Principal Issues: [TaxInterpretations translation] 1. Will a taxpayer realize a foreign exchange gain or loss on the use of foreign currency funds to acquire U.S. corporation shares that are capital property of the taxpayer?
2. How to calculate the capital gain or loss on investments other than funds on deposit paid and sold in foreign currency.
Position: 1. Yes.
2. The gain or loss on the sale of the investments will be calculated by converting the adjusted cost base and the proceeds of disposition of the investments into Canadian currency using the exchange rate prevailing at the relevant time. Specifically, the adjusted cost base is to be converted into Canadian currency using the rate of exchange prevailing at the time the relevant investments were acquired and the proceeds of disposition of the investments are to be converted using the rate of exchange prevailing at the time the investments were disposed of.
Reasons: 1. Paragraph 13 IT-95R.
2. Gaynor v. La Reine (FCA) 91 DTC 5288
CRA PUBLICATIONS: F2007-024244, F2007-0237791I7, IT-95R
SECTION OF THE ACT: 39
HAA: 7007-4
XXXXXXXXXX 2007-024371 Sylvie Labarre, CA April 28, 2008
Dear Sir,
Subject: Foreign exchange gains and losses
This is in response to your letter of February 20, 2007 requesting our opinion on computing gain and loss on the acquisition and disposition of securities denominated in foreign currency.
First, you asked us for clarification of the second part of paragraph 13 of Interpretation Bulletin IT-95R regarding the realization of a foreign exchange gain or loss on the use of foreign currency funds. Second, you asked whether, instead of recognizing the fluctuation of the foreign currency as soon as there is a transaction of purchase and sale of investments other than funds on deposit, you can use a method that would recognize a fluctuation only when the foreign currency funds are exchanged for Canadian money.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
For the purposes of this letter, we have assumed that your investments are capital property since one of your questions relates to paragraph 13 of the Interpretation Bulletin (the "Bulletin"). However, a review of all the relevant facts would be required to confirm or deny that that is the case in your situation. The second part of paragraph 13 of the Bulletin reads as follows:
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.
Paragraph 13 of the Bulletin is an interpretation of when a foreign exchange gain or loss on capital account is realized. The acquisition of a negotiable instrument or other property with foreign currency funds constitutes a realization of the foreign currency funds. The authors provide examples of a negotiable instrument whose acquisition thus leads to the computation of a foreign exchange gain or loss on capital account. However, these examples do not represent an exhaustive list of what we consider to be negotiable instruments. In addition, the phrase "or some other asset" is added after the phrase "negotiable instrument". Thus, the use of foreign currency funds that could result in a foreign exchange gain or loss is not limited to the acquisition of negotiable instruments but also includes the acquisition of any other property. Consequently, assuming that the transactions are on capital account, there will be a foreign exchange gain or loss calculation in respect of foreign currency funds used to acquire the property that is the corporate shares purchased in the US market.
Where there is a sale of foreign currency investments other than funds on deposit ("investments"), the CRA's position is that the gain or loss on the sale of the investments will be computed by converting the adjusted cost base and the proceeds of disposition of the investments into Canadian currency using the exchange rate prevailing at the relevant time. Specifically, the CRA's position is that the adjusted cost base is to be converted into Canadian currency using the exchange rate prevailing at the time of the acquisition of the subject investments, and the proceeds of disposition of the investments are to be converted into Canadian currency using the exchange rate prevailing at the time of disposition of those investments. This position is based on a decision of the Tax Court of Canada. The fluctuation of the foreign currency relative to the Canadian currency will be recognized at the time of disposition of the investments. We do not allow an individual investor to use the method you advocate that would delay recognition of the foreign currency fluctuation.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.