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W.E. Douglas (613) 593-6937
June 3, 1983
Dear Sirs:
This is in reply to your letter of March 9, 1983 wherein you requested our views with respect to the application of sections 39(2) and 80 of the Income Tax Act (the "Act") and subsection 26(1.1) of the Income Tax Application Rules ("ITAR") in the following situation:
1. Company A borrowed $1,000,000 (U.S.) from Company B on June 30, 1971 at an interest rate of 7% per annum, repayable on June 30, 1991.
2. On January 1, 1972 the debt had a fair market value of $1,000,000 (Cdn.) for the purposes of subsection 26(1.1) of ITAR and the Canadian and U.S. dollars traded at par at that time.
3. In order to receive advance payment of the debt, Company B will allow Company A a 5% discount and will accept $950,000 (U.S.) as payment in full of Company A's indebtedness.
4. The $950,000 (U.S.) is the fair market value of the debt at the time of prepayment; however, because of the decline in the value of the Canadian dollar vis-a-vis the U.S. dollar, the $950,000 (U.S.) in Canadian dollars is $1,172,839.50.
Our comments are as follows:
It is our view that a foreign exchange gain or loss with respect to a particular transaction is a separate and distinct event from the transaction. In the situation described above, for example, the borrowing of the US $1,000,000 and the subsequent repayment of US $950,000 and forgiveness of US $50,000 are separate trans- actions from any foreign exchange gains or losses that might arise as a result of these transactions.
It therefore follows that:
A. Since Company A is required to outlay Canadian currency of $1,172,839.50 to obtain U.S. currency of $950,000 which it had originally obtained at par and which had a V-Day value of par, it is our view that the Company will suffer a foreign exchange loss of $222,839.50 on the transaction pursuant to subsection 39(2) of the Act.
B. It is also our view that section 80 of the Act would be appli- cable to the forgiven portion of the debt of U.S. $50,000 converted to the equivalent in Canadian dollars at the time the debt was forgiven (i.e.: Cdn. $61,728.39).
We trust that the above comments are of help.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch