In order to hedge a U.S.-dollar Loan made by it to its Canadian subsidiary (Opco, whose tax reporting currency was the U.S. dollar), Opco (whose reporting currency was the Canadian dollar) entered into a Hedging Agreements with its non-resident Parent. When the Loan to Opco was settled at a gain, Holdco realized foreign exchange losses on settlement of the Hedging Agreements.
In finding that Holdco and Parent did not have different tax reporting currencies, sot that this condition in s. 261(20) was not met, CRA stated:
If Parent had Canadian tax results for the taxation years in that period, subsection 261(2) would require that Parent’s Canadian tax results be determined in Canadian currency, as Parent is not eligible as a non-resident to make a functional currency election. As a result, Parent’s tax reporting currency for those taxation years would be Canadian currency, the same tax reporting currency as Holdco. Alternatively, if Parent did not have any Canadian tax results for the taxation years in which the Hedging Agreements were outstanding, it would not have had a tax reporting currency for those years.
In going on to find that s. 261(2) could not be applied on the basis that the Hedging Agreements were part of the same specified transaction as the Loan, CRA stated:
[T]he gain or loss in respect of the settlement of the hedging arrangement and the gain or loss in respect of the settlement of the liability are nevertheless still taxed as separate transactions. In our view, the same principles apply for purposes of subsection 261(21)… .