On Wednesday, the Canada Revenue Agency (CRA) released correspondence (2012-0436921I7) between Headquarters and a Large File Case Manager in a local office (TSO).  Under audit was a Canadian parent company (Canco), which had invested in USD preferred shares of a second-tier foreign affiliate (FA).  When these USD preferred shares were redeemed in 2007, Canco claimed a foreign exchange (FX) capital loss under s. 39(2).  Headquarters advised the Large File Case Manager that this capital loss was deemed to be nil under s. 40(3.6)(a) because the FA was “affiliated with” Canco.  Further, this denied loss could not be added to the cost (ACB) of any other share; Canco did not directly own any other shares of the FA (s. 40(3.6)(b)).  It is interesting to note that s. 40(3.6)(a) requires the denied loss to be from the disposition of a share, whereas an FX loss under s. 39(2) is deemed to be from the disposition of foreign currency.  This subtle distinction may have been the technical basis for Canco’s position in 2007 that the FX loss was not deemed to be nil under s. 40(3.6)(a).  However, for taxation years that begin after August 19, 2011, all FX gains and losses arising from asset dispositions will be governed by s. 39(1) and not s. 39(2).  As a result, any such technical argument would no longer be available.