Part 2: Corporate Federal Taxes Changes

4.  Debt Parking To Avoid Foreign Exchange Gains

Debt Parking occurs when the debt seems to be unrepayable, instead of writing it off completely, the debt is sold to a non-arm’s length person at a discounted rate to create a debt forgiven amount. Such amount, if in Canadian currency, can avoid the application of debt forgiveness rules if the discounted rate is lesser than 20% (in other word, the debt amount is sold at 80% or more).

However, in the foreign currency context, when the debt needs to be repaid, the repayment would include the accrued foreign exchange gain and the gain would be realized and included as income (either 100% taxable or 50% taxable depending on the use of the debt). Some taxpayers use debt parking practice to discount the foreign currency debt, so the accrued foreign exchange gain will be converted into forgiven amount and so the debt forgiveness rule applies (in such only 50% of income inclusion is needed).

As a result, Budget 2016 introduces a new rule so that any accrued foreign exchange gains on foreign currency debts will be realized when debt parking practice is used on such debts. Exceptions may apply to certain transactions.

This measure will apply to a foreign currency debt that meets the conditions to become a parked obligation on or after 22 March 2016, with an exception for written agreements entered into before this date.

For more information, please contact us @ 604-639-3229 or info@theresalocpa.ca

Note:  All information relating to debt parking above is available from Government of Canada website.

By Theresa Lo, CPA, CGA

October 11, 2017