A foreign exchange (FX) loss on a transaction within a related corporate group can be denied under s. 261(21) if the parties to the transaction have different tax reporting currencies in Canada.  A simple example could be a US dollar loan made from one group entity (Can-Holdco) to another (Can-Opco), where Can-Holdco has a Canadian tax reporting currency and Can-Opco has a US tax reporting currency.  An FX loss realized by Can-Holdco on such a loan would be ignored under s. 261(21).  In 2015-0612501I7 (recently released), the CRA Rulings Directorate considered such a loan, but with the added wrinkle that Can-Holdco also entered into hedging agreements with its non-resident parent (NR-Parent).  Can-Holdco realized an FX gain on its loan with Can-Opco, and an FX loss on the hedging agreements with NR-Parent.  The CRA Rulings Directorate noted the following:

  • s. 261(21) does not refer to a “series of transactions”, but rather refers only to a single transaction.  For this reason, the hedging agreements (between Can-Holdco and NR-Parent) could not be linked together with the US dollar loan (between Can-Holdco and Can-Opco) for the purposes of this provision.  The only relevant “transaction” for purposes of s. 261(21) was each hedging agreement between Can-Holdco and NR-Parent (see page 6).  
  • s. 261(21) did not apply to eliminate Can-Holdco’s FX loss on the hedging agreements – for two reasons.  First, if NR-Parent had Canadian tax results in a year, NR-Parent would have a Canadian tax reporting currency for that year (i.e., non-residents cannot make a functional currency election).  Second, if NR-Parent had no Canadian tax results in a year, NR-Parent would have no tax reporting currency (at all).  Either way, the required condition in s. 261(20)(b) – that Can-Holdco and NR-Parent have different tax reporting currencies in Canada – was not satisfied (see page 5).