The Taxpayer, a taxable Canadian corporation, used the proceeds of a U.S.-dollar loan to subscribe for shares of a wholly-owned foreign affiliate (“Subsidiary”). After receiving a dividend, which the Taxpayer had treated in part as a return-of-capital and in part as an exempt dividend, Subsidiary was wound-up (at a time that its net worth was nil), with the Taxpayer realizing a capital loss, which was entirely attributable to the depreciation in the U.S. dollar. The Taxpayer repaid the loan in a subsequent year and realized a capital gain.
In finding that s. 93(2) applied to reduce the capital loss, the Directorate stated:
[T]he term "loss" in subsection 93(2) cannot be interpreted to exclude a loss realized by a taxpayer on the disposition of shares of a FA solely because of a fluctuation in the value of a foreign currency relative to Canadian currency. …
In addition … February 24, 2004 Legislative Proposals … which provides relief from the application of the loss limitation rule in subsection 93(2) in certain circumstances, confirms, in our view, that this provision is technically applicable in a situation where a loss on the disposition of shares of a FA is solely due to a currency fluctuation.