On the repayment (on maturity) of a U.S.-dollar loan that had been received from an affiliated trust, the borrower sustains a foreign exchange loss. The trust keeps the repayment proceeds as cash during the following 30 days or reinvests them.
(a) If the repayment proceeds of the loan (which, thus, has disappeared from the trust’s balance sheet) are kept in cash and no further loan is made during the period of 30 days before or after the repayment, can CRA confirm that the loss realized by the borrower on the repayment would not be a superficial loss?
(b) What if the trust makes a new U.S.-dollar loan to the borrower during the 30-day period following the initial loan’s repayment (or the 30 days before)?
In finding that, in (a), the suspended loss rule in s. 40(3.4) (or superficial loss rule in s. 40(2)(g)(i)) would not apply, CRA stated:
[T]he borrowing would be one of the borrower's liabilities and, as such, would not be property of the borrower. Consequently, repayment of the loan by the borrower would not, in itself, constitute the disposition of a property by the borrower. Furthermore, although subsection 39(2) deems there to be a capital loss arising from the disposition of a currency other than Canadian currency, subsection 39(2) does not deem the affiliated creditor to have acquired the foreign currency which the borrower is deemed to have disposed of.
Respecting (b), CRA stated:
[T]he borrower would have received foreign currency by virtue of the new loan made to it. The issue is whether, for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4), that foreign currency would be identical property to the currency that the borrower is deemed to have disposed of in accordance with subsection 39(2). According to the definition of "property" in subsection 248(1), money could constitute property unless a contrary intention is evident. However, the CRA's position is not to consider money to be identical property for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4) in a circumstance such as this where a taxpayer sustains a loss under subsection 39(2).