S. 261(6.1) deems a foreign affiliate, for purposes of computing foreign accrual property income, to have an elected functional currency that is the same as that of the Canadian taxpayer of which it is a FA. Suppose that FA, a U.S. subsidiary of Cansub, which has elected to have the U.S. dollar as its functional currency, makes a U.S.-dollar loan to Parent (which has the Canadian dollar as its functional currency and is the parent of Cansub) and Parent hedges this U.S. dollar exposure by entering into a Canadian-U.S. dollar cross-currency swap with a bank. If Parent realizes an FX loss on the maturity of the loan to it, would this loss be denied under s. 261(21)?
CRA responded that s. 261(21) would apply in these circumstances, mainly because the loan is on FAPI account, and therefore within the scope of s. 261(6.1), so that FA would have a tax-reporting currency of the U.S. dollar.