With the Canadian dollar hovering at around 70¢ in US currency (the lowest level since 2003), Canadians who repay $US debts will likely incur a significant forex loss. This loss will be based on the difference between the rate that applied when the debt was incurred and the rate that applied when the debt was repaid.
In the event that the debt is on income account (i.e. trade payables of a business), the loss will be factored into the normal computation of income or loss from that business.
However, if the debt is on capital account, there is a special rule (contained in subsection 39(2) of the ITA) that allows that loss to be treated as a capital loss even though it does not result from the disposition of any property.
In addition, here is an important fact which many taxpayers and their advisors often overlook: this capital loss may be claimed even if the debt related to the acquisition of a “personal use property” (“PUP”) (such as a vacation home). This is somewhat curious in that the ITA does not allow capital losses to be claimed on PUP. However, there is nothing in subsection 39(2) which extends this to related debts, and the CRA even acknowledged that fact many years ago in paragraph 5 of IT-95R when it stated:
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Likely, this is because of the fact that subsection 39(2) treats the loss as being from a disposition of a foreign currency (in this case $US), rather than the PUP.
However, in the case of individuals, a de minimis rule in subsection 39(1.1) of the ITA effectively excludes the first $200 of losses incurred in any year from being claimed as a capital loss.
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
