Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the methodology provided by the FCA in Agnico-Eagle case results in a capital loss under subsection 39(2) or subsection 39(1)?
Position: No.
Reasons: See reasons below.
2016 Canadian Tax Foundation Annual Conference
CRA Roundtable
Question 3 – Agnico-Eagle Mines Decision
The Federal Court of Appeal’s (“FCA”) decision in The Queen. v. Agnico-Eagle Mines Ltd (2016 FCA 130) (Agnico-Eagle) provided a methodology to determine whether the issuer of certain foreign currency denominated convertible debentures realized a gain when the debentures were converted into shares. If we apply the methodology provided by the FCA, it would appear that an issuer of debentures could be considered to have realized a loss. Does the CRA agree that an issuer could be considered to realize a loss on the conversion and, if so, that the loss is a loss described in subsection 39(2) or an otherwise deductible capital loss?
CRA Response
The CRA is of the view that the decision of the FCA in Agnico-Eagle simply sets out the method to be employed in the determination of whether the issuer had made a gain for the purposes of subsection 39(2) on a conversion of convertible debentures. The CRA recognizes that in applying the FCA’s methodology to such a conversion, one might conclude that the issuer could have realized a loss. However, while the CRA accepted the methodology put forth by the FCA in the Agnico-Eagle case, the CRA is of the view that any potential loss computed based on that methodology cannot be said to have been sustained because of the fluctuation in the value of a foreign currency relative to Canadian currency. Therefore, such a loss would not be a loss described in subsection 39(2) of the Act. Furthermore, such a loss would not be a capital loss for purposes of subsection 39(1) as no property was disposed of.
Additionally, although not raised in Agnico-Eagle, the potential application of subsection 143.3(3) of the Act to the computation of any gain or loss arising on a conversion of a debenture should be considered in any similar fact situation, and could impact the application of the methodology endorsed by the FCA.
Judy Ho
Vitaliy Anissimov
2016-067020
November 29, 2016
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