All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Canada: Canada introduces debt-parking rules to prevent avoidance of foreign exchange gains

Canada Free Trade

Canada's Department of Finance has published proposals that would implement anti-avoidance measures when borrowers enter into "debt-parking" transactions that may result in a foreign exchange gain when the foreign currency is exchanged into Canadian dollars for tax reporting purposes.

zimka.jpg

Kevin P Zimka

Under Canada's Income Tax Act (the Act) all amounts relevant to the computation of income generally must be reported in Canadian dollars. If an amount is denominated in a foreign currency, the Act requires it to be converted into Canadian dollars. Pursuant to subsection 39(2) of the Act, a borrower may realise a capital gain or capital loss on the repayment of a debt denominated in a foreign currency as a result of fluctuation in the value of the foreign currency against the Canadian dollar.

To avoid realising a foreign exchange gain on repayment of debt denominated in a foreign currency, some borrowers have entered into "debt-parking" transactions. These transactions involve the borrower arranging for a person, with whom the borrower does not deal at arm's length, to acquire the debt from a third party creditor for a purchase price equal to the principal amount rather than the borrower repaying the debt. From the third-party creditor's perspective the debt is effectively repaid, but from the borrower's perspective the debt remains owing and no foreign exchange gain is realised.

On July 29 2016, the Department of Finance released legislative proposals to amend the Act so that accrued foreign exchange gains on a foreign currency denominated debt would be realised when such debt becomes a "parked obligation".

The legislative proposals deem the borrower to have made, at the time the debt becomes a "parked obligation", the capital gain that the borrower otherwise would have made if it had paid an amount at that time in satisfaction of the debt equal to:

1) The price paid to purchase the debt at that time; or

2) If the debt is not purchased at that time, the fair market value of the debt at that time.

In order to be a "parked obligation", the legislative proposals require that both:

i) At the particular time, the holder of the debt does not deal at arm's length with the borrower or where the borrower is a corporation, has a "significant interest" in the borrower; and

ii) At any previous time, a person who held the debt dealt at arm's length with the borrower and, where the borrower is a corporation, did not have a significant interest in the borrower.

Further, one of the main purposes of the transaction that resulted in the debt meeting the condition in (i) above must be to avoid recognition of the foreign exchange gains.

Generally, a person will have a significant interest in the corporation if they or any other person with whom they do not deal at arm's length owns shares of the corporation to which 25% or more of the votes or value are attributable.

This rule was generally effective on March 22 2016, subject to grandfathering for a debt that becomes a parked obligation before 2017 pursuant to a written agreement entered into before March 22 2016.

Taxpayers potentially affected by these rules should consult their tax advisers.

Kevin P Zimka (kevin.zimka@blakes.com)

Blake, Cassels & Graydon

Tel: +1 604 631 3363

Website: www.blakes.com

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree