No automatic offset of FX loss against forgiven amount on USD debt restructuring (p. 5)
Canadian corporations undergoing debt restructurings of US dollar denominated debt will need to understand the interaction of section 80 (and the computation of a "forgiven amount") and subsection 39(2) (respecting the realization of foreign exchange gains and losses). A common misconception is that the entire foreign exchange loss inherent in a US dollar denominated debt may be utilized to offset the forgiven amount arising on a debt restructuring….
Example of separate s. 80(2)(k) forgiven amount and s. 39(2) FX gain (pp. 5-6)
[A]ssume that the Canadian debtor described above is now settling and extinguishing the US$100 million debt for cash consideration of US$15 million (or CDN$21.43 million). Assuming that the US$100 million of debt was issued when the currencies were at par, and that the Canadian dollar is now valued at US$0.70…[t]he foreign exchange loss under subsection 39(2)…is calculated as the Canadian dollar equivalent of US$l5 million using the current exchange rates (CDN$21.43 million) less the Canadian dollar equivalent of US$15 million using the exchange rate at the time the debt was issued (CDN$15 million).
In aggregate, the Canadian debtor has realized a forgiven amount of CDN$85 million and a foreign exchange loss of CDN$6.43 million….
Need to use up other s. 80 attributes first before using current s. 39(2) (p. 6)
[U]nder section 80, the foreign exchange loss of CDNS6.43 million realized on the debt exchange cannot be used to offset the CDN$85 million forgiven amount if there are sufficient other tax attributes in the debtor. In particular, if the debtor has non-capital or capital loss carryforwards, undepreciated capital cost, cumulative eligible capital, resource pools, or adjusted cost base in certain capital property, those attributes must be used before the forgiven amount can be applied against the current year foreign exchange loss. Accordingly, planning to utilize or move other more valuable tax attributes prior to the debt forgiveness should be considered.
If a Canadian corporate debtor, which borrowed US$100 at par, restructures its debt, at a time that the US dollar is now worth Cdn.$1.50, by settling that debt for a payment of US$20, it will realize an economic gain of Cdn.$70 (Cdn.$100 - Cdn.$30). That gain for tax purposes will consist of a forgiven amount of Cdn.$80 (as per s. 80(2)(k)) and a s. 39(2) FX loss of $10.
[I]f the debtor has non-capital or capital loss carryforwards, undepreciated capital cost, cumulative eligible capital, resource pools, or adjusted cost base in certain capital property, those attributes must be used before the forgiven amount can be applied against the current year foreign exchange loss. Accordingly, planning to utilize or move other more valuable tax attributes prior to the debt forgiveness should be considered (p. 6)
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