received by it will reduce the adjusted cost base of its units because the corresponding income allocated to it by the income fund will not be included in its income until its October 31, 2008 taxation year, i.e., at the time of the disposition of the units it was not the case that the amount of the distributions "was included in the taxpayer's income" (s. 53(2)(h.1)(A)).

In light of the provision in s. 39(1)(a) that a capital gain will not include an amount otherwise included in income, the corporation at the time of filing its 2008 return (in which it includes the distributions in income under s. 104(13)) will be able to refile ints 2007 return to reduce the capital gain reported in that return.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) amount paid to beneficiary "was included" in its taxation year in which trust's taxation year ends/beneficiary return for previous year re-opened to avoid double taxation 264

84 C.R. - Q.51

S.39(1)(a) prevents double taxation of the parent on a subsequent disposition of depreciable property received by the parent on a s. 88(1) winding up of a wholly-owned subsidiary.

Subparagraph 39(1)(a)(i.1)

Cases

Canada v. Zelinski, 2000 DTC 6001 (FCA)

The taxpayers purchased numerous paintings of Morrisseau - initially because of the advantageous price and, later, in greater volume after they learned of the tax benefits of donating the paintings. In rejecting a submission that the gains realized on donation did not qualify for exemption under s. 39(1)(a)(i.1) because the paintings were acquired on income account, Sexton J.A. found that properties purchased for the purpose of donation are, therefore, not acquired in connection with a 'scheme for profit-making'. Furthermore, the doctrine of the secondary intention could not be applied to the taxpayers because their primary intention (i.e., purchasing the paintings either with no specific intention, or with the intention to donate them) was not frustrated and, in any event, the possibility of reselling was not an operating motivation for the acquisitions.

Any secondary intention to resell at a profit was irrelevant, as the taxpayers did not follow thorough on that intention. Sexton JA stated (at para. 34):

Since the taxpayers did not carry out any purported secondary intention they might have had, those intentions cannot transform their de facto decision to not follow through on that secondary intention so as to make it appear as if they did do so.

Subparagraph 39(1)(a)(iii)

Administrative Policy

9 October 2015 APFF Financial Strategies and Financial Instruments Roundtable Q. 1, 2015-0588941C6 F - Critical illness insurance

critical illness policy transferred free of capital gains tax

A corporate owner of a critical illness insurance policy (in this case, "Opco" holding a policy referencing its sole individual shareholder) could transfer it free of capital gains tax, as insurance policies are excluded from capital gains treatment and there is no provision explicitly taxing such a policy’s disposition.

Subparagraph 39(1)(a)(ii)

Administrative Policy

8 July 2013 Internal T.I. 2012-0470021I7 - Settlement of Future Benefits – ASO Plan

CRA noted that an employer's group disability plan which was administered by an administrator (such as an insurance corporation) on an administrativee services only basis nonetheless would qualify as an insurance plan ("IP") (and a wage loss replacement plan ("WLRP")) for the purpose of paragraph 6(1)(f) of the Act, if it contained "an undertaking by one person to indemnify another person, for an agreed consideration, from a loss or liability in respect of an event, the happening of which is uncertain." When asked whether the "decision in Tsiaprailis, 2005 DTC 5119, would apply to characterize a payment made by the administrator to an employee in settlement of future periodic benefits under the disability plan as a capital receipt from the disposition of a right," CRA stated:

…where it is established that the ASO plan is an IP and therefore a WLRP, the decision of the SCC in Tsiaprailis would apply to characterize the amount of a settlement for future WLRP benefits as a capital receipt from the disposition of a right….

Subparagraph 39(1)(a)(iii)...would exclude the capital receipt from the disposition of an employee's right under an ASO plan, if the plan was an IP, from the employee's income.

However where an employee receives such a settlement amount under an employer's ASO plan that is not an IP, the amount would be included in the employee's income under subsection 5(1) or section 6….

Paragraph 39(1)(b)

Administrative Policy

8 October 2010 CTF Annual Conference Roundtable, 2013-0507191C6 - Monetization of Securities - 2010 CTF Conference

payment under an equity swap not a capital loss because no disposition (and on income account)

2007-0246461R3 concerned a monetization contract (the "Term Contract") of Holdco A and Holdco X with a Canadian financial institution (“FI”) under which they each had an obligation to make a payment to FI if the closing price of their referenced Class A Shares of of a Canadian public company was higher than the benchmark price on the settlement date, and with a correlative obligation of FI to make a payment on the settlement date if such closing price was lower. In commenting on this ruling, CRA stated:

It is important to note that in ruling F...the CRA did not state that the loss that would result from the settlement of the obligations of a corporation under the forward contract, in the event of an increase in the value of the monetized shares, would constitute in and by itself a capital loss. In such a situation, it appears to us that this loss would not technically constitute a capital loss under the provisions of the ITA solely by reason of the settlement of the forward contract.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges equity forward gain on income account 110

7 October 2016 APFF Roundtable Q. 3, 2016-0652851C6 F - Annulation d'une promesse d'achat sur une maison

no capital loss for damages paid for breach of purchase obligation

As a result of breach to sell a personal residence, an individual receives $50,000 in damages from the defaulted purchaser. If the purchaser had intended to rent the residence to unrelated persons, could it recognize an allowable capital loss of $25,000? CRA responded:

[T]he purchaser is not entitled to a capital loss from paying the damages of $50,000, since he had not disposed of property as defined in subsection 248(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b) damages for breach of covenant to purchase principal residence not covered 60

IT-159R3 "Capital Debts Established to be Bad Debts"

Where a debt is established to have become a bad debt, any resulting capital loss will be reduced under s. 39(1)(b) by the amount of any deduction made in respect of the loss under provisions such as s. 20(4) or s. 20(1)(p).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) 0

Paragraph 39(1)(c)

Cases

Ollenberger v. Canada, 2013 DTC 5064 [at 5863], 2013 FCA 74

The taxpayer was entitled to recognize a business investment loss on a loan owing to him by a Canadian-controlled private corporation ("AES") which was not repaid. The trial judge erred in finding that "active business" in the small business corporation definition meant anything more than "any business carried on by the taxpayer," as set out in the applicable part of the definition of "active business" in s. 248(1), i.e., there was no basis for the Minister's contention that the business must be "active" in the ordinary sense of that word.

As the Minister effectively acknowledged in the Amended Reply that AES carried on a business, the requirements of the definition were satisfied.

Rich v. Canada, 2003 DTC 5115, 2003 FCA 38

In finding that the taxpayer was entitled to realize a business investment loss on a loan made by him to a company of which he was a minority shareholder and which was operated by his son, Rothstein J.A. stated:

"There is no obligation on the taxpayer to try to think of every conceivable proactive step and show that none would be productive. It is sufficient that the taxpayer provides evidence as to the condition of the debtor and its inability at the relevant time to repay the loan in whole or in part."

The debtor was in a weak financial position, had just lost an account that had generated two-thirds of his cash flow and the debt was subordinate to other significant debts of the debtor. There was no requirement for the taxpayer to have explored possible workouts in the absence of any evidence that they would have been successful.

Reeson Investments Ltd. v. The Queen, 90 DTC 6420 (FCTD)

The taxpayer acquired shares from another CCPC ("Quasar") within the same corporate group. Although the shares had an ACB to Quasar of $7,385,255, their fair market value and purchase price were only $950. The amount of the capital loss was denied to Quasar and added to the ACB of the shares to the taxpayer pursuant to paragraph 53(1)(f.1). The Crown unsuccessfully argued that the ABIL which otherwise would have been realized by the taxpayer on a subsequent arm's length sale of the shares was reduced by the amount of the paragraph 53(1)(f.1) increase to the ACB of the shares. "There has never been an increase in the adjusted cost base of the taxpayer with respect to the shares in issue by virtue of subsection 85(4) ... the limitation in subparagraph 39(1)(c)(v) requiring a decrease in a business investment loss, in proportion to any increase occurring as a result of 85(4), was included in order to prevent the conversion of an ordinary capital loss into a business investment loss (and ABIL) and has nothing to do with the prevention of transfers of ABIL's as between members of the controlled group." (p. 6425)

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Drafting Style 55

See Also

Barnwell v. The Queen, 2015 DTC 1115 [at 724], 2015 TCC 98 (Informal Procedure), aff'd 2016 FCA 150

loan made to the principal of a business corporation could not be construed as a corporate loan

The taxpayer made various loans to an individual ("Austin"), who was the sole director and shareholder of a business corporation ("Whitesand"), in order to publish a travel magazine. Owen J affirmed the Minister's position that the taxpayer's resulting loss was not an allowable business loss. The loan was, both in form and substance, a personal loan rather than a loan to Whitesand (although, in any event, the form of the transaction would probably have prevailed (paras. 53-55)).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Corporate/Separate Personality - separate existence separate personality of Ontario corporation 84

Nanica Holdings Limited v. The Queen, 2015 DTC 1111 [at 657], 2015 TCC 85 (Informal Procedure)

loan made to the principal of a business corporation could not be construed as a corporate loan

The taxpayer was a Canadian controlled private company which paid taxable dividends to its shareholders in 2007 and 2008. However, it failed to file its income tax returns for those years within three years of its year end and it was denied a dividend refund under s. 129(1) of the Act. The MNR used the formula in s. 129(1) to calculate the “dividend refund” which had been denied in 2007 and 2008, and subtracted this amount from the taxpayer’s refundable dividend tax on hand (“RDTOH”) account, using this reduced amount to calculate the dividend refund which the taxpayer received in 2010 and 2011.

Consistent with Presidential MSH Corporation and Tawa , V.A. Miller J. stated that "a dividend refund is an amount which is actually paid or credited" to the taxpayer (para. 4).

In allowing the appeal, V.A. Miller J. concluded (at paras. 35 & 36):

[T]he context of the “dividend refund” described in paragraph 129(1)(a) is within the system used to collect tax up front from a corporation and then to refund that tax, or part of it, when a dividend is paid out to a shareholder. … The purpose of the section 129 is to prevent tax deferral by placing the shareholder who has received the dividends in much the same tax position as if he had received the investment income himself without the intermediary corporation.

When the phrase “dividend refund” is analysed in this context, it is clear that it is not a notional amount. The system contemplates an actual repayment of tax to the corporate taxpayer… .

Other locations for this summary
Tax Topics - Income Tax Act - Section 129 - Subsection 129(1) “Dividend refund” an amount actually paid, not a notional amount.

Gaumond v. The Queen, 2014 DTC 1024 [at 98], 2014 TCC 339 (Informal Procedure)

renounced debt is not disposed of to anyone/s. 50 not available where debt settled in year

The Canadian-controlled private corporation ("GMG") of which the taxpayer was the principal shareholder made a proposal in May 2011 under the Bankruptcy and Insolvency Act which, when accepted by its creditors, resulted in the interest–bearing unsecured debt owing by GMG to him being extinguished on 30 August 2011. In finding that the resulting capital loss to the taxpayer did not also qualify as a business investment loss ("BIL"), Lamarre J first found that a BIL could not be recognized under the s. 50 branch of the definition as the debt was not owing to him at the end of 2011. The debt also did not qualify as having been disposed of to an arm's length person (in the French version, described as a person with whom the taxpayer does not have a non-arm's length relationship). After noting (at para. 27, TaxInterpretations translation) that

in the absence of subsection 84(9) of the ITA, it can be assumed that a shareholder who deals at arm's length with the small business corporation which redeems or cancels his shares cannot benefit from a BIL

and then (without referring to the English version) stated (at para. 31):

[I]n the absence of a provision analogous to subsection 84(9) applying in the case of a settlement or cancellation of a debt, it seems to me that in simply renouncing his debt the appellant did not dispose of it in favour of anyone; and a fortiori he did not dispose of it in favour of a person with whom he did not have a non- arm's length relationship, or at least he did not so demonstrate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) s. 50 not available where debt settled in year 100
Tax Topics - Income Tax Act - Section 84 - Subsection 84(9) s. 84(9) not for greater certainty 123

St-Hilaire v. The Queen, 2014 TCC 336 (Informal Procedure)

acceptance of bankruptcy proposal caused debt to disappear before taxpayer's year end

The taxpayer made non-interest bearing advances to a wholly-owned incorporated radio station. On 8 August 2008, the corporation made a proposal under the Bankruptcy and Insolvency Act, which was accepted by the creditors, and then approved by the Quebec Superior Court on 9 October 2008. The taxpayer subsequently sold his shares at a gain to a purchaser which was interested in the CRTC radio licences.

The taxpayer's complete loss under the proposal on his advances (although conceded to be a capital loss) was not a business investment loss because his disposition of the advances was not a disposition to which s. 50(1) applied, which required that the advances be owing to him at the end of his taxation year (31 December 2008). After noting that most authorities suggested that under a proposal, the debtor was released of its obligations when the proposal had been accepted by the creditors and approved by the Court, Paris noted that here the taxpayer had renounced his entitlement to receive a distribution with the unsecured creditors (in order to secure approval) and that the corporation had written off the debt in its financial statements for its 31 October 2008 fiscal year:

As the taxpayer's loan no longer existed at 31 December 2008, the provisions of section 50 of the Act could not apply and the appellant had no right to an ABIL (para. 41)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) acceptance of bankruptcy proposal caused debt to disappear before taxpayer's year end 216

Langille v. The Queen, 2009 DTC 1103 [at 564], 2009 TCC 139

The taxpayer who was the sole director and officer of a corporation ("Alland") owned by him and a family trust, lent money in order for Alland to participate over the course of 15 months in what the taxpayer thought were purchases of inventory by another corporation ("Trev Cor"), with Alland to receive a share of the profits from resale of the inventory. In fact, Trev-Cor was engaged in a pyramid scheme so that few or none of the transactions actually occurred. Given the active involvement of the taxpayer in determining whether Alland should participate in the transactions and the fact that the transactions were found to be joint venture transactions with Trev-Cor, Alland was not engaged in a specified investment business, so that the losses sustained by the taxpayer on his loans to Alland were business investment losses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business unwitting pyramid scheme 137

Borys v. The Queen, 2005 DTC 1069, 2005 TCC 397

Before going on to find that the taxpayer had provided evidence that amounted to a prima facie case that a loss realized by it on a debt owing to it by a corporation was a business investment loss, Bowman C.J. noted (at p. 1072):

"There is authority to support the view that merely because a company is in a period of inactivity it may still be carrying on a business .... it seems, at first blush, unreasonable to assume that for a taxpayer to be allowed an ABIL the debtor company must have to be carrying on an active business when the debt went bad."

MacKay v. The Queen, 2003 DTC 748 (TCC)

After a corporation of which the taxpayer was a significant shareholder entered into a period of financial difficulty, the taxpayer followed the practice of each year lending funds to the corporation on a non-interest-bearing basis and then writing off the amount of the loan at year-end.

In finding that the amounts advanced each year were a bad debt at the end of the year, Mogan T.C.J. accepted the evidence of the taxpayer that in light of depressed conditions in the local real estate market a sale of the property would have produced proceeds of disposition sufficient to pay only debts of the corporation owing to third party creditors, leaving nothing for the taxpayer.

Klein v. The Queen, 2001 DTC 443 (TCC)

A loan that the taxpayer made to a partnership consisting of two Canadian-controlled private corporations qualified for recognition as a business investment loss in the year that the debt became bad. Given that the partnership itself did not have the capacity to be indebted, the debt of the partnership was owed by the partners, i.e., by Canadian-controlled private corporations. Lamarre J stated (at para. 22):

The legal view of a partnership, which is adopted by the provincial legislation, clearly states that the partnership itself does not have the capacity to be indebted. The debt of the partnership is owed by the partners....

Furthermore, the corporate partner that was controlled by the taxpayer qualified as a small business corporation even after the appointment of a receiver-manager for the partnership on the basis of a finding that the receiver-manager was acting not only as agent for the secured creditors but also as agent for the debtor partners for the purposes of managing the partnership business.

Sandner v. MNR, 93 DTC 901 (TCC)

The taxpayers did not realize allowable business investment losses pursuant to their guarantees of obligations of a corporation where in the taxation year the bank obtained judgment against them on their guarantees and registered the judgments in the appropriate land titles office against lands owned by them. It could not be said that the bank regarded the issuance of the judgments as payment as it continually proceeded by way of execution in subsequent taxation years to sell the parcels of land.

Kyrés v. MNR, 92 DTC 1958 (TCC)

Interest on loans made by the taxpayer that accrued after the bankruptcy of the recipient corporations, and that was not deductible under s. 20(1)(c), gave rise to the deduction of allowable business investment losses given that the loans originally were made for an income-producing purpose, and in light of s. 50(1)(a).

McHale v. MNR, 92 DTC 1781 (TCC)

Because the taxpayer did not make any payment under a guarantee of debt of his company which was called in the taxation year in question, no debt in that year became owing to him by his company under his rights of surety. Accordingly, he did not realize an allowable business investment loss in that year.

Administrative Policy

16 June 2016 Internal T.I. 2015-0597971I7 F - Perte réputée nulle - loss deemed nil

BIL potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) capital loss potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity/subordinate purpose sufficient 245

2 October 2014 External T.I. 2013-0513281E5 F - Interaction entre 42(1) et 39(1)c)

s. 42(1)(b)(ii) payments currently do not qualify as BILs

As a result of the amendment to s. 42 effective for taxation years ending after 4 November 2010, a s. 42(1)(b)(ii) payment (if made after the filing due date for the taxation year of the sale of shares of a small business corporation) is deemed to be a capital loss from the disposition of property in the abstract rather than from the specific shares, so that such amount could no longer qualify as a BIL. See detailed summary under s. 42.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 42 no deeming of s. 42(1)(b)(ii) loss to arise from the SBC shares, so that not a BIL 259

15 September 1995 External T.I. 5-951451 -

"Where a taxpayer's loss qualifies as a BIL under paragraph 39(1)(c) of the Act, it must be claimed as such and not as a capital loss, since paragraph 39(1)(c) of the Act is not an elective provision."

23 August 1994 External T.I. 5-941375 -

Where a taxpayer's loss qualifies as a business investment loss, it must be claimed as such and not as a capital loss.

29 July 1992 Memorandum (Tax Window, No. 21, p. 4, ¶2040)

A loss on the disposition of a debt may be a business investment loss if the debtor and creditor are dealing at arm's length at the time of disposition, even though they may not have been dealing at arm's length at the time the debt was incurred. A loss on the sale of an interest-free debt owing to a shareholder will be denied by s. 40(2)(g)(ii) where the conditions in IT-239R, paragraph 10 are not met.

14 April 1993 T.I. (Tax Window, No. 30, p. 6, ¶2491)

Re whether s. 39(1)(c) does not require the corporation to be a small business corporation when a debt is incurred, but only when there is a disposition of the debt.

91 C.R. - Q.35

The arm's length determination is made at the point at which there is a disposition of the debt giving rise to the application of s. 39(1)(c).

19 February 1990 T.I. (July 1990 Access Letter, ¶1319)

Discussion of the phrase "was at any time in the twelve months preceding that time a small business corporation".

86 C.R. - Q.24

ABIL's re non-interest bearing loans.

81 C.R. - Q.20

Although the redemption by a CCPC of shares held by an arm's length shareholder gives rise to an ABIL, the dissolution does not because there has been no disposition of shares "to a person".

80 C.R. - Q.18

A disposition of shares in the course of either a redemption or purchase for cancellation is a disposition "to" a corporation for purposes of s. 39(1)(c). [C.R.: 84(9)]

IT-484R "Business Investment Losses"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(9) 0

Subsection 39(2) - Foreign exchange capital gains and losses

Cases

Canada v. Agnico-Eagle Mines Limited, 2016 FCA 130

conversion of a U.S.-dollar convertible debenture resulted in no FX gain based on the appreciation in the underlying shares

In 2002, the taxpayer issued US-dollar denominated debentures which were convertible at the holders' option into common shares at a conversion price of U.S.$14 per share (or a conversion ratio of 71.429 per each U.S.$1,000 debenture). In December 2005, the taxpayer issued a notice of redemption for all outstanding debentures, which prompted the conversion of over 99% into common shares before the date specified for redemption. The balance of 0.8% of the debentures were redeemed.

The determination of the extent of any gain arising under s. 39(2) on the debentures’ conversion turned on a comparison of the Canadian dollar equivalents of the amount for which they were issued (accepted to be Cdn.$1,588 per debenture) and the amount (the “Repayment Amount”) for which they were repaid on the conversion dates. After noting (at para. 77) that his decision was limited to the question as to whether there was any s. 39(2) gain and after noting that the debenture indenture provided that the converting holder was entitled to cash equal to the current market value of any fractional share and that the directors’ resolution issuing the shares on conversion essentially indicated that the fair value of the consideration received for the shares’ issuance was their “Sale Price” (i.e., current market price on the NYSE), Ryer JA stated (at paras.103-104):

[T]he Repayment Amount in respect of each Convertible Debenture was, in essence, the US$ amount determined when the “Sale Price” of a Common Share, on each Conversion Date…was multiplied by 71.429. The resulting US$ amount would then be converted to C$, in accordance with subsection 261(2) on each Conversion Date, and the determination of whether the Taxpayer made a gain, for the purposes of subsection 39(2), would be made by comparing the C$ amount, so determined, with $1,588, the C$ amount received by the Taxpayer on the Issuance Date. …If the Repayment Amount in respect of any particular Conversion is less than the related Issuance Amount, the Taxpayer would have a gain… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) on conversion of USD convertible debenture, the repayment amount arose at the conversion time 158

Canada v. Macmillan Bloedel Ltd., 99 DTC 5454 (FCA)

loss on redemption of U.S.-dollar preferred shares

The taxpayer redeemed U.S.-dollar denominated preferred shares at a time that the U.S. dollar had appreciated relative to the exchange rate at the time of issuance. The taxpayer was found to have realized a loss under s. 39(2) notwithstanding that s. 84(3) simultaneously operated to deem it to have paid a dividend to the shareholders. Strayer JA stated (at para. 8):

According to the common understanding of "loss", the respondent's payment to the shareholders clearly qualifies. That is, in Canadian dollar terms the respondent paid more to redeem the shares than it had initially received.

Tahsis Co. Ltd. v. The Queen, 79 DTC 5328, [1979] CTC 410 (FCTD)

The only fluctuations in exchange rates to be taken into account under s. 39(2) are those occurring subsequent to 1971. Thus, where U.S. dollars were borrowed in 1965 and partially repaid in 1973, the capital loss under s. 39(2) was measured by comparing the exchange rate on December 31, 1971 with the rates prevailing on the repayment dates, and the amount of the capital loss was not reduced by unrealized foreign exchange gains that had accrued on the borrowed funds prior to December 31, 1971.

See Also

Agnico-Eagle Mines Limited v. The Queen, 2015 DTC 1008 [at 43], 2014 TCC 324, aff'd 2016 FCA 130

U.S. dollar principal of a convertible debenture should be considered on conversion to have been settled at the historical exchange rate when the conversion price was set

In 2002, the taxpayer ("Agnico") issued US-dollar denominated debentures which were convertible at the holders' option into common shares at a conversion price of U.S.$14 per share (or a conversion ratio of 71.429 per each U.S.$1,000 debenture). In December 2005 Agnico issued a notice of redemption for all outstanding debentures, which prompted the conversion of over 99% into common shares before the date specified for redemption. The balance of 0.8% of the debentures were redeemed, with the taxpayer exercising its right to satisfy the redemption price for each debenture by issuing common shares whose number was computed by dividing U.S.$1,000 by a heavily discounted share value.

The Crown took the position that gains were realized under s. 39(2) on conversion, as the U.S. dollar had depreciated substantially relative to the Canadian dollar between the debenture issuance and conversion.

In rejecting one of Agnico's arguments that s. 39(2) did not apply because the fair market value of the shares issued was higher than the debentures' principal amount, Woods J found (at paras. 47, 50) that, applying Teleglobe, "the amount paid out by Agnico is the amount for which the Common Shares were issued" and that "it is necessary ... to search for the consideration as agreed by the parties and as reflected in the stated capital account." Although Agnico had not added any specific dollar amount to its stated capital account, the common shares were issued on conversion because of a commitment to issue them at a price of U.S.$14 per share or U.S.$1,000 per debenture, so that this was the agreed consideration for their issuance.

How then should U.S.$1,000 be translated into Canadian dollars? She stated (at paras. 58, 61-63, 67):

Subsection 261(2) requires that the relevant amounts be translated into Canadian dollars at the spot rates when the amounts "arose."

...

In my view, the appropriate translation date should be when the consideration for the Common Shares was received by Agnico. ...

...[T]he appropriate translation date in this particular case is the date that the Convertible Debentures were issued. This is when the true consideration for the issuance of the Common Shares was received by Agnico. ...

...Suppose convertible debentures are issued for $1,500, [and] the principal amount ... is $1,100 ... . [T]he true consideration [for the shares on the debenture conversion] is $1,500. ...

...[T]he equivalent of $1,588 [the Cdn$ equivalent on that date of U.S.$ 1,000] per [Agnico] Convertible Debenture was received on issuance of the Convertible Debentures and the same amount was paid for the extinguishment of the Convertible Debentures on the conversions. There is no foreign exchange gain.

Agnico's alternative argument (at para. 43), that s. 51(1) "provides that on a conversion ... there was no transaction that could give rise to a gain," was not considered.

Conversely, given that the Debentures' terms "make it clear that the Common Shares issued on redemption are in satisfaction of the Redemption Price which became due and payable on the date of redemption" (para. 73), the amount the taxpayer paid on redemption was based on the Canadian dollar equivalent of such amounts at that time, so that Agnico realized s. 39(2) gains on redemption.

Other locations for this summary
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) U.S. dollar principal of a convertible debenture should be considered on conversion to have been settled at the historical exchange rate when the conversion price was set
Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence expert opinion on domestic law excluded 31

Imperial Oil Limited v. The Queen, 2004 DTC 2377, 2004 TCC 207, aff'd on different grounds 2004 DTC 6044, 2004 FCA 36

The taxpayer issued U.S. dollar debentures in 1989 at a discount of 1.199% at which time the U.S. dollar had a value of Cdn.$1.1766 and redeemed a portion of the debenture in 1999 at which time the U.S. dollar had a value of Cdn.$1.48192. Miller J. found that the amount deductible under s. 20(1)(f) should be computed first in U.S. dollars and then converted to Canadian dollars at the 1999 exchange rate, with the balance of the loss treated as a capital loss under s. 39(2). Under the scheme of the Act that loss which is deductible on income account is specifically excluded from the scope of s. 39(2). Furthermore, the Gaynor principle (that amounts were to be converted into Canadian dollars when they first arose) only applied to the computation of capital gains or losses, and not the computation of deductions on income account. Accordingly, it was appropriate to calculate the foreign exchange loss under s. 39(2) only after computing a deduction under s. 20.

Federal Commissioner of Taxation v. Energy Resources of Australia Ltd., 94 ATC 4923, [1994] FCA 924 (Full Fed. Ct.)

In order to refinance U.S.-dollar loans that it had received to finance the development of its mine, the Australian taxpayer negotiated a new Euronote facility pursuant to which it issued 90-day non-interest bearing U.S. dollar promissory notes which were sold at a discount to members of a banking consortium who were successful in tendering for the purchase of the notes to be issued, with the same procedure being repeated upon maturity of the notes. In finding that the taxpayer ("ERA") had not "made or realized gain or loss attributable to currency exchange rate fluctuations" at the time of the roll-over of the notes at the end of each 90-day period, Hill J. stated (p. 4958):

"Once ERA availed itself of the facility it became subject to a continuing obligation in respect of the face value of the notes reduced in accordance with the facilities agreement or payments which ERA at its option might make discharging the facility obligation ... ." [I]n the context of the agreement it is incorrect to see each roll-over as a discharge of indebtedness upon a new indebtedness arising from the issue in discounting fresh notes ... Second, and more fundamental for the present case, it seems to me that the relevant contract under which the notes were issued was the facilities agreement rather than the individual contracts arising out of the acceptance of tenders for purchase of notes and the issue and sale of those notes at a discount."

Reed v. Young, [1984] BTC 424 (C.A.), aff'd [1986] BTC 242 (HL)

"The word 'sustains' ... means no more than 'incurs' or 'suffers'." A trading "loss is only sustained because debts and liabilities have been incurred, but the loss does not have to be cleared or satisfied once and for all at the end of the period."

Words and Phrases
sustains

The Minister of National Revenue v. Consolidated Glass Limited, 57 DTC 1041, [1957] CTC 78, [1957] S.C.R. 167

In computing its undistributed income on hand at the end of its 1949 taxation year, the taxpayer was entitled to deduct "all capital losses sustained" by it. The taxpayer was not entitled to a deduction in respect of a decline in the value of shares. "The phrase 'capital losses sustained' or its equivalent appears in several provisions of the statute in a context from which it is apparent that, within the conceptions of accountancy underlying the Act, it means actually realized ... That state of things is realized upon a sale; it can also be said to be realized in the case of stock in a company which is hopelessly insolvent and has ceased business."

Administrative Policy

29 November 2016 CTF Roundtable Q. 3, 2016-0670201C6 - Agnico-Eagle Mines Decision

Agnico-Eagle analysis rejected

The Agnico-Eagle methodology would appear to potentially result in an issuer of U.S.-dollar debentures (where the underlying shares have appreciated even if the U.S. dollar has appreciated) being considered to have realized a loss. Does CRA agree that an issuer could be considered to realize a loss on the conversion?

CRA indicated that the loss did not arise because of the fluctuation in a foreign currency relative to the Canadian dollar (and instead arose from the appreciation of shares of the taxpayer), so that it was not described in s. 39(2) (nor was it a s. 39(1) loss from the disposition of property).

CRA also indicated that if a similar case arose, it would consider that s. 143.3(3)(b) also denied a loss respecting the share appreciation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 143.3 - Subsection 143.3(3) - Paragraph 143.3(3)(b) application to coversion of debenture 109

22 January 2015 Internal T.I. 2014-0560571I7 - Paid-up capital reduction of a foreign affiliate

no s. 39(2) gain arises on a CFA distribution of U.S.-dollar stated capital

Canco, which reports its Canadian tax results in Canadian dollars, invested US$200M in common shares of its wholly-owned non-resident subsidiary ("Foreignco"), with this amount being added to their legal stated capital. As the exchange rate was $1US = $1 Canadian, the shares had a cost of $200M.

In 2009, Foreignco paid Canco US $99M (equivalent to $108.9 M at the current spot rate) on a reduction of its paid-up capital. In finding that no s. 39(2) gain thereby arose to Canco, the Directorate stated:

[Applying s. 261(2)], the Canadian dollar equivalent ($108.9M) of the amount received by Canco in 2009 in satisfaction of the reduction of PUC of the common shares, would be deducted in computing the ACB to Canco of Foreignco's common shares pursuant to former subparagraph 53(2)(b)(ii). ...Canco [could] be deemed to have a gain pursuant to subsection 40(3). (footnote 1: If such deemed gain arose in a taxation year of Canco that began on or before August 19, 2011, and was wholly attributable to fluctuation in the value of the US currency relative to Canadian currency it would be a subsection 39(2) capital gain. …) Alternatively…subsection 40(1) provides for the computation of a gain or loss based on the ACB to Canco of the shares of Foreignco...when the shares are disposed of by Canco. Therefore, whether it is subsection 40(1) or subsection 40(3) that applies, the full amount deducted from the ACB to Canco of the Foreignco shares under paragraph 53(2)(b) in 2009 will be reflected in the eventual gain or loss realized by Canco on the Foreignco shares.

An argument could be made that for the purposes of subsection 39(2), Canco "made a gain" because of a fluctuation in the value of US currency relative to Canadian currency in the same way that a lender might make a gain on the repayment of a portion of a foreign currency denominated loan. … If subsection 39(2) were also applicable, the accretion in the value of the share investment attributable to foreign currency fluctuation would be duplicated in the gain computed under subsection 39(2) and any potential gain calculated in respect of the shares under section 40. [Accordingly] subsection 39(2) would not apply… .

2014 Ruling 2013-0479701R3 - Transfer of US dollar loan

amendment of non-interest bearing loan to be interest-bearing

Ruling that s. 39(2) would not apply to the amendment (without novation) of a non-interest-bearing demand U.S-dollar loan to make it interest-bearing. See detailed summary under s. 40(2)(e.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(e.1) s. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved 167
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) s. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved 112
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) S. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved 167

2014 Ruling 2013-0514191R3 - Debt restructuring, forgiveness and winding-up

s. 51.1 exchange of U.S.-dollar notes

underline;">: Currrent structure. Canco1 is obligated to its affiliate (Canco3) under non-interest-bearing U.S.-dollar debt evidenced by demand notes ("Notes A") whose fair market value is substantially lower than their adjusted cost base (equal to their principal) to Canco3, and with there also being an accrued FX gain to Canco1.

Proposed transactions

Before engaging in transactions to eliminate such debt though ATR-66-style debt-slide transactions, the terms of the Notes A will be amended by adding a right allowing the holder to exchange them for new Canadian-dollar interest-bearing demand notes ("Notes B") - with the exchange rights then being exercised by Canco3.

Ruling

that s. 51.1 will apply, and ss. 80 and 39(2) will not apply, to such exchange.

See under s. 80.01(4) for detailed summary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Principal Amount non-application of s. 39(2) to exchange of U.S.-dollar notes 123
Tax Topics - Income Tax Act - Section 51.1 s. 51.1 exchange of U.S.-dollar notes 123
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(f.1) 0
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(4) s. 51.1 exchange of U.S.-dollar notes and ATR-66 debt slide 372

14 March 2014 Internal T.I. 2013-0507661I7 - Foreign Exchange - Loan Renewal

loan renewal v. novation

A U.S.-dollar borrowing of a subsidiary of the Ultimate Parent from a related company was not repaid when it matured but the loan instead was renewed, with an FX gain being recognized for income statement purposes but not tax purposes. After indicating that a s. 39(2) gain would arise only if there was a novation of the loan, CRA stated that "the courts have found that one of the main conditions for a novation to occur is that the parties have the intention to novate," and that "the automatic renewal of a loan does not, in and of itself, result in a novation and therefore, does not trigger the application of subsection 39(2) of the Act."

5 November 2013 External T.I. 2013-0501241E5 F - Application of subsection 39(2)

declared dividend as debt

Respecting whether s. 39(2) applied on the payment of a previously declared dividend, CRA stated (TaxInterpretations translation):

A dividend, at the moment of declaration, becomes a debt of the corporation which declared it to the shareholder (see in particular the decision of the Supreme Court of Canada in The Custodian v. Blucher [1927] S.C.R. 420, p. 425). Therefore, we are of the view that the foreign exchange gain or loss at the moment of payment of the dividend…relates to a debt and not to a transaction or event in respect of shares of the capital stock of the taxpayer.

2011 Ruling 2011-0395771R3 - 39(2) - Conversion of P/S to C/S

no s. 39(2) gain on conversion of US-dollar prefs

US-dollar denominated preferred shares of a Canadian corporation held by its non-resident parent are amended to add a conversion right, so that they are convertible into common shares having an equivalent fair market value at the time of conversion. On such a conversion, no gain or loss results under s. 39(2) as there is no change in the patrimony of the Canadian corporation as a result.

16 November 2009 External T.I. 2009-0317591E5 - FX gains/losses when partners assume ptnshp debt

assumption on s. 98(3) wind-up

Foreign exchange gains or losses generally can be recognized where foreign-currency denominated debt obligations of a partnership are assumed by the former partners on the dissolution of the partnership in accordance with s. 98(3).

5 October 2007 APFF Roundtable, 2007-0242441C6 -

...in respect of a gain or loss resulting from the disposition of a property that is a capital property...subsection 39(2) of the ITA will apply if, and only if, this gain or loss, as calculated in accordance with section 40 of the ITA, is solely attributable to the fluctuation in the value of a foreign currency relative to the Canadian currency.

23 July 2007 Ruling 2007-0234691I7 -

S.39(2) applies only if the gain or loss is solely attributable to the fluctuation of currency. Accordingly, if the gain or loss is not solely attributable to the fluctuation of the value of currency, in this case, on the dispositions of securities and commercial paper (other than those disposed of by virtue of maturing), the capital gain or loss realized will be under s. 39(1), so that the capital dividend account will be affected at the time of disposition rather than at year end. By way of contrast, s. 39(2) should apply with respect to foreign exchange losses sustained upon the disposition upon maturity of commercial paper.

23 July 2007 Internal T.I. 2007-0228601I7 -

s. 86 exchange of US-dollar denominated prefs does not affect patrimony of issuer

Where US-dollar denominated preferred shares in a wholly-owned subsidiary are redeemed through the issuance of Canadian-dollar denominated preferred shares having a higher stated capital than the Canadian-dollar equivalent of the value of the US-dollar denominated preferred shares at the time of their issue, there is a good argument that the subsidiary will not have sustained a loss as a result of the transaction as its "patrimony" will not be affected by the transaction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) 80

15 January 2007 External T.I. 2006-021680 -

The redemption of U.S.-dollar denominated preferred shares of the taxpayer gave rise to a capital loss under s. 39(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) 36

8 September 2005 External T.I. 2004-008508 -

s. 39(2) gain on conversion of US-dollar debt into common shares with different stated capital

Where the holders of US-dollar denominated convertible debentures of a Canadian public corporaton ("Pubco") convert their debentures into common shares at a time that the US dollar has depreciated relative to the issue date, Pubco will realize a gain under s. 39(2) assuming that the stated capital of the shares issued by Pubco on the conversion, measured at the time of the settlement of the debentures, is less than the Canadian-dollar equivalent of the debentures' principal on the date of their issue.

2000 External T.I. 2000-0044425 -

The CCRA accepts the reasoning in the MacMillan Bloedel decision. "It is not clear whether the reasoning can be applied to a purchase of shares where the purchase price is greater than the issue price in the foreign currency but is not determined by the terms of the shares."

19 November 1999 TEI Roundtable, 1999-0010360 -

MacMillan restricted to pref redemptions

Does CCRA accept MacMillan (where a s. 39(2) capital loss was recognized on the redemption of the preferred shares)? CCRA responded:

We accept the reasoning of the Federal Court of Appeal but are not prepared to extend the reasoning to a redemption of shares in general.

The case deals with the redemption of redeemable and retractable preferred shares which may be viewed as similar to the repayment of a debt obligation. Consequently, the application of this case is restricted to its facts and is confined to situations in which the shares redeemed are redeemable and retractable at a specific amount as specified in the terms and conditions of the shares.

23 January 1998 T.I. 972149 [change of currency without novation]

change of currency without novation

Where a loan payable by a Canadian corporation to its foreign parent is changed from Deutschemarks into Euros, there will not be a realization of foreign exchange gain or loss assuming that under German law a change in national currency will not result in a disposition, novation, settlement, extinguishment, etc., of those properties or liabilities affected by such change.

Income Tax Technical News No. 14, 9 December 1998

implied novation

As a result of the review, it is now our position that if a debt obligation is renegotiated otherwise than as provided for in its original terms, the determination of whether a change in its terms is a substitution of a debt obligation for another should be made in accordance with the law of the relevant jurisdiction.

. . . [A] rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms as to substitute a new obligation in its place, which is entirely inconsistent with the old, or, if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it.

28 February 1996 TI 960179

Where a debt denominated in U.S. dollars was replaced by a new debt obligation denominated in Canadian dollars whose amount was equivalent to the U.S.-dollar debt at the current exchange rate, there would be a foreign exchange gain recognized and no forgiven amount recognized.

4 June 1993 External T.I. 5-931384 -

A partnership realized capital losses under s. 39(2) on the repayment of U.S.-dollar denominated debt, with those losses being allocated to its partners. As s. 39(2) applied at the partnership level, the $200 limit did not apply.

7 July 1992 External T.I. 5-9215705 -

no s. 39(2) gain when Canadian partnership returning U.S.-dollar capital to a partner

The partnership accounts for a partnership between two Canadian residents (X and y) are denominated in U.S. dollars. X contributes U.S.$10 million to the Partnership while the Canadian dollar is at par, whereas Y has a nominal contribution (but also contributes valuable expertise etc.). The partnership agreement provides that on the ultimate dissolution of the Partnership, X is entitled to a return of its remaining capital contribution in U.S. dollars (together with any share of partnership income it has not yet withdrawn), while Y is entitled to the residual partnership equity (and is required to absorb any residual deficit).

As a result of the arrangements, when it is ultimately determined to discontinue the Partnership business and dissolve the Partnership., X has withdrawn U.S.$10 million (or Cdn. $12.5 million Canadian) from the Partnership so that it has a negative ACB of $2.5 million (triggered as a capital gain) and the $2.5 million required to be contributed by Y to the partnership to satisfy the withdrawal by X is added to the ACB of Y's interest in the partnership and results in a capital loss to Y on the disposition of that interest on the dissolution of the partnership.

Would s. 39(2) apply at the partnership level, so that the partnership realizes a loss from trading in its own interest?

CRA stated:

[A] partnership would not make a gain or sustain a loss for the purposes of subparagraph 96(1)(c)(i)… when it redeems its own interest because such a transaction is not a disposition of property by the partnership which gives rise to a gain or loss. In addition, under the general principles of commercial practice and accounting, a partnership would not be considered to have made a gain or loss in these circumstances because such items could not be considered to arise from the partnership business. Such a gain or loss only accrues to the partners by virtue of the partnership agreement which they have entered into and would be accounted for in the partner's capital accounts not the income accounts of the partnership.

17 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 2, ¶1094)

Accrued foreign exchange gains or losses on foreign currency deposits will not be considered to have been made or sustained until the funds are converted into another currency or are used to purchase a negotiable instrument or some other asset.

3 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 3, ¶1025)

Where there is a reduction in the U.S. dollar par value of the shares of a U.S. corporation through a distribution of U.S. dollars to the Canadian taxpayer, s. 39(2) will not apply, unless the reduction in cost base (computed in the Canadian-dollar equivalent at the time of payment) is sufficient to trigger the application of s. 40(3). If the gain on the reduction of paid-up capital of the shares calculated pursuant to s. 40(3) arises solely from the foreign currency fluctuation, s. 39(2) will be used to compute the capital gain. Otherwise, s. 39(1) will be used to compute the gain.

90 C.R. - Q51

The same criteria as set out in IT-448 apply to the question of whether a foreign currency obligation has changed sufficiently to trigger a foreign exchange gain or loss. If an assignment of a debt by the original lender to a new lender does not constitute a novation, and none of the terms of the debt instrument are varied, such an assignment will not trigger a foreign exchange gain or loss.

79 C.R. - Q.35

Where funds of a particular currency are moved from one form of deposit to another (e.g., the rollover of term deposits and GIC's) no gain or loss is realized.

Where a capital obligation of a foreign affiliate is repaid, it will realize a gain or loss.

IT-270R2 "Foreign Tax Credit" under "Amount Paid by the Taxpayer for the Year"

Discussion of application of s. 39(2) to late payments or overpayments of foreign taxes.

Calculating and reporting your capital gains and losses

Use the exchange rate that was in effect on the day of the transaction or, if there were transactions at various times throughout the year, you can use the average annual exchange rate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) 33

IT95R "Foreign Exchange Gains and Losses" 1 January 1995.

13. ...Foreign currency funds on deposit are not considered to be disposed of until they are converted into another currency or are used to purchase a negotiable instrument or some other asset, i.e. foreign funds on deposit may be moved from one form of deposit to another as long as such funds can continue to be viewed as "on deposit". Term deposits, guaranteed investment certificates and other similar deposits which are in fact not negotiable, are considered funds on deposit. Transactions in which foreign currency funds are invested in negotiable instruments such as notes, bonds mortgages, debentures, U.S. government treasury bills and notes and U.S. commercial paper, will require a foreign exchange gain or loss calculation at the time the foreign currency funds are used to purchase these investments and as well, each time such investments mature or are otherwise disposed of, whether or not the funds are rolled over into like securities.

Articles

Didier Fréchette, Ryan Rabinovitch, "Current Issues Involving Foreign Exchange", 2015 CTF Annual Conference paper

Dealing with FX gain on U.S. dollar loan by Can LP to Cansub to fund on-loan to US Opco: asymmetrical application where s. 51 applies (pp. 16-19)

A private equity fund, Can LP, makes a US$100 million loan to its wholly owned Canadian subsidiary, Cansub. Cansub, in turn, uses the funds to make a loan denominated in US dollars to its US operating subsidiary, US Opco. At the time the loan is made, the Canadian dollar is at par with the US dollar. Subsequently, the value of the US dollar increases to Cdn$l.25….

[T]he following steps could be carried out...:

1) Cansub establishes Forco in a jurisdiction that has an income tax treaty with the United States and Canada.

2) Cansub transfers the US Opco loan to Forceco as consideration for shares of Foreco.

3) The Cansub loan is amended to add a conversion right…

4) Can LP exercises the conversion right and converts the Cansub loan into preferred shares of Cansub having a redemption and liquidation value equal to the outstanding amount under the loan, converted into Canadian dollars on the date of the conversion…. Cansub realizes a foreign exchange loss of Cdn$25 million. This loss is used to offset the Cdn$25 million gain realized upon the transfer of the US Opco loan to Forco.

[P]ursuant to paragraph 51(1)(c), the conversion [in 4] should be deemed not to be a disposition for Can LP... .

[T]he application of section 51 to the transaction should not affect the issue of whether a gain or loss is realized by the debtor (Cansub)….[T]he amount paid pursuant to the agreement of the parties and the amount added to stated capital would be equal to the amount outstanding under the debt, converted into Canadian dollars on the date of the conversion (namely, Cdn$125 million). ...

The above example illustrates the asymmetry that is inherent in section 51. It is unclear whether the CRA would seek to invoke GAAR in this scenario. As mentioned above, the CRA has noted in the past, with respect to a convertible debenture issued by a Canadian corporation to its US parent, that this type of arrangement seemed "artificial" and could be challenged if it gave rise to "anomalous tax results." [f.n. 67: …"Canada Revenue Agency Round Table," in the 2009 Conference Report, question 33]

Realization of gain by debtor but not creditor on internal assumption (pp. 19-20)

In both [rulings: 2007-0239291R3, 2007-0252491R3] the taxpayer had capital losses that would otherwise have expired as a result of the acquisition of control, and wanted to trigger the gain on its external debt denominated in US dollars prior to the acquisition of control. [f.n. 71: The transactions implemented in the above rulings preceded the introduction of subsection 111(2).]

The taxpayer in the rulings ("Parentco") incorporated a new wholly owned Canadian subsidiary ("Newco"). Parentco then transferred assets to Newco in consideration for Newco shares and the assumption by Newco of a portion of a Parentco external debt denominated in US dollars. Upon the assumption, Newco was added as a "co-obligor" (without Parentco being correspondingly removed as co-obligor or guarantor), and Newco and Parentco became jointly and severally liable for the entirety of the debt. The taxpayers represented that, under the applicable commercial law, the assumption did not result in a novation…

The CRA confirmed in the rulings that, as a result of the assumption, Parentco would "make a gain" in respect of the assumed debt under subsection 39(2). Because Parentco remained liable for the entirety of the assumed debt as co-obligor and because there was neither a novation of the original debt nor a recession, one might wonder why Parentco would be considered to have realized a gain. ...

[I]t seems reasonable to suggest that, because the assumed debt formed part of the consideration for the transfer of assets by Parentco to Newco, as between Parentco and Newco, Newco became the "primary debtor"…

While the creditors preserved all of their rights against the original debtor, it appears that, as between the two co-obligors, Parentco's position became similar to that of a guarantor. In that sense, Parentco was, in effect, "relieved" of its obligation…

CRA confirmed that the proposed assumption of the debt by Newco would not, in and of itself, result in a disposition of the debt for the holders... .

The rulings thus confirmed the asymmetric treatment of the transaction: the assumption of a portion of the original debt resulted in the triggering of a foreign exchange gain for the debtor, but was a non-event as far as the debtholders were concerned.

When an FX-denominated debt is repaid by issuing a replacement debt denominated in the same currency, there is an argument that no s. 39(2) gain or loss is realized (pp. 23-24)

Somewhat surprisingly, ...Imperial Oil...cast doubt on the soundness of the CRA's view regarding the foreign exchange implications of a debt repayment. Relying on...Marine Midland...the court indicated that the mere repayment of a foreign-currency-denominated principal in the same currency could not yield a profit or a loss, and that any appreciation or depreciation in principal amount does not result from the simple fact that the amount has been borrowed and repaid.

[I]n Income Tax Technical News no. 38, the CRA stated:

[W]here U.S. dollar denominated loans are repaid with newly borrowed U.S. dollars…a taxpayer will be considered to have "made a gain" or "sustained a loss"….

The analysis is less straightforward when a foreign-currency-denominated debt is repaid with another debt, particularly when that debt is denominated in the same currency….To the extent that the taxpayer remains equally exposed to changes in the value of the relevant currency before and after a debt-for-debt exchange, it could be argued that no gain or loss has been "realized"…

Carrie Smit, "Debt Restructuring and the Falling Canadian Dollar"

If a Canadian corporate debtor, which borrowed US$100 at par, restructures its debt, at a time that the US dollar is now worth Cdn.$1.50, by settling that debt for a payment of US$20, it will realize an economic gain of Cdn.$70 (Cdn.$100 - Cdn.$30). That gain for tax purposes will consist of a forgiven amount of Cdn.$80 (as per s. 80(2)(k)) and a s. 39(2) FX loss of $10.

[I]f the debtor has non-capital or capital loss carryforwards, undepreciated capital cost, cumulative eligible capital, resource pools, or adjusted cost base in certain capital property, those attributes must be used before the forgiven amount can be applied against the current year foreign exchange loss. Accordingly, planning to utilize or move other more valuable tax attributes prior to the debt forgiveness should be considered (p. 6)

Amélie Guimont, "Denial of Capital Losses from Foreign Currency Fluctuations", Canadian Tax Focus, Vol. 3, No. 2, May 2013, p.4.

... New subsection 39(2) does not apply to any capital gain or capital loss to which subsection 39(1) applies. ...Therefore, subsection 39(2) will apply to debtors upon the repayment of debt and similar obligations that are denominated in foreign currency. ...

...[S]uppose that a Canadian corporation (the creditor) sustains a foreign exchange loss on the disposition to one of its foreign affiliates (FA 1) of an obligation denominated in foreign currency and owed by another foreign affiliate (FA 2). The creditor holds the obligation on account of capital, and the transfer occurs at fair market value. In this case, there is no capital loss: paragraph 40(2)(e.1) applies to deem the loss to be nil (because the loss is sustained on the disposition of an obligation between related parties and the obligation is still payable after the transfer by the debtor to the new creditor). Paragraph 53(1)(f.11) adds the amount of the foreign exchange capital loss to the adjusted cost base (ACB) of the obligation to FA 1. Because FA 1 is not liable to income tax in Canada, this increase in the ACB is irrelevant (except for the purposes of determining the FAPI and surplus of FA 1). Thus, even though the loss is real, it is still eliminated from the standpoint of the Canadian tax base.

Eric Bretson, Heather Kerr, "Tax Planning for Foreign Currency", 2009 Conference Report: discussion of relationship between ss. 39(1) and (2).

K. A. Siobhan Monaghan, Raj Juneja, "Selected Issues in Cross-Border Debt Financing", 2006 Conference Report, c. 16: includes discussion of foreign exchange issue on tower structures.

H. Berwick, E. Richardson, "Conversion to the Euro-Taxable Event?", Corporate Finance, Vol. VI, No. 2, p. 500.

Subsection 39(2.02)

Articles

Carrie Aiken, Johnson Tai, "Debt Restructuring Transactions – Issues, Strategies and Trends", 2016 CTF Annual Conference draft paper

Background to s. 39(2.01) (pp. 13-14

Many Canadian companies have or had significant accrued foreign currency gains in their US dollar denominated debts, particularly where the debts were originally issued in 2001 or 2002… . Many of those debts had ten year terms and matured in 2011 and 2012, when the Canadian dollar was at or near parity… .

One of main purposes test (p. 17)

In order to defer recognition of such large foreign currency gains, many Canadian companies effectively used debt parking techniques that had become prohibited by the debt parking provisions introduced in 1995. As will be explained below, these techniques, if designed and implemented properly, could defer recognition of the accrued foreign currency gain and avoid the debt parking provisions.

Subsection 39(2.1) - Upstream loans — transitional set-off

Administrative Policy

28 May 2015 IFA Roundtable Q. 8, 2015-0581561C6 - IFA 2015 Q.8: 39(2.1) and FCTR

gains under s. 39(2) include s. 261(10) gains

A corporation resident in Canada (the "borrowing party"), which elected for the U.S. dollar as its functional currency election starting in 2014 borrowed in U.S. dollars from its foreign affiliate (also a calendar year taxpayer) prior to August 20, 2011 and repaid the loan in 2015. S. 261(10) deemed the borrowing party to make a gain or sustain a loss in 2015 as a result of the currency fluctuations that occurred prior to 2014. Given that the matching condition under s. 39(2.1) requires that the borrowing party's capital gain or loss be determined under s. 39(2), will s. 39(2) apply to a gain that is "made" or "sustained" (by virtue of s. 261(10)(a) or (b)) respecting the loan repayment? CRA responded:

[A] gain that is deemed to be "made", or a loss that is deemed to be "sustained", under subsection 261(10) is a gain or loss that is contemplated by subsection 39(2) such that it would, in turn, be deemed to be a capital gain or a capital loss from the disposition of currency. We…find textual support…in the choice… to use the terms "make a gain" and "sustain a loss" in subsection 261(10) which…suggests that the provision is meant to tie in with subsection 39(2).

Thus…it should be possible for subsection 39(2.1) to apply… . However…where a taxpayer and its foreign affiliate do not have the same year end, and as a result do not convert to the functional currency regime on the same day, the matching requirement would not generally be expected to be met, and subsection 39(2.1) would not apply.

Articles

Geoffrey S. Turner, "Transitional Tax Treatment of Grandfathered Upstream Loans – Repayment Deadline Approaching", International Tax (Wolters Kluwer CCH), No. 88, June 2016, p. 7

Purpose of eliminating FAPI whipsaw mismatch (e.g., where US dollar upstream loan) due to sub’s taxable capital gain or allowable capital loss not being off-settable against parent’s loss or gain (pp. 7-8)

[S]ubsection 39(2.1) and paragraph 95(2)(g.04)…appropriately recognize that taxpayers may have made historic upstream loans in a foreign currency, exposing themselves to the risk of the FAPI whipsaw mismatch but with the original intention of leaving the upstream loans outstanding indefinitely so as to defer any adverse consequences. The new upstream loan rules…may have caused taxpayers to accelerate repayment of pre-existing upstream loans, and consequently to realize the previously deferred adverse foreign exchange consequences.

Subsection 39(3) - Gain in respect of purchase of bonds, etc., by issuer

Administrative Policy

2014 November 18 TEI Roundtable, Q. E.3

no open market purchase if not anonymous

Would s. 39(3) apply to the following repurchases by a public company of its bonds?

  1. A public offer to repurchase a predetermined number at a specified price.
  2. A repurchase transaction directly with a selected bondholder.
  3. Exercise of a call to force the redemption of bonds.

CRA responded:

If the vendor and the purchaser have made an arrangement with respect to the purchase and sale of the obligation in question, the purchase would not be considered to be carried out in the manner in which any member of the public would normally purchase obligations in the open market. Indeed, if the identities of both the purchaser and the vendor are known to each other with certainty, generally the bonds would not be considered to be purchased [as described in s. 39(3).]

Accordingly, none of the three examples would come within s. 39(3).

20 April 2009 Internal T.I. 2008-0302511I7 - LYONS - Open Market Purchase

s. 80 does not apply to open market purchases

On an open market purchase of liquid yield option notes ("Lyons"), s. 80 will not apply on the repurchase if s. 39(3) so applies (i.e., there is a gain on capital account). CRA stated:

[S]ubsection 39(3)...allow[s] for a capital gain or capital loss where a taxpayer purchases in the open market any obligation earlier issued by the taxpayer and these provisions would apply in these current circumstances. The provisions do not...affect transactions which are income transactions under the general rules for distinguishing income from a capital gain. ...Subsection 248(27) of the Act clarifies that the open market purchase of any portion of an obligation under subsection 39(3) of the Act is treated on the same basis as the purchase of the entire obligation. Further, the definition in subsection 80(1) of the Act of "forgiven amount", at paragraph (d) of the formula calculating B, clarifies that any portion of a debt extinguished under circumstances to which subsection 39(3) of the Act applies is not subject to the application of subsection 80(1) of the Act. Subsection 39(3) of the Act overrides any of the more general provisions. Accordingly, in our view, section 80 would not apply in the situation described.

S.39(3) does not provide for an apportionment between principal and interest upon repurchase on the open market, and there will be an inclusion in income of accrued interest that no longer is payable as a result of the repurchase.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount s. 80 does not apply to open market purchases 193

Articles

Carrie Smit, "Repurchasing Underwater US Dollar Notes", International Tax (Wolters Kluwer), August 2015, No. 83.

Separate forgiven amount and s. 39(2) loss on note tender offer repurchase

[C]onsider notes with a principal amount (and issuance price) of US$ 100 million, which were issued when the Canadian dollar and US dollar were at par and which are repurchased under a Tender Offer for US$70 million when US$1.00 equals CDN$1.20. …[Under s. 80(2) [k)] the principal amount of US$100 million and payment of US$70 million must both be converted into Canadian dollars using the rate applicable when the notes were issued (which was par). This results in a forgiven amount of CDN$30 million. In addition, the resulting foreign exchange gain or loss under subsection 39(2)… must also be computed…in respect of the portion of the notes that are actually repaid. In the above example, a foreign exchange loss of CDN$14 million will be realized on the repayment of the US$70 million of notes. The CDN$30 million debt forgiveness and CDN$14 million foreign exchange loss results in a "net" adverse tax effect to the issuer of CDN$16 million… . Unfortunately, the issuer may not be able to apply the foreign exchange loss to offset a portion of the forgiven amount…

Comparison with open market purchase

]T]he capital gain realized under subsection 39(3) is equal to the excess of the amount for which the obligation was issued over the purchase price to be paid. ...CRA...has taken the position [fn 4: …2008-0302511I7... .]… that the amount for which the obligation was issued, and the purchase price to be paid, need to be translated into Canadian dollars using the relevant exchange rates at the times such amounts arose. For example, where notes with a principal amount (and issuance price) of US$100 million were issued when the Canadian dollar and US dollar were at par, and those notes are repurchased on the open market for US$70 million when US$1.00 equals CDN$1.20, the resulting capital gain under subsection 39(3) appears to equal CDN$16 million. [fn 5: Cdn$ 100 million - Cdn$84 million.] It is the CRA's position [fn 6: Supra note 4.] that subsection 39(2) will not also apply to an Open Market Purchase, as the capital gain calculated under subsection 39(3) reflects both the economic gain and the foreign exchange gain or loss.

The resulting capital gain of CDN$16 million can be compared [with] the net adverse tax effect to the issuer of the Tender Offer… of a CDN$30 million forgiven amount and a CDN$14 million foreign exchange capital loss….

Forgiven amount does not arise on an open market purchase under s. 39(3)

[U]nder paragraph d of the formula B in the definition of forgiven amount in subsection 80(1)..., the forgiven amount is to be reduced by the capital gain realized under subsection 39(3).

…[I]n the situation of an Open Market Purchase of underwater US dollar denominated notes…the forgiven amount is to be calculated using the exchange rate applicable at the time the obligation was issued. Using the first example above (US$100 million of notes are repurchased for US$70 million), this would result in a forgiven amount of CDN$30 million, which would be reduced by the amount of the capital gain resulting from the application of subsection 39(3). As this capital gain is only CDN$16 million, this would leave a forgiven amount of Cdn$14 million. The total net adverse tax effect to the issuer of the Open Market Purchase would then be CDN$30 million (CDN$16 million, capital gain under subsection 39(3) and CDN$14 million forgiven amount under section 80). Clearly, this is not an appropriate result….

The CRA appears to have recognized this issue in a 2008 technical interpretation [2008-0302511I7], where it took the position that section 80 should not apply at all to an Open Market Purchase to which subsection 39(3) applies.

Hugh Berwick, Derek Chiasson, "Repayment or Repurchase of Debt", Corporate Finance, Vol. VI, No. 1, 1998, p. 457: Discussion of whether s. 18(9.1) or 20(1)(f) applies to open market purchases of foreign currency bonds.

Subsection 39(4) - Election concerning disposition of Canadian securities

Cases

Rezek v. Canada, 2005 DTC 5373, 2005 FCA 227

After confirming the Minister's position that the taxpayer and his wife were engaged in spread transactions as a partnership, and therefore that losses generated by the taxpayer could not be exclusively allocated to him (see summaries under ss. 96 and 248(1) - "property"), Rothstein JA found that s. 39(4) elections that were made with late-filed returns were valid.

The Minister argued that the s. 150(1) requirement that returns be filed on 30 April of the year following the taxation year, and the s. 39(4) requirement that the election be filed with a return, established a 30 April deadline for the election. Rothstein JA stated (at para. 114):

Where the Act prescribes sanctions for late filing, those sanctions will apply. Where it does not, the Court will not read into the Act sanctions that do not appear.

Satinder v. Canada (Attorney General), 2003 DTC 5022, 2002 FCA 491

The filing of elections under s. 39(4) by the appellants had no effect on interest that had accrued on bonds that were redeemed by the appellants. Such interest was included in their income under s. 12(1)(c) rather than being a capital gain.

Satinder v. The Queen, 95 DTC 5340 (FCA)

The difference between the $152,078 purchase price for a Government of Canada Treasury Bill, which the taxpayer acquired on May 2, 1989, and its face value of $170,000, which the taxpayer received on the maturity of the treasury bill on April 27, 1990 was correctly treated by Revenue Canada as interest income for the taxpayer's 1990 taxation year, rather than as a payment of principal to which s. 39(4) applied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) T-Bill discounts were interest 131

The Queen v. Loewen, 93 DTC 5109 (FCTD)

In finding that a purported election made by the taxpayer only after an audit by Revenue Canada was invalid, Dubé J. stated (p. 5115):

"... The Act contains no provisions specifically allowing a taxpayer to file late under subsection 39(4). Consequently, the taxpayer's late election is not valid."

See Also

Sandnes v. The Queen, 2004 DTC 2466, 2004 TCC 244

Before going on to find that the taxpayer's transaction in shares of a public company were on capital account rather than adventures in the nature of trade, Miller J. noted that he was influenced by the significant uncertainties as to whether a late s. 39(4) election would be available to the taxpayer if his transactions had been found to be adventures in the nature of trade.

Robertson v. The Queen, 97 DTC 449 (TCC)

The taxpayer was found not to have made a valid election under s. 39(4) given that the election form filed with its return was incomplete, and the completed election form was not filed until later.

Taylor v. MNR, 90 DTC 1917 (TCC)

The Minister was not compelled to accept an s. 39(4) election in an amended return which the taxpayer filed four years after the taxation year in question.

Financial Collection Agencies (Quebec) Ltd. v. MNR, 90 DTC 1040 (TCC)

Before finding a late election under s. 39(4) to be ineffective, Rip J. stated (p. 1049):

"Just because it may be obvious from the return of income how a taxpayer wishes to report a particular transaction or item of income does not in itself free the taxpayer of the necessity of filing a form of election as required."

Administrative Policy

18 September 2013 Internal T.I. 2013-0487871I7 - Filing Due Date for Elections

Regarding elections that are required to be filed with the taxpayer's return, CRA noted that Rezek established that "where an election is required to be filed in the taxpayer's return of income for the year, such an election would not be considered late-filed if the election was filed with a return of income for that year that was late-filed," and then stated:

[F]or the purpose of calculating the late-filing penalty under subsection 220(3.5), the date the election is required to be filed is the date that the return of income for the year was actually filed and not the filing-due date for the particular return of income for the year.

Therefore, where an election that is required to be filed in the taxpayer's return of income for the year is not filed with that return of income but rather is filed later, that election, if accepted by the Minister, is technically considered to be late-filed, even if the election is filed before the filing due date of the particular return of income.

However, as indicated in Rulings document 2012-046598, it may not be possible to make such an election in an electronically filed return of income. As such, the CRA might want to consider what form of administrative relief, if any, should be provided in such circumstances.

24 May 2001 External T.I. 2001-006904 -

If a taxpayer is eligible to make the s. 39(4) election and does so, the gain or loss on a short sale of shares that are Canadian securities would be on account of capital.

9 September 1999 TI 991439

"For purposes of the election under subsection 39(4) of the Income Tax Act (the Act), it is the Department's position that a Canadian security includes the short sale of a security described in subsection 39(6) of the Act."

Subsection 39(4.1) - Members of partnerships

Administrative Policy

20 June 2016 External T.I. 2014-0559961E5 F - Subsection 39(4) - securities owned by partnership

limited partners carry on the trading business of their LP for purposes of the election

A hedge fund LP fund invests most of its assets in highly speculative securities. Can (passive) limited partners still make elections under s. 39(4)? CRA responded (TI translation):

[A] limited partner of an LP will be considered to be carrying on the business of the LP in applying subsections 39(4) and 39(5). The determination of whether a partner is a taxpayer described in subsection 39(5) is a question of fact… . [P]aragraph 11 of… IT-479R…contains information that could be useful in determining…whether a limited partner of an LP in the described situation is a trader or dealer in securities for the purposes of subsection 39(5).

12 February 2003 External T.I. 2002-014142 -

A s. 39(4) election made by a member of a second-tier partnership would not apply to Canadian securities disposed of by the first-tier partnership.

Subsection 39(5) - Exception

Administrative Policy

31 January 1995 T.I. 942569 (C.T.O. "Venture Capital Corporation")

"It is likely that we would consider a venture capital corporation to be a 'trader or dealer in securities', within the meaning of paragraph 39(5)(a) of the Act, unless the facts indicated that the securities were acquired, not as part of the venture capital corporation's business, but as an adventure in the nature of trade."

Paragraph 39(5)(a)

Cases

Kane v. The Queen, 94 DTC 6671 (FCTD)

The taxpayer was not able to rely on an election under s. 39(4) in unsuccessfully seeking to establish that gains realized by him on the disposition of shares of a junior mining corporation ("Orell") were on capital account given that he had special knowledge of the market in which the Orell shares were traded: he was a director, the president, an insider and a promoter for purposes of the B.C. Securities Act; and he was directly involved in the mining ventures of Orell and in organizing its public financing offerings.

Noël J. stated (p. 6674) that it was clear that the legislator did not intend individuals who by virtue of being of being registered or licensed traders or dealers in securities:

"Have professional knowledge of the market in which they deal to benefit from the election. I believe that in determining the availability of the election to one who trades in securities without being licensed or registered, the focus should be the same, namely, does the author of the transactions in question possess a particular or special knowledge of the market in which he trades?"

The Queen v. Vancouver Art Metal Works Ltd., 93 DTC 5116 (FCA)

In rejecting the taxpayer's submission that s. 39(5)(a) should be limited to persons who are registered or licensed by regulatory authorities to buy and sell securities, Létourneau J.A. stated (p. 5120) that:

"The words 'trader or dealer in securities' ... are broad enough to include anyone other than a person engaged in an adventure or concern in the nature of trade"

See Also

Zsebok v. The Queen, 2012 DTC 1127 [at 3145], 2012 TCC 99

Applying the Kane decision, Sheridan J. agreed with the Minister that the taxpayer, having no "particular or specialized knowledge of the market in which he trades", did not qualify as a trader under s. 39(5)(a). The taxpayer had some university education in economics and accounting, but no professional training in shares trading. Sheridan J. stated (at para. 11):

The most that can be taken from the evidence is that his employment duties provided him with some experience in share trading, including exposure to various internet tools that could be used to track the market. But he had no specialized knowledge of the shares traded; as for the internet programs he used, these were available to the general public simply by paying the requisite subscription price.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss leveraged frequent stock trading 123

Administrative Policy

24 March 2015 External T.I. 2012-0470991E5 F - Mutual fund trust

election can be made by leveraged day-trading MFT

Would a s. 39(4) election apply even if a mutual fund trust was a "day trader" that used margin? CRA stated (TaxInterpretations translation):

[T]he election under subsection 39(4) does not apply to a disposition of a Canadian security by a taxpayer who, at the time of the disposition, is a trader or dealer in securities… . These exceptions do not apply to a MFT or a mutual fund corporation. The election made by a MFT under subsection 39(4) thus is always applicable even where the trust has one or other of the statuses listed in paragraphs 39(5)(a) to (g)... .

…[S]ubsection 104(21) expressly provides for the preservation of the character of net taxable capital gains that a trust allocates to its beneficiaries… . [T]he election and allocation of a taxable capital gain in accordance with subsections 39(4) and 104(21) determines the nature of the amount allocated to a holder of units of a MFT. In context, the latter generally need not examine the facts and circumstances respecting the given situation to determine the nature of an amount allocated by the trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) flow-through to unitholder of capital gain designated by MFT 175
Tax Topics - Income Tax Act - Section 132 - Subsection 132(6) day trading included in investment undertaking 56
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose s. 39(4) presumption establishing expense non-deductibility 60
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares capital v. income character determined at trust level 88

6 October 2010 External T.I. 2010-0381231E5 - Extensive Trading in Securities

A "trader or dealer in securities" includes not only brokers or professionals who are registered or licensed professionally, but also includes individuals or corporations that engage in the business of dealing in securities when such dealings amount to carrying on a business.

15 September 1994 External T.I. 5-941818 -

It is very likely that a venture capital corporation will be a trader or dealer in securities because it will not be a passive investor but, rather, will carry on the business for which it was incorporated.

93 C.R. - Q. 52

The conclusion in the Vancouver Art Metal Works was that a taxpayer loses rights under s. 39(4) "when he becomes a trader or a dealer - that is to say, when he professionally engages in the business of dealing in securities or when his dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade."

25 April 1990 Memorandum (September 1990 Access Letter, ¶1413)

An officer or employee of a brokerage firm will be assimilated to a trader or dealer in securities only in respect of his transactions in securities promoted or underwritten by his employer, or securities regarding which he uses privileged information to realize a quick gain.

86 C.R. - Q.16

Venture capital corporations generally would not be regarded as traders or dealers.

Subsection 39(9)

Administrative Policy

S4-F8-C1 - Business Investment Losses

Example

1.64 ... In the 2015 tax year, Mr. R has a capital loss of $300,000 from a disposition of a debt that was owing to him ... an SBC [that] qualifies ... as a business investment loss. ...

...

The subsection 39(9) amount in respect of Mr. R’s disposition of the debt will be the lesser of:

  • the business investment loss otherwise determined from the disposition($300,000); and
  • the total of all amounts previously claimed by Mr. R in a prior tax year as a capital gains exemption ($120,000).

...

Therefore, Mr. R’s business investment loss from the disposition of the debt, under paragraph 39(1)(c), is $180,000 ($300,000 - $120,000).

...

The portion of the capital loss that does not qualify as a business investment loss because of the reduction under subparagraph 39(1)(c)(viii) (the $120,000 computed under subsection 39(9)) remains a capital loss under paragraph 39(1)(b). ... Therefore, in connection with the disposition of the debt, Mr. R’s 2015 tax return will also reflect an allowable capital loss in the amount of $60,000 ($120,000 x one-half).

Subsection 39(12) - Guarantees

Cases

Abrametz v. Canada, 2009 DTC 5828, 2009 FCA 111

The Trial Judge erred in implicitly treating the taxpayer's claim for a business investment loss as being governed by s. 39(12). The principal purpose of this provision was merely to loosen the timing requirements for the corporation in question to qualify as a small business corporation. However, in this case, the Trial Judge had been correct in finding that there was insufficient evidence to establish that the corporation carried on an active business, so that it did not qualify as a small business corporation at the relevant times.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) 187

See Also

Gordon v. The Queen, 96 DTC 1554 (TCC)

After finding that an amount paid by the taxpayer to related persons pursuant to the taxpayer's guarantee of an obligation of a corporation owned by him, was an allowable business investment loss, McArthur TCJ. stated (at p. 1558) that he found:

"nothing in subsection 39(12) that operates to preclude a taxpayer from claiming as a debt an amount paid to a related company where the related company was a small business corporation at the time when the debt was disposed of."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) income-producing purpose at time guarantee given 177