CRA indicates that on the partial repayment of USD debt with forgiveness of the balance, the s. 39(2) gain or loss is computed on a net basis.

How is a gain or loss under s. 39(2) computed where a foreign currency-denominated debt is partly repaid, with the remaining principal amount being forgiven?

For instance, a taxpayer borrows U.S.$1,000,000. On maturity, U.S.$300,000 of the principal amount is repaid, and the balance is forgiven. On the issuance date, the spot rate is U.S.$1.00 equals Cdn. $1.25; and on the maturity date, U.S.$1.00 equals either Cdn.$1.50, or Cdn.$1.00.

CRA noted that Agnico-Eagle computed the s. 39(2) gain or loss on the repayment of a debt issued at its FX face amount by comparing A – B, where:

• A is the issuance (i.e., borrowing) amount, and
• B is the repayment amount,

with the amounts borrowed and repaid in foreign currency being converted to Cdn. dollars using the respective spot rates on the two dates.

CRA also noted its historical position that no foreign exchange gain or loss arises in the context of a debt forgiveness because there is no transaction that would result in realizing such a gain or loss.

CRA then indicated that in the situation where a foreign exchange indebtedness is partially repaid and partially forgiven, s. 39(2) and s. 80 each apply to their respective portions of the indebtedness. Accordingly, in the above example, the formula is adjusted by reducing A by the forgiven amount of U.S.$700,000. Thus, in the first scenario, there is a capital gain under s. 39(2) of $75,000 (1.25*$300,000 – $300,000); and in the second scenario, there is a loss of $75,000 (1.25*$300,000 – 1.5*$300,000).

The above formula would have to be further adjusted, for example, where the debt was issued at a discount or premium.

Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.5 under s. 39(2).