In 2013-0514191R3, the CRA ruled that a non-interest bearing foreign denominated debt obligation (Debt) owed by a Canadian parent (Parent) to a related Canadian subsidiary (Sub) could be effectively eliminated through a series of steps without (i) recognizing any FX gain or loss, or (ii) realizing any debt forgiveness. The end result was similar to that which could be achieved by simply amalgamating the Parent and Sub, but an amalgamation was not viable for legal and commercial reasons. In brief, the relevant steps involved:

  1. amending the Debt to add a right of exchange (without novation of the Debt),
  2. Sub exchanging the Debt for an interest-bearing Canadian dollar denominated debt (Debt B) on a rollover basis under s. 51.1 (with no debt forgiveness in Parent),
  3. Parent incorporating a new subsidiary (ULC),
  4. After a period of time, Sub selling Debt B to ULC at fair market value in exchange for a debt of ULC (Debt C), with Sub’s loss on Debt B being denied under s. 40(2)(e.1) and Sub’s ACB on Debt B being moved to ULC under s. 53(1)(f.1),
  5. ULC winding up into Parent under s. 88(1) and filing an election under s. 80.01(4) to eliminate any debt forgiveness, and
  6. Sub distributing Debt C to Parent as a reduction of PUC (with no debt forgiveness).