Principal Issues: Whether our position announced at the 1999 TEI Conference and the 2000 CTF Conference regarding foreign exchange losses to the issuer corporation on redemption of its shares is still our position?
Position: Yes
Reasons: We accept the reasoning in The Queen v. MacMillan Bloedel, 99 DTC 5446 (FCA)
January 15, 2007
Emidio De Angelis HEADQUARTERS Acting Banking Industry Specialist Income Tax Rulings Technical Applications & Valuations Division Directorate Montreal TSO S.E. Thomson (613) 957-2122
2006-021680
Redemption of US Dollar Denominated Preferred Shares
Dear Mr. De Angelis:
We are responding to your memo to us on November 27, 2006 in which you ask for our views regarding the redemption of US dollar denominated preferred shares. You have a file where a Canadian corporation has redeemed US dollar denominated preferred shares that it had issued. The Canadian dollar had depreciated against the US dollar during the time the shares were outstanding. As a result, the corporation is claiming a capital loss under subsection 39(2) of the Act on the redemption of the shares, under authority of The Queen v. MacMillan Bloedel, 99 DTC 5454 (FCA).
At the 2000 Canadian Tax Foundation annual conference, we said the following:
The CCRA accepts the reasoning in the MacMillan Bloedel decision and intends to assess any redemption of foreign-currency-denominated redeemable and retractable high paid-up capital preferred shares on the basis of that reasoning regardless of whether the result is a capital gain or a capital loss under subsection 39(2). However, it is not clear whether the reasoning in this decision could be applied to an acquisition of other shares where the acquisition price is greater than the issue price in foreign currency, but is not determined by the terms of the shares. In such a case, there is no clear benchmark against which to determine whether a foreign currency gain or loss has accrued on the shares' repurchase.
At the 1999 Tax Executive Institute annual conference, we said the following:
We accept the reasoning of the Federal Court of Appeal but are not prepared to extend the reasoning to a redemption of shares in general. The case deals with the redemption of redeemable and retractable preferred shares, which may be viewed as similar to the repayment of a debt obligation. Consequently, the application of this case is restricted to its facts and is confined to situations in which the shares redeemed are redeemable and retractable at a specific amount as specified in the terms and conditions of the shares. We confirm that this remains our position with reference to the application of subsection 39(2) to a corporation that has redeemed foreign currency denominated preferred shares issued by it. In addition, we would consider on a case-by-case basis situations where the foreign currency denominated shares did not have all the same attributes as those in MacMillan Bloedel.
Yours truly,
Olli Laurikainen, Manager
For Director
International & Trusts Division
Income Tax Rulings Directorate