Principal Issues: Whether paragraph 95(2)(i) applies to an amount payable incurred for property acquired?
Position: Yes, to the extent all or substantially all of the amount payable was incurred to acquire excluded property.
Reasons: When read in context, the phrase "a debt of the debtor all or substantially all of the proceeds from which were used to acquire property " in paragraph 95(2)(i) can be interpreted in a manner so as to include an amount payable for property acquired to the extent that all or substantially all of the amount payable was incurred to acquire excluded property.
2015 International Fiscal Association Conference
CRA Roundtable
Question 9 - 95(2)(i): can "proceeds" be something other than cash
Assume that a controlled foreign affiliate (a CFA) of a taxpayer has borrowed money from a bank in a currency other than Canadian dollars and has used all of that borrowed money to acquire a building which it uses at all times in its retail business. When the CFA repays the loan to the bank, a foreign exchange gain or loss may arise relative to the Canadian dollar. Generally, such a gain or loss would result in foreign accrual property income or loss to the CFA which would be included in the income of the taxpayer on a current basis. However, because the CFA had used all of the money borrowed from the bank to acquire a property that it used at all times in its active business, the foreign exchange gain or loss, if any, would be deemed to be a gain or loss from the disposition of an excluded property and therefore, the CFA would have no resulting foreign accrual property income or loss.
The above result arises because paragraph 95(2)(i) provides that any income, gain or loss of a foreign affiliate debtor (or a partnership of which a foreign affiliate is a member) is deemed to be income, gain or loss from the disposition of excluded property if it arose on the settlement or extinguishment of certain debts. More specifically, paragraph 95(2)(i) applies in circumstances where all or substantially all of the proceeds of a debt of the debtor had been used at all times to earn income from an active business carried on by the debtor or to acquire property that had been excluded property of the debtor at all times that the debt had been outstanding to the debtor.
Given that paragraph 95(2)(i) specifically refers to the use of the proceeds of a debt by a foreign affiliate, it is not entirely clear whether the provision would apply to the settlement of an indebtedness that had not given rise to borrowed money. In the above example, the CFA had received borrowed money on its bank loan and, therefore, had received proceeds from that debt which it used to acquire excluded property. However, would paragraph 95(2)(i) apply if the CFA had acquired the building from a third party by issuing a note?
More generally, in the CRA's view, can paragraph 95(2)(i) apply in respect of an amount payable for property acquired?
CRA Response
Yes, in our view, paragraph 95(2)(i) would apply if the CFA had acquired the building from a third party by issuing a note.
In our view, when read in context, the phrase "a debt of the debtor all or substantially all of the proceeds from which were used to acquire property " in paragraph 95(2)(i) can be interpreted in a manner so as to include an amount payable for property acquired to the extent that all or substantially all of the amount payable was incurred to acquire excluded property.
Although the determination of whether paragraph 95(2)(i) would apply to the settlement or extinguishment of any particular amount payable by a foreign affiliate for property acquired would be a question of fact, generally, examples where paragraph 95(2)(i) may apply would include an amount outstanding on account of the purchase price, a note issued, or a debt assumed for the acquisition of excluded property by a foreign affiliate.
Jack Chang
2015-058158
May 28, 2015