Canada: Budget 2016: Debt Parking Rules Expanded To Address Foreign Currency Denominated Debts

In Budget 2016, the Government proposed new anti-avoidance rules to close a loophole that the Government believes permits taxpayers to "park" debt denominated in a foreign currency with a party with which it does not deal at arm's length, instead of repaying it, in order to avoid realizing accrued foreign exchange gains and losses.


For Canadian tax purposes, all amounts relevant to the computation of taxable income must generally be converted to, and reported in, Canadian dollars. As a consequence, a taxpayer may realize a gain or a loss on the repayment of a debt denominated in a foreign currency when the value of the foreign currency changes relative to the Canadian dollar.

The Income Tax Act ("Tax Act") deems a gain or loss realized in respect of a foreign currency on a foreign currency denominated debt that is held on capital account to be a capital gain or loss from the disposition of the foreign currency. However, such a gain or loss is generally considered to have been realized only at the time the debt is actually settled, whether by virtue of being repaid or otherwise extinguished.

To avoid realizing a gain due to an appreciation in the value of the Canadian dollar relative to a foreign currency in which a particular debt is denominated, some taxpayers have opted to enter into "debt-parking" transactions. In a conventional "debt-parking" arrangement, instead of simply repaying a debt with an accrued foreign exchange gain, the debtor arranges for a person with which it does not deal at arm's length (e.g., an affiliate) to acquire the debt from the lender for a purchase price equal to the amount owing on the debt. The transfer of the debt by the lender to the non-arm's length person would generally not result in the debt being settled or extinguished. Indeed, although the debt would effectively be repaid from the lender's perspective, from the debtor's perspective, the debt remains outstanding (i.e., it is now owing to the non-arm's length person). As a result, the foreign exchange gain would not be triggered as long as the non-arm's length person allows the debt to remain outstanding. The debt could be left outstanding indefinitely, or could potentially be repaid at a later date if, for example, the debtor has since sustained sufficient capital losses to offset the foreign exchange gain, or the Canadian dollar has depreciated sufficiently relative to the foreign currency in which the debt is denominated such that the accrued gain has significantly decreased or has disappeared altogether.

Currently, the Tax Act contains rules that deal with "debt-parking" transactions for purposes of the "debt forgiveness" rules. Where these "debt-parking" rules apply, a debt is deemed to have been repaid for an amount equal to its cost to the new, non-arm's length creditor. Any difference between the principal amount of the debt and the amount for which it is deemed to have been repaid is treated as a "forgiven amount", which is then applied to reduce various tax attributes of the debtor, and can ultimately lead to an income inclusion for the debtor where there are insufficient tax attributes to fully absorb the forgiven amount1.

While the existing debt-parking rules will generally deem a foreign currency debt owed to a third party to have been repaid at the time of its acquisition by a non-arm's length creditor, any foreign exchange gain accrued on the debt would not be taken into account in determining the forgiven amount of the debt, since, based on the interpretation of the existing rules by the Canada Revenue Agency (the "CRA"), it is the historical foreign exchange rate at the time the debt was issued that is to be used for purposes of determining the forgiven amount that arises as a consequence of the application of the debt-parking rules2. Accordingly, the amount of any accrued foreign exchange gain in respect of a debt deemed settled under the "debt parking" rules would not, under existing rules, result in any incremental reduction in a debtor's tax attributes, nor would any portion of such accrued foreign exchange gain be required to be included in the debtor's income at the time the debt became a parked debt.

Budget 2016: Debt Parking Proposals

Although it is the Government's view that debt-parking transactions undertaken to avoid foreign exchange gains could be challenged under the general anti-avoidance rule ("GAAR") in the Tax Act, such challenges under the GAAR can often be time-consuming and costly, and could also yield unfavorable results from the Government's perspective. As a result, Budget 2016 proposes to introduce rules aimed at ensuring that any accrued foreign exchange gain on a foreign currency debt will be realized when the debt becomes a parked obligation. In this regard, a debtor will be deemed to have realized a foreign exchange gain that it would otherwise have realized if it had paid an amount (expressed in the currency in which the debt is denominated) in satisfaction of the principal amount of the debt equal to:

(i) where the debt becomes a parked obligation as a result of its acquisition by the current holder, the amount for which the debt was acquired; and

(ii) in any other case, the fair market value of the debt.

For these purposes, a foreign currency debt will become a parked obligation at a particular time where:

(i) at that time, the current holder of the debt does not deal at arm's length with the debtor, or, where the debtor is a corporation, has a "significant interest"3 in the debtor, and

(ii) at any previous time, a person who held the debt dealt at arm's length with the debtor, and, where the debtor is a corporation, did not have a "significant interest" in the debtor.

The Government has proposed to enact statutory exceptions to the new anti-avoidance rules to ensure that a foreign currency debt will not become a parked obligation in the context of certain bona fide commercial transactions. One such exception provides that a foreign currency debt that is acquired by the current holder as part of a transaction or series of transactions that results in the acquisition of a significant interest in, or control of, the debtor by the current holder (or a person related to the current holder) will not become a parked obligation unless one of the main purposes of the transaction or series of transactions was to avoid a foreign exchange gain. Another exception would provide that a change of status between the debtor and the current holder (i.e., from dealing at arm's length to not dealing at non-arm's length, or, if the debtor is a corporation, from the current holder not having a significant interest in the debtor to having one) will not cause the debt to become a parked obligation unless one of the main purposes of the transaction or series of transactions that gave rise to the change of status was to avoid a foreign exchange gain.

The proposed revisions to the debt-parking rules will also provide relief to financially distressed debtors. The relief will be similar to the existing relieving provisions that enable insolvent debtors to claim a deduction that may fully or partially offset the inclusion in income of any residual forgiven amount that may arise under the debt forgiveness rules.

Although Budget 2016 contained a general summary of the proposed rules, it did not include any detailed draft legislative measures. As a result, it remains to be seen how the proposed revisions to the debt-parking rules will be integrated with the existing rules. Specifically, it will be interesting to see whether the exceptions proposed for bona fide commercial transactions and a change in status between a debtor and creditor will restrict the broader application of the debt forgiveness rules more generally, or whether they will be limited in their application to simply precluding the immediate recognition of an accrued foreign exchange gain.

The proposed measures will apply to a foreign currency debt that meets the conditions to become a parked obligation on or after March 22, 2016. However, the new proposals will not apply where the satisfaction of the conditions occurs before 2017 and results from a written agreement entered into before March 22, 2016.


1 After being applied to reduce a debtor's tax attributes to the maximum extent required under the Tax Act, one-half of any residual forgiven amount would then generally be required to be included in the debtor's income.

2 See, for example, Canada Revenue Agency Document No. 2009-0347661C6, "Debt parking and foreign currency", December 8, 2009.

3 Generally, a person will be considered to have a "significant interest" in a corporation if the person (alone or together with any non-arm's length persons) owns shares of the corporation to which 25% or more of the votes or value of the corporation are attributable. Additional rules, which parallel the interpretative rules that currently form part of the debt forgiveness provisions in the Tax Act, are proposed to be enacted to deal with situations involving trusts and partnerships.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2016

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Michel M. Ranger
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions