The Canada Revenue Agency (CRA) issued a ruling on August 2, 2007 which has not yet been publicly released. The ruling indicates that a borrower may trigger an accrued foreign exchange gain or loss on its issued foreign currency debt by causing a wholly-owned subsidiary to be added as a co-obligor notwithstanding that the original debtor is not released, the subsidiary is immediately amalgamated with the debtor and there is no novation or disposition of the debt by its holders as a matter of law. We understand that the CRA is also prepared to rule that, in such circumstances, the debt holders do not have a disposition and that the "five-year term" requirement under the withholding tax exemption in subparagraph 212(1)(b)(vii) is not violated by the transaction.
This ruling may be of interest to taxpayers in various circumstances, such as the following:
- an entity with accrued f/x losses on its outstanding debt obligations that has available capital gains from prior years or anticipates realizing capital gains in the near future;
- a corporation about to undergo an acquisition of control that has accrued f/x gains on its outstanding debt obligations and capital losses which would expire unused as a result of the acquisition of control rules if an f/x exchange gain cannot be created; and
- a corporation about to undergo an acquisition of control that has accrued f/x losses on its outstanding debt obligations and accrued capital gains on other assets that could be sheltered to the extent of the accrued f/x loss, thus stepping up its tax basis in the other assets.