A corporation resident in Canada (the "borrowing party"), which elected for the U.S. dollar as its functional currency election starting in 2014 borrowed in U.S. dollars from its foreign affiliate (also a calendar year taxpayer) prior to August 20, 2011 and repaid the loan in 2015. S. 261(10) deemed the borrowing party to make a gain or sustain a loss in 2015 as a result of the currency fluctuations that occurred prior to 2014. Given that the matching condition under s. 39(2.1) requires that the borrowing party's capital gain or loss be determined under s. 39(2), will s. 39(2) apply to a gain that is "made" or "sustained" (by virtue of s. 261(10)(a) or (b)) respecting the loan repayment? CRA responded:
[A] gain that is deemed to be "made", or a loss that is deemed to be "sustained", under subsection 261(10) is a gain or loss that is contemplated by subsection 39(2) such that it would, in turn, be deemed to be a capital gain or a capital loss from the disposition of currency. We…find textual support…in the choice… to use the terms "make a gain" and "sustain a loss" in subsection 261(10) which…suggests that the provision is meant to tie in with subsection 39(2).
Thus…it should be possible for subsection 39(2.1) to apply… . However…where a taxpayer and its foreign affiliate do not have the same year end, and as a result do not convert to the functional currency regime on the same day, the matching requirement would not generally be expected to be met, and subsection 39(2.1) would not apply.