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

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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 across site & shared bottom lb ros

More from across our site

Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
The US president also unveiled a new 50% levy on copper imports; in other news, a UK wealth tax proposal has been criticised by the Institute for Fiscal Studies
Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Gift this article