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).
CRA considers that any FX loss realized by Parent on maturity of the loan would be denied by s. 261(21) given that the loan made by FA was on FAPI account – even if Parent had entered into a cross-currency swap to hedge its U.S.-dollar exposure under this loan and thus realized a (supposedly) offsetting gain on the swap.