Cases
Imperial Oil Ltd. v. The Queen, 2006 DTC 6639, 2006 SCC 46
Before finding that the taxpayers were not entitled to recognize deductions under s. 20(1)(f)(ii) at the time they repaid U.S.-dollar denominated debentures following an appreciation in the U.S. dollar, LeBel J adressed (at para. 61) an argument that as the US dollar appreciated, the "principal amount" of the debentures increased:
[T]he arguments based on the use of the phrase "maximum amount" in the definition of "principal amount" fail because there is no indication that foreign currency conversions were in Parliament's contemplation when that section was drafted.
Administrative Policy
2014 Ruling 2013-0514191R3 - Debt restructuring, forgiveness and winding-up
underline;">: Currrent structure. Canco1 is obligated to its affiliate (Canco3) under non-interest-bearing U.S.-dollar debt evidenced by demand notes ("Notes A") whose fair market value is substantially lower than their adjusted cost base (equal to their principal) to Canco3, and with there also being an accrued FX gain to Canco1.
Proposed transactions
Before engaging in transactions to eliminate such debt though ATR-66-style debt-slide transactions, the terms of the Notes A will be amended by adding a right allowing the holder to exchange them for new Canadian-dollar interest-bearing demand notes ("Notes B") - with the exchange rights then being exercised by Canco3.
Ruling
that s. 51.1 will apply, and ss. 80 and 39(2) will not apply, to such exchange.
See under s. 80.01(4) for detailed summary.
13 February 1996 T.I. 9532285 [foreign currency principal]
Respecting whether s. 51.1 would apply to the conversion of a U.S.-dollar denominated convertible debenture, CRA noted that under s. 51.1(c) the principal amounts of the old and new obligations must be equal, quoted the "principal amount" definition in s. 248(1), and stated:
In order to establish the principal amount of an obligation, we must look at the amount of the obligation in the currency in which it must be repaid under the terms of the obligation. The principal amount of an obligation that must be repaid in U.S. dollars should accordingly be expressed in U.S. dollars. Therefore, section 51.1…could apply in respect of an exchange of obligations issued in a foreign currency.
Articles
David W. Ross, "Convertible Debentures - Principal Amount", Resource Sector Taxation, (2006) Vol. IV, No. 2, p. 280.
Where a corporation issues a convertible debenture and the debenture is converted to shares, the amount paid-up for the shares that are issued is the amount originally paid for the debenture. It is not the fair market value of the shares at the time they are issued. Accordingly, in my view the paid-up capital is the proper measure of value for tax purposes in this situation. Thus, it follows that "principal amount" is the initial issue price for the debenture. I further suggest that this same principle should apply in the case of trusts.