Principal Issues: 1- Is an amount of money in a foreign currency registered in an individual’s account of a financial institution a capital property as defined in section 54 and subject to subsection 39(1) in the absence of subsection 39(1.1)? 2- If so, would subsections 70(5), 70(6) and 73(1) apply ?
Position: 1- Subsection 39(1.1) would not apply because the individual would not hold a property that is a foreign currency; he would rather hold a debt. A debt may, depending on the facts, constitute or not a capital property. If it is determined that the debt is a capital property, any gain or loss attributable to fluctuation in the value of the currency would be subject to subsection 39(1) at the time of its disposition or deemed disposition 2- If the debt is a capital property, subsections 70(5), 70(6) and 73(1) could apply where all the conditions listed in those subsections are met.
Reasons: 1- According to the wording of the Act and the jurisprudence. 2- Wording of the Act.
Financial Strategies and Financial Instruments Roundtable, 6 October 2017
2017 APFF Conference
Question 8
Foreign Currency – Capital property and rollover
A sum of money is considered to be a "property" as defined in subparagraph 248(1)(b). Pursuant to subsection 39(1.1) specific rules apply to the disposition of a sum of money in a foreign currency, the gain or loss from which would, in the absence of subsection 39(1.1), be described under subsection 39(1).
Question to the CRA
Is a sum of money in a foreign currency held by an individual on deposit with a financial institution a "capital property" within the meaning of section 54 and subject to subsection to 39(1) in the absence of subsection 39(1.1) applying?
If so, does subsection 70(5) apply on the death of the individual?
Can a rollover be effected between spouses pursuant to subsection 73(1) or 70(6)?
CRA response
The gain or loss attributable to fluctuations in the value of a currency can be on capital or income account. Whether such a gain or loss is on capital or income account is a question of fact. On the disposition of a property, where the gain or loss is attributable to fluctuations in the value of a currency is on capital account, subsections 39(1.1) or 39(1) will apply according to the property that is disposed of. The gain or loss attributable to fluctuations in the value of a currency must be included or deducted in computing income under section 9 where such gain or loss is on income account.
Briefly, subsection 39(1.1) applies if, because of any fluctuation in the value of a currency in relation to the Canadian currency, an individual has made a gain or sustained a loss from the disposition of currency other than Canadian currency and such gain or loss would, in the absence of subsection 39(1.1), be a capital gain or loss described under subsection 39(1).
In the current situation, subsection 39(1.1) would not apply since the individual does not own property that is a foreign currency but, rather, has a claim. Indeed, the relationship between a financial institution and its client, who has entrusted the client’s money to the institution, is usually the ordinary relationship that exists between debtor and a creditor. However, the legal relationship with an individual who entrusts his or her money to a financial institution can only be definitively determined on a consideration of all the relevant facts.
A debt may or may not, depending on the facts, constitute a capital property. The question of whether a debt is a capital property of a taxpayer is a question of fact which can only be resolved after a full analysis of the facts of a particular situation.
If it is determined that the debt is capital property within the meaning of section 54, any gain or loss attributable to fluctuations in the value of the currency is subject to subsection 39(1) on the debt’s disposition or deemed disposition.
If the debt is not capital property, subsection 39(1) would not apply. This could be the case, for example, where the debt was was part of an adventure or concern in the nature of trade or was an inventory property. If the receivable is not a capital property, any gain attributable to a fluctuation in the value of the currency would be considered to be income from a business or property, and any loss sustained would be considered as a loss from a business or property.
If the debt is a capital property, subsections 70(5), 70(6) and 73(1) could apply where all the conditions set out in those subsections are met.
Response prepared by:
Danny Gagnon
613-670-9030
October 6, 2017
2017-071262