Sobier T.C.J.:
1 At the commencement of the appeal, the parties filed a Partial Consent to Judgment and Minutes of Settlement (“Consent to Judgment”) as follows:
The Appellant and Respondent consent to judgment allowing the appeal in part in respect of the 1987 taxation year on the basis that:1. The timber licenses numbered T0340, T0579, T0785, T0732 and T0738 which were disposed of to the Province of British Columbia in 1987 were not timber resource properties; and
2. The Appellant's expenditures of $229,203 on the Sturgeon Falls dam headgate qualified for an investment tax credit because the dam headgate was a Class 2 asset of Schedule II.
1. The calculation of the adjusted cost base of its shares in Sociedade Civil de Investimentos Florestais Limitada disposed of in its 1987 taxation year, and
2. The inclusion in income of $1,400,000 received by the Appellant in respect of its Chemical Treatment of Long Fibres Project.
2 Accordingly, in connection with those issues set out in the Consent to Judgment, judgment will issue in accordance with the Consent to Judgment filed.
3 The remaining issue deals with a capital loss under subsection 39(2) of the Income Tax Act (the “Act”) claimed by the Appellant in its 1987 taxation year. At the hearing of the appeal, the parties also filed a Statement of Agreed Facts as follows:
The parties admit the following facts for the purposes of this action only. Either party may adduce other evidence relevant to the appeal and not inconsistent with the facts in this statement.1. The Appellant is a public corporation incorporated in the province of British Columbia and with its head office at 925 West Georgia Street, Vancouver, British Columbia, V6C 3L2.
2. The Appellant appeals from a notice of reassessment dated June 12, 1992 and bearing the number 3601759 (the “Reassessment”) which was made under the Income Tax Act (the “Act”) by the Minister of National Revenue (the “Minister”) for the Appellant's taxation year ending December 31, 1987.
3. The Appellant at all times material to this appeal carried on an integrated forest products business in Canada and elsewhere both directly and through its wholly and partly owned subsidiaries.
4. In 1977, the Appellant issued 3,400,000 Series A preferred shares (the “Series A Shares”) for U.S. $85,000,000, and in 1982 and 1983, the Appellant issued 250,000 Class B, Series 4 preferred shares (the “Series B-4 Shares”) for U.S. $18,000,000. Both classes of preferred shares were redeemable at the option of the Appellant as issuer and retractable at the option of the holders.
5. For the purposes of the Act the Appellant is required to keep its financial records in Canadian dollars. The equivalent Canadian dollar amount of the proceeds from the issue of the Series A Shares and Series B-4 Shares was $87,954,250 and $23,660,080 respectively.
6. The special rights and restrictions attached to the Series A Shares and the Series B-4 Shares required the Appellant to pay the redemption price of the shares to the holders of the shares when the shares were eventually redeemed or retracted in U.S. dollars.
7. In 1987, the Appellant gave notice and then redeemed all of the Series A Shares for U.S. $85,000,000 and 9,287 of the Series B-4 shares for U.S. $675,000. The difference between the Canadian dollar equivalent of the proceeds in US dollars from the original issue of the shares and the Canadian dollar equivalent of the amount paid in US dollars to redeem the shares was calculated by the Appellant as follows:
| Series | No. Shares | Original Proceeds | Redemption Price | Difference |
|---|
| A | 3,400,000 | $87,954,250 | $112,867,075 | $24,912,825 |
| B-4 | 9,287 | 834,679 | 887,253 | 52,574 |
| | | | 24,965,399 |
The parties accept that the amount of $24,965,399 represents the difference between the Canadian dollar equivalent of the proceeds in US dollars from the original issue of the shares and the Canadian dollar equivalent of the amount paid in US dollars to redeem the shares, and that amount is referred to as the “Difference”.8. For tax purposes the Appellant treated the Difference as a foreign exchange loss deemed to be a capital loss by subsection 39(2) of the Act.
9. In the single entity financial statements for the Appellant the Difference was charged to the retained earnings account in the Shareholders' Equity portion of its Balance Sheet.
10. The paid-up capital in respect of the Series A shares which were redeemed in 1987 was $87,954,250 immediately before they were redeemed and the paid-up capital in respect of the Series B-4 shares which were redeemed in 1987 was $834,679 immediately before they were redeemed.
11. In the reassessment, the Minister disallowed the Appellant's claim for a capital loss under subsection 39(2) of the Act on the redemption of the Series A and Series B-4 Shares.
12. The Appellant duly served a Notice of Objection to the Reassessment dated August 5, 1992, the receipt of which was acknowledged by the Minister on September 3, 1992.
13. More than 90 days passed after the Notice of Objection was served upon the Minister without the Minister confirming, varying or vacating the Reassessment, and the Appellant appealed to the Tax Court of Canada pursuant to section 169 of the Act.
4 The provisions of subsection 39(2) of the Act reads as follows:
(2) Capital gains and losses in respect of foreign currencies Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year, the following rules apply:- (a) the amount, if any, by which
(i) the aggregate of all such gains made by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be included in computing his income for the year or any other taxation year)
(ii) the aggregate of all such losses sustained by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be deductible in computing his income for the year or any other taxation year), and
(iii) if the taxpayer is an individual, $200,
- (b) the amount, if any, by which
(i) the aggregate determined under subparagraph (a)(ii),
(ii) the aggregate determined under subparagraph (a)(i), and
(iii) if the taxpayer is an individual, $200,
5 The Appellant maintains that the loss of $24,965,399 was one to which the provision of subsection 39(2) is applicable whereas the Minister of National Revenue (the “Minister”) takes the position that the difference between the Canadian equivalent of the redemption price and the issue price was a deemed dividend by virtue of subsection 84(3) of the Act and therefore cannot qualify for the treatment afforded by subsection 39(2).
6 Subsection 84(3) reads as follows:
(3) Redemption, etc. Where at any time after December 31, 1977 a corporation resident in Canada has redeemed, acquired or cancelled in any manner whatever (otherwise than by way of a transaction described in subsection (2)) any of the shares of any class of its capital stock,(a) the corporation shall be deemed to have paid at that time a dividend on a separate class of shares comprising the shares so redeemed, acquired or cancelled equal to the amount, if any, by which the amount paid by the corporation on the redemption, acquisition or cancellation, as the case may be, of those shares exceeds the paid-up capital in respect of those shares immediately before that time; and
(b) a dividend shall be deemed to have been received at that time by each person who held any of the shares of that separate class at that time equal to that portion of the amount of the excess determined under paragraph (a) that the number of those shares held by him immediately before that time is of the total number of shares of that separate class that the corporation has redeemed, acquired or cancelled, at that time.
7 Here we see two competing provisions of the Act arising from one fact situation.
8 While section 39, as a whole, sets out the various rules dealing with the recognition of capital gains and capital losses, subsection 39(2) was included specifically to deal with capital gains and losses resulting from foreign currency transactions. The scheme of Subdivision c of the Act, dealing with capital gains and losses has as one of it starting points the “disposition” of property.[FN1: <p>See section 40</p>] However, since no disposition takes place in a currency gain or loss situation, subsection 39(2) deems it a capital gain or loss from the disposition of currency of the country other than Canada. The subsection sets out that, if the rules are followed, where there is a gain or loss on a currency fluctuation (and it does not matter how it arose), there will be a deemed capital gain or capital loss and this is so even though there has been no disposition in fact.
9 What did the preferred shareholders pay on the acquisition of their shares and what did they receive on redemption? In both cases, it was United States currency, not the Canadian dollar equivalent. By redeeming the preferred shares, the Appellant conferred no benefit on the shareholders. They paid and received the exact same amount of United States dollars. It was only the issuer who could gain or lose on currency fluctuations, not the shareholder.
10 The Respondent maintains that since taxpayers must maintain their financial records in Canadian dollars, the difference between the Canadian dollar equivalent of what the shareholder received on redemption and what was paid, or issuance, is deemed to be a dividend under subsection 84(3). I think not.
11 In dealing with statutory interpretation, Mr. Justice Gonthier pointed out in Québec (Communauté urbaine) c. Notre- Dame de Bonsecours (Corp.) (1994), 95 D.T.C. 5017 (Eng.)(S.C.C.) at page 5021:
In Canada it was Stubart Investments Ltd. v. The Queen[84 DTC 6305],[1984] 1 S.C.R. 536, which opened the first significant breach in the rule that tax legislation must be strictly construed. This Court there held, per Estey, J., at p. 578, that the rule of strict construction had to be bypassed in favour of interpretation according to ordinary rules so as to give effect to the spirit of the Act and the aim of Parliament:
...the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable.
This turning point in the development of the rules for interpreting tax legislation in Canada was prompted by the realization that the purpose of tax legislation is no longer simply to raise funds with which to cover government expenditure. It was recognized that such legislation is also used for social and economic purposes. In The Queen v. Golden[86 DTC 6138],[1986] 1 S.C.R. 209, at pp. 214-15, Estey, J. for the majority explained Stubart as follows:
In Stubart... the Court recognized that in the construction of taxation statutes the law is not confined to a literal and virtually meaningless interpretation of the Act where the words will support on a broader construction a conclusion which is workable and in harmony with the evident purposes of the Act in question. Strict construction in the historic sense no longer finds a place in the canons of interpretation applicable to taxation statutes in an era such as the present, where taxation serves many purposes in addition to the old and traditional object of raising the cost of government from a somewhat unenthusiastic public.
Such a rule also enabled the Court to direct its attention to the actual nature of the taxpayer's operations, and so to give substance precedence over form, when so doing in appropriate cases would make it possible to achieve the purposes of the legislation in question. (See Johns-Manville Canada Inc. v. The Queen[85 DTC 5373],[1985] 2 S.C.R. 46, and The Queen v. Imperial General Properties Ltd.[85 DTC 5500],[1985] 2 S.C.R. 288.) It is important, however, not to conclude too hastily that this latter rule (giving substance precedence over form) should be applied mechanically, as it only has real meaning if it is consistent with the analysis of legislative intent. As Dickson, C.J. noted in Bronfman Trust v. The Queen[87 DTC 5059],[1987] 1 S.C.R. 32, at pp. 52-53:
I acknowledge, however, that just as there has been a recent trend away from strict construction of taxation statutes ... so too has the recent trend in tax cases been towards attempting to ascertain the true commercial and practical nature of the taxpayer's transactions. There has been, in this country and elsewhere, a movement away from tests based on the form of transactions and towards tests based on what Lord Pearce has referred to as a “common sense appreciation of all the guiding features” of the events in question...
(Emphasis added)
This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of taxpayers' transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon the taxpayer's sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.
This does not mean, however, that a deduction such as the interest deduction in s. 20(1)(c)(i), which by its very text is made available to the taxpayer in limited circumstances, is suddenly to lose all its strictures.
[Emphasis added in the original.]
In light of this passage there is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles: “...the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. The following passage from Vivien Morgan's article “Stubart: What the Courts Did Next” (1987), 35 Can. Tax J. 155 at pp. 169-70, adequately summarizes my conclusion:
There has been one distinct change [after Stubart], however, in the resolution of ambiguities. In the past, resort was often made to the maxims that an ambiguity in a taxing provision is resolved in the taxpayer's favour and that an ambiguity in an exempting provision is resolved in the Crown's favour. Now an ambiguity is usually resolved openly by reference to legislative intent.
[Emphasis added in the original.]
The teleological approach makes it clear that in tax matters it is no longer possible to reduce the rules of interpretation to presumptions in favour of or against the taxpayer or to well-defined categories known to require a liberal, strict or literal interpretation. I refer to the passage from Dickson, C.J., supra, when he says that the effort to determine the purpose of the legislation does not mean that a specific provision loses all its strictures. In other words, it is the teleological interpretation that will be the means of identifying the purpose underlying a specific legislative provision and the Act as a whole; and it is the purpose in question which will dictate in each case whether a strict or a liberal interpretation is appropriate or whether it is the tax department or the taxpayer which will be favoured.
12 In dealing with subsection 84(3) of the Act, Parliament surely intended only to deal with situations where a corporation attempts to return by way of disguised capital more than the shareholder paid, thus benefiting the shareholder without apparently paying a dividend. In that case, Parliament says that if a corporation chooses to do so, by making what appears a capital payment, a dividend will be deemed to have been paid in the amount of the excess of the amount received over the amount paid on the shares. It is the benefit which is taxed. If there is no benefit, from where comes the charging language of the Act, taxing it. The Minister says that it comes from subsection 84(3) which he believes to be applicable because more Canadian dollars were used to pay for US dollars on redemption, than Canadian dollars received when the shares were issued and therefore the difference or benefit must be a dividend.
13 On the other hand, subsection 39(2) was enacted to deal specifically with gains and losses on currency fluctuations.
14 Given the intent and purpose of these subsections of the Act, and having regard to the commercial aspects or economic substance of the transaction under review, one must ask: “What is the commercial reality of the transaction in the case at bar?” The transaction is one of redemption of shares for exactly what was paid for those shares in the currency in which they were paid. The reality also is that there is no benefit to the shareholder which there would have been had they received more than they paid and, accordingly, no dividend is paid by the issuer.
15 The loss is incurred not on the redemption of shares but on the acquisition of currency to redeem those shares. Nothing has been returned to the shareholders other than what they paid.
16 The fact that there is a conversion for the purpose of carrying the amounts on the corporation's books and records, does not change the legal obligation of the Company to pay US dollars. The paid up capital of the company was US dollars converted into Canadian for reporting purposes. On paying the redemption price, the company had to pay more for the US dollars but the shareholder received not the equivalent Canadian dollars but actual US dollars.
17 Of some assistance in this matter, is Tahsis Co. v. R. (1979), 79 D.T.C. 5328 (Fed. T.D.). In that case, the fluctuations came about in connection with borrowing and repaying. The Federal Court-Trial Division interpreted the provisions of subsection 39(2) as being applicable to the fluctuation or differences in currency values. However, it was only the post 1971 fluctuations which were allowed since the statute was specific in that regard.
18 I can see no difference between the situation in Tahsis (debt) and the situation in the case at bar (equity). In both situations, it is the borrower (debt) and the issuer (equity) who bear the risk of a rate of currency exchange being different at the moment that the debt/equity is issued and the moment when the debt/equity is redeemed and as such should benefit from the application of subsection 39(2).
19 Therefore, the appeal is allowed with costs with respect to the deemed capital loss and the matter shall be referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled to the foreign exchange capital loss as reported.
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