Principal Issues: Whether a partnership is required to recognized foreign exchange gains or losses when foreign debt is assumed by the partners in conjunction with a rollover of partnership property to the partners pursuant to subsection 98(3) of the Act.
Position: Question of fact but generally yes.
Reasons: This position is consistent with our position regarding the assumption of debt by a transferee corporation where property has been transferred to the corporation under section 85 of the Act.
XXXXXXXXXX 2009-031759 J. Gibbons, CGA November 16, 2009
Dear XXXXXXXXXX :
Re: Foreign Exchange Gains / Losses on Assumption of a Partnership's Foreign Debts
This is in reply to your email dated April 12, 2009, concerning the above-noted issue.
In particular, you have asked for our opinion about whether a foreign exchange gain or loss on account of capital can be recognized in the hypothetical situation where a Canadian partnership is dissolved in accordance with subsection 98(3) of the Income Tax Act (the "Act") and, as part of the dissolution, each former partner assumes a pro rata share of the foreign debt obligations of the partnership.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.
Subsection 39(2) of the Act provides that a gain made or loss sustained by a taxpayer by virtue of any fluctuation of a foreign currency relative to the Canadian dollar and that is not on account of income is a capital gain or capital loss, as the case may be. Generally, it is our view that subsection 39(2) of the Act applies only where an actual transaction has taken place. It is our view that foreign exchange gains or losses can generally be recognized in the circumstances described above, i.e., where foreign debt obligations are assumed by former partners as part of a rollover under subsection 98(3) of the Act.
Notwithstanding the above, it is always a question of fact whether or not subsection 39(2) of the Act would apply to a particular transaction, and this can only be determined following an actual review of all of the relevant facts and circumstances.
We trust these comments will be of assistance.
Yours truly,
G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch