The taxpayer had a US dollar bank account into which it deposited US dollars from its sales and from which it lent US dollars to affiliates (in this case, a non-interest-bearing loan to its parent) which were repaid in US currency, which it deposited to that bank account. The Directorate rejected the taxpayer’s position that the advance to the parent came within the position in IT-95R, para. 13 that there was no realization of FX gains or losses where there was a mere change in the for in which money was held on deposit, stating:
[Such] position with respect to money on deposit does not cover situations where an investment in the form of a debt or loan, as in this situation, is acquired from an entity other than a financial institution. Consequently, the foreign currency funds would have been disposed of when the funds were used to acquire the debt obligation or loan. That disposition could result in a capital gain or loss pursuant to subsection 39(2). Furthermore … the taxpayer may realize a capital gain or loss when the debt or loan investments in its affiliates are repaid to the taxpayer since the repayment of a debt obligation is a disposition of property.
… [I]n calculating the capital gain or loss resulting from the repayment of the debt or loan, the proceeds of disposition would be converted to Canadian currency using the exchange rate at the date of repayment and the adjusted cost base would be converted to Canadian currency using the exchange rate at the date of the loan.