2018-0779911C6 2018 CTF Q. 14 - Foreign exchange

Principal Issues: What is the appropriate foreign exchange rate to use when computing a deduction pursuant to paragraph 20(14)(b)?

Position: The appropriate foreign exchange rate to use when computing a deduction pursuant to paragraph 20(14)(b) is the relevant spot rate for the day the debt obligation is transferred to the transferee.

Reasons: For the purposes of paragraph 261(2)(b), the day that the “particular amount arose” is the day on which the debt obligation is transferred.

Author: Johns, Jeffrey
Section: 12(1)(c), 12(3), 20(14), 261(2)

2018 CTF Annual Conference 
CRA Roundtable

Question 14 -    Foreign exchange

What is the appropriate foreign exchange rate to use when computing a deduction pursuant to paragraph 20(14)(b) – i.e., does the purchaser bear foreign exchange risk on foreign currency interest accrued to the time of the purchase of the debt obligation?

CRA’s Response:

Subsection 20(14) provides that the amount of interest accrued to the time of transfer of a debt obligation is included in the income of the transferor for the taxation year in which the transfer occurred and an offsetting deduction is permitted to the transferee for the year the interest is included in the transferee’s income.  Our response assumes that neither of the parties to the transfer have elected under subsection 261(3) to report their income in a currency other than the Canadian dollar.

Paragraph 261(2)(b) of the Act requires that, if a “particular amount” that is relevant in computing a taxpayer’s “Canadian tax results” (as defined in subsection 261(1)) is expressed in a currency other than Canadian currency, that particular amount is to be converted to an amount expressed in Canadian currency using the relevant spot rate for the day on which the particular amount “arose”.

Subsection 20(14) requires that the amount of interest that has accrued at the time of transfer of certain debt obligations must be included in the income of the transferor and may be deducted from the income of the transferee.  Therefore, such amount is relevant to both taxpayers’ Canadian tax results.  Consequently, where a transferred debt obligation is denominated in a foreign currency, the “particular amount” in the context of paragraph 261(2)(b) that must be converted to Canadian currency in order to apply subsection 20(14) is the amount of foreign currency denominated accrued interest at the time of the transfer.

In applying subsection 20(14) in respect of the transfer of a foreign currency denominated debt obligation, the day the accrued interest is considered to “arise” for the purposes of paragraph 261(2)(b) is the day of the transfer because that is the day when the amount of interest that has accrued is required by subsection 20(14) to be determined (hence when an amount relevant to computing the transferor and transferee’s Canadian tax results is created).  The accrued interest converted to Canadian dollars using the relevant spot rate for this day will be the amount used in determining both the transferor’s income inclusion under paragraph 20(14)(a) and the transferee’s deduction under paragraph 20(14)(b).

This interpretation also aligns with our understanding of the tax policy underlying paragraph 261(2)(b).  The use of the relevant spot rate for the day of the transfer is appropriate from the perspective of the transferor as this is the day that the accrued interest is computed and is also the day the transferor disposes of its right to receive that accrued interest. This is also appropriate from the perspective of the transferee as that is the day when the transferee acquires the right to the accrued interest.

Jeffrey Johns
2018-077991
November 27, 2018

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