Revenue Canada's Tax Rulings and Interpretations Directorate has received numerous inquiries concerning the Canadian tax implications surrounding the implementation of the European Economic and Monetary Union (EMU) that begins on January 1, 1999. The following outlines their general comments as recently published by Revenue Canada.
The EMU involves the adoption of a single currency, the "Euro". On January 1, 1999, the exchange rates between the national, or "legacy", currencies of the 11 countries participating in the conversion and the Euro will be irrevocably fixed. During a transitional period running from January 1, 1999 to the year 2000, taxpayers are free to use the Euro unit, but are under no obligation to do so. However, on January 1, 2002, the legacy currency units will cease to exist as subdivisions of the Euro. References to legacy currency units in legal instruments at the end of the transitional period will be required to be read as references to Euro, according to the conversion rates.
As a result of the adoption of the Euro, legacy-denominated obligations may be converted into Euro-denominated obligations. The main issue for Canadian tax purposes is whether the conversion to Euro of a legacy-denominated obligation results in the creation of a new obligation and the disposition of the former obligation.
There are three main types of changes which an obligation may undergo as a result of its conversion to Euro:
- The legacy currency unit in which the obligation is stated may simply be changed to the Euro unit ("redenomination");
- A fraction of the obligation may be repaid by the debtor or, possibly, forgiven by the creditor, in order to round-off the obligation to the nearest whole number or decimal fraction in terms of Euros. For example, a debt that is redenominated from 1000 Deutsche Marks to 104.251 Euros may be rounded to 104.25 Euros ("renominalization");
- Some of the terms of the obligation may be changed to reflect the different market conventions prevailing for Euro-denominated obligations ("reconventioning").
In general terms, the determination of whether a legacy-denominated obligation has been disposed of for Canadian tax purposes by virtue of its redenomination, renominalization, or reconventioning depends on whether these events are considered to result in the discharge of the obligation and the substitution of a new obligation under the law governing the former obligation.
Where the governing law is Canadian law, Revenue Canada is prepared to offer the following specific guidance based on Canadian legal principles:
- The redenomination of an obligation from a legacy currency to the Euro currency will not be considered a disposition of the obligation for Canadian tax purposes. Similarly, the conversion of a foreign affiliate's surplus accounts from a legacy denomination to the Euro denomination will not be considered a taxable event.
- Where, following its redenomination, a legacy-denominated obligation is renominalized, it will not be considered to be disposed of on that basis alone. However, the actual repayment or forgiveness of an amount on an obligation's renominalization may have Canadian tax consequences.
- Where the original terms of an obligation contemplate its amendment in the event of the adoption of a single currency by the EMU, any amendments to the terms of the obligation that are strictly consequential on and relate solely to the adoption of the Euro currency by the EMU will generally not, in and by themselves, be considered to result in the disposition of an obligation.
- In any case not dealt with above, the issue of whether there has been a disposition of a legacy-denominated obligation by virtue of the alteration of its terms depends on the application of Canadian legal principles, notably the law of rescission or novation, to the facts and circumstances of each case.
- Where the law that governs an obligation is foreign law the determination of whether the obligation has been disposed of for Canadian tax purposes by virtue of its redenomination, renominalization or reconventioning depends, in part, on foreign legal principles. Put another way, the legal effect of these events on such an obligation under the relevant foreign law must be considered in order to determine if the obligation has been disposed of for Canadian tax purposes.
- Finally, Revenue Canada does not expect the adoption of the Euro currency to have any significant impact on the administration of excise taxes, including the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST).
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor, or:
David W. Steele PricewaterhouseCoopers LLP 145 King Street West Toronto, Ontario M5H 1V8 Canada Fax: 1-416-941-8415 E-mail: Click Contact Link
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