Imperial Oil Ltd. v. Canada; Inco Ltd. v. Canada, 2006 DTC 6639, 2006 SCC 46, [2006] 2 SCR 447

                                                 SUPREME COURT OF CANADA

Between:

Her Majesty The Queen

Appellant

and

Imperial Oil Limited

Respondent

and between:

Her Majesty The Queen

Appellant

and

Inco Limited

Respondent

‑ and ‑

Teck Cominco Limited

Intervener

Coram: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella and Charron JJ.

______________________________

Imperial Oil Ltd. v. Canada; Inco Ltd. v. Canada, [2006] 2 S.C.R. 447, 2006 SCC 46

Her Majesty The Queen                                                                                  Appellant

v.

Imperial Oil Limited                                                                                      Respondent

‑ and ‑

Her Majesty The Queen                                                                                  Appellant

v.

Inco Limited                                                                                                   Respondent

and

Teck Cominco Limited                                                                                    Intervener

Indexed as:  Imperial Oil Ltd. v. Canada; Inco Ltd. v. Canada

Neutral citation:  2006 SCC 46.

File Nos.:  30695, 30849.

2006:  February 7; 2006:  October 20.

Present:  McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella and Charron JJ.

on appeal from the federal court of appeal

Taxation — Income tax — Computation of business income — Capital losses — Discount on certain obligations — Foreign exchange losses — Debentures issued by taxpayer companies in U.S. dollars — Appreciation of U.S. dollar against Canadian dollar resulted in foreign exchange losses on redemption of debt obligations — Whether s. 20(1)(f) of Income Tax Act permits deductions from income of foreign exchange losses incurred on redemption of debt obligations —  Whether s. 20(1)(f) limited to deduction of original issue discounts — Whether foreign exchange losses constitute capital losses pursuant to s. 39(2)  of Income Tax Act — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 20(1) (f), 39(2) .

In 1989, Imperial Oil issued debentures in U.S. dollars and later redeemed a portion of those debentures in 1999.  The U.S. dollar had appreciated against the Canadian dollar and Imperial Oil suffered a loss on redemption which represented the original discount and the foreign exchange loss.  It took the position that it was entitled to deduct from income the entire loss under s. 20(1) (f)(i) of the Income Tax Act  (“ITA ”) or, in the alternative, that it was entitled to a deduction of 75% of the loss under s. 20(1) (f)(ii) and that the non‑deductible 25% under that formula was by default  a capital loss under s. 39(2) . The Minister of National Revenue decided that the loss was predominantly a capital loss under s. 39(2)  and not deductible under s. 20(1) (f).  The Tax Court of Canada upheld the Minister’s assessment with a minor adjustment.  The Federal Court of Appeal allowed Imperial Oil’s appeal, in part.  It allowed a deduction of 75% of the foreign exchange loss under s. 20(1) (f)(ii), but refused any further deduction. 

Similarly, in 1989, Inco issued debentures in U.S. dollars at a discount, later redeeming a portion of them in 2000.  Unlike Imperial Oil, Inco had sufficient U.S. funds on hand to redeem or purchase the debentures in the open market.  In computing its income for 2000, Inco nevertheless deducted, under s. 20(1) (f) of the ITA , a foreign exchange loss allegedly resulting from the purchase of the 1989 debentures.  The Minister disallowed the deduction.  The Tax Court of Canada confirmed the Minister’s assessment, finding that the change in the value of the Canadian dollar during the term of the debentures had not resulted in any realized loss or cost to Inco.  The Federal Court of Appeal, on the basis of its earlier decision in Imperial Oil, set aside that decision and sent the matter back to the Minister for reassessment.

Held (Binnie, Fish and Charron JJ. dissenting):  The appeals should be allowed.  The Minister’s assessments, as varied by the Tax Court of Canada in Imperial Oil, should be confirmed.

Per McLachlin C.J. and LeBel, Deschamps and Abella JJ.:  Section 20(1) (f) of the ITA  does not permit the deduction of foreign exchange losses, which must be claimed as a capital loss under s. 39 .  Since the purpose of s. 20(1) (f) is to address a specific class of financing costs arising out of the issuance of debt instruments at a discount, s. 20(1) (f) should not be construed as a broad provision allowing for the deductibility of a wide range of costs attendant upon financing in foreign currency, in the absence of any mention of such costs in the text of the ITA , and despite the fact that such costs are usually regarded as being on capital account.  The text, scheme and context of s. 20(1) (f) indicate that the deduction is limited to original issue discounts —  shallow discounts in para. (f)(i) and deep discounts in para. (f)(ii).  Although the word “discount” does not appear in s. 20(1) (f), the opening words of s. 20(1) (f)(i) set out what is commonly accepted as the definition of a discount.  Moreover, there is no express mention in s. 20(1)(f) of a foreign currency exchange.  These factors suggest that the primary referent of s. 20(1) (f) is something other than foreign exchange losses, namely, payments in the nature of discounts.  Furthermore, the scheme of s. 20 , which provides deductions for virtually all costs of borrowing, does not imply that foreign exchange losses are also deductible under s. 20 .  The other costs enumerated in s. 20  are intrinsic costs of borrowing.  Foreign exchange losses arise only where the debtor chooses to deal in foreign currency.  They belong to a different class than the costs referred to in s. 20 . [1] [62] [64-65] [67]

If s. 20(1)(f) applied to foreign exchange losses, the section would operate quite differently in relation to obligations denominated in foreign currency than it does in relation to obligations denominated in Canadian dollars.  In the context of foreign currency obligations, the deduction would reflect the appreciation or depreciation of the principal amount over time, whereas in the context of Canadian dollar obligations, the deduction would reflect a point‑in‑time expense — the discount at the date of issue.  In the context of foreign currency obligations, the s. 20(1)(f) deduction would accordingly be available even where there was no original issue discount.  Such an approach would have the additional effect of altering the distinction between shallow discounts under s. 20(1)(f)(i) and deep discounts under s. 20(1)(f)(ii), which would be replaced by a distinction of a different nature — one that can be ascertained only at the time of repayment. [66]

If s. 20(1)(f) applied to foreign exchange losses, the section would  also conflict with the general treatment of capital gains and losses in the ITA .  In particular, such an interpretation would not properly appreciate the role of s. 39  of the ITA .  That provision sets out a meaning of capital gains and losses and includes express rules for the treatment of gains and losses resulting from currency fluctuations.  Although s. 39 is a residual provision, this section is a statement of Parliament’s intent to treat foreign exchange losses as capital losses. [19] [66] [68]

Finally, the Federal Court of Appeal decision in Gaynor does not support the proposition that all elements of a statutory formula must be converted into their Canadian dollar value at the relevant time.  Converting the amounts in the statutory formula merely simplified the method of calculating the amount of the capital gain in that case. Gaynor did not purport to establish a new general principle. [52]

Per Binnie, Fish and Charron JJ. (dissenting):  In the nature of things foreign currencies fluctuate in value against the Canadian dollar.  These fluctuations are not incidental or collateral to the foreign debt transaction but are as inherent and inescapable as if the debt was denominated in bars of silver.  The respondent taxpayers in these cases both issued debentures denominated in U.S. dollars, which they subsequently retired at a time when the U.S. dollar was trading at a higher premium to the Canadian dollar than it had at the date of issuance.  The taxpayers’ claim thus fits squarely with s. 20(1) (f) of the ITA .  This provision permits a deduction of the amount by which the original issue proceeds of the debt are exceeded by the amount paid in satisfaction of the principal amount of the debt.  This deduction is not limited to the “original issue discount” and may include the increase in the cost to the taxpayers of buying U.S. dollars between the date the obligations were issued and the date they were satisfied.  The extra cost of buying the U.S. dollars payable to satisfy the requirements of a debenture is part of the cost of the financing arising directly out of the debtor‑creditor relationship.  The Crown’s argument limiting s. 20(1) (f) to “original issue discounts” rests on its attempt to bifurcate a single foreign loan transaction into a “loan” contract and a “foreign exchange” loss.  Such an argument does not respect the precise nature of the taxpayer’s actual legal relationships and obligations.  Furthermore, the limitation of s. 20(1) (f) to “original issue discounts” would be contrary to the Minister’s treatment of other commodity‑type loans where the Minister has routinely allowed a s. 20(1) (f) deduction.  There is no principled reason to treat foreign currency loans differently than other commodity‑type loans under s. 20(1) (f). [70] [72] [77‑79] [83-84] [88] 

When the relevant language of ss. 20(1) (f) and 248(1)  of the ITA  is read in light of the statutory purpose, the only way the “maximum total amount . . . payable on account of the obligation” can be ascertained (as required by the definition of “principal amount” in s. 248(1) ) is by using the exchange rate prevailing when the obligation becomes payable.  It is at that time the “obligation” arose on the part of the taxpayers to purchase U.S. dollars to retire their debt.  It follows that the relevant exchange rate is the rate prevailing at the date of redemption because it is not until that date that it is possible to determine the maximum amount “payable on account of the obligation”.  It is thus the redemption, not the issuance, that triggers the tax deduction.  Since the principal amount of the obligation must be ascertained at the date of redemption, the debentures in these cases do not meet the criteria of s. 20(1) (f)(i).  Consequently, the taxpayers are entitled only to the deduction permitted by s. 20(1) (f)(ii). [77] [86-87]

Cases Cited

By LeBel J.

Distinguished:  Gaynor v. The Queen, 91 D.T.C. 5288, aff’g 88 D.T.C. 6394, aff’g 87 D.T.C. 279; referred to:  Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62; Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54; Mathew v. Canada, [2005] 2 S.C.R. 643, 2005 SCC 55; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Tip Top Tailors Ltd. v. Minister of National Revenue, [1957] S.C.R. 703; Eli Lilly and Co. (Canada) Ltd. v. Minister of National Revenue, [1955] S.C.R. 745; Alberta Gas Trunk Line Co. v. Minister of National Revenue, [1972] S.C.R. 498; Imperial Tobacco Co. v. Kelly, [1943] 2 All E.R. 119; Bentley v. Pike (1981), 53 T.C. 590; Pattison (Inspector of Taxes) v. Marine Midland Ltd., [1984] 1 A.C. 362; Capcount Trading v. Evans (1992), 65 T.C. 545; Nowegijick v. The Queen, [1983] 1 S.C.R. 29.

By Binnie J. (dissenting)

Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54; Eli Lilly and Co. (Canada) Ltd. v. Minister of National Revenue, [1955] S.C.R. 745; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Canada v. Canadian Pacific Ltd., [2002] 3 F.C. 170, 2001 FCA 398; Montreal Coke and Manufacturing Co. v. Minister of National Revenue, [1944] A.C. 126, aff’g [1942] S.C.R. 89 (sub nom. Montreal Light, Heat and Power Consolidated v. Minister of National Revenue); Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32; Tennant v. M.N.R., [1996] 1 S.C.R. 305.

Statutes and Regulations Cited

Currency Act, R.S.C. 1985, c. C-52, ss. 3(1) , 14 .

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 3 , 9 , 18(1) (b), 20(1) , 39 , 79 , 80 , 248  “amount”, “principal amount”.

Authors Cited

Canada. Canada Revenue Agency. Income Tax Rulings Directorate. Advance Income Tax Ruling, No. 1999-0008753 (F), "Débentures échangeables", January 1, 2000.

Canada. Canada Revenue Agency. Income Tax Rulings Directorate. Advance Income Tax Ruling, No. 90063-3 (E), "Exchangeable Debenture", July 30, 1990.

Canada. Canada Revenue Agency. Income Tax Rulings Directorate. Advance Income Tax Ruling, No. 2000-0060103 (E), "Principal Amount of Debt Obligation", January 1, 2001.

Canada. Canada Revenue Agency. Income Tax Rulings Directorate. Technical Interpretation, No. 9703377 (E), "Consumer Based Loan", April 17, 1997.

Côté, Pierre‑André.  The Interpretation of Legislation in Canada, 3rd ed.  Scarborough, Ont.:  Carswell, 2000.

Driedger, Elmer A.  Construction of Statutes, 2nd ed.  Toronto: Butterworths, 1983.

Krishna, Vern.  The Fundamentals of Canadian Income Tax, 8th ed.  Toronto:  Carswell, 2004.

APPEAL from a judgment of the Federal Court of Appeal (Létourneau, Sharlow and Malone JJ.A.), [2005] 1 C.T.C. 65, 2004 D.T.C. 6702, 327 N.R. 329, [2004] F.C.J. No. 1793 (QL), 2004 FCA 361, allowing Imperial Oil’s appeal, in part, from a judgment of Miller J., [2004] 2 C.T.C. 3030, 2004 D.T.C. 2377, [2004] T.C.J. No. 122 (QL), 2004 TCC 207.  Appeal allowed, Binnie, Fish and Charron JJ. dissenting.

APPEAL from a judgment of the Federal Court of Appeal (Décary, Nadon and Sexton JJ.A.), [2005] 1 C.T.C. 369, 2005 D.T.C. 5109, [2005] F.C.J. No. 169 (QL), 2005 FCA 38, allowing Inco’s appeal from a judgment of Bonner J., [2005] 1 C.T.C. 2096, 2004 D.T.C. 3586, [2004] T.C.J. No. 531 (QL), 2004 TCC 468.  Appeal allowed, Binnie, Fish and Charron JJ. dissenting.

Wendy Burnham and Rhonda Nahorniak, for the appellant.

Al Meghji and Edward C. Rowe, for the respondent Imperial Oil Limited.

Warren J. A. Mitchell, Q.C., and Michael W. Colborne, for the respondent Inco Limited.

Written submissions only by Wilfrid Lefebvre, Q.C., and Dominic C. Belley, for the intervener.

The judgment of McLachlin C.J. and LeBel, Deschamps and Abella JJ. was delivered by

LeBel J. —

I.  Introduction

1                                  These two appeals turn on the proper interpretation of a provision of the federal Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”), namely s. 20(1) (f).  In general terms, s. 20(1)  permits the deduction of various financing costs in the computation of business income.  The question is whether s. 20(1) (f) permits the deduction of foreign exchange losses incurred in the redemption of debt obligations or whether it is limited to the deduction of original issue discounts.  With minor changes in the Imperial Oil case, the judgments of the Tax Court upheld the assessments of the Minister of National Revenue (“Minister”) which had disallowed the deduction of the foreign exchange losses.  The Federal Court of Appeal allowed the appeals of Imperial Oil and Inco.  For the reasons that follow, I would reverse the Court of Appeal’s judgments and reinstate the assessments, in accordance with the approach adopted by Miller J. in the Imperial Oil case.  Section 20(1) (f) does not permit the deductions claimed by the respondents, who are only entitled to claim a capital loss under s. 39  of the ITA .

II.  Background

A.  Imperial Oil

2                                  In 1989, Imperial Oil issued 30‑year debentures with a face amount of US$300,000,000.  In 1999, it redeemed a portion of those debentures with a face value of US$87,130,000.  The United States dollar had appreciated against the Canadian dollar and the respondent suffered a loss on redemption of C$27,831,712 representing the original discount and the foreign exchange loss.  The respondent took the position that it was entitled to deduct the entire loss under s. 20(1) (f)(i) of the ITA .  In the alternative, it took the position that it was entitled to a deduction under s. 20(1) (f)(ii) and that the non‑deductible 25% under that formula was by default  a capital loss under s. 39(2) .  The Minister decided that the C$27,831,712 loss was predominantly a capital loss under s. 39(2) .  The respondent appealed, and three questions were referred to the Tax Court of Canada: what portion was deductible under s. 20(1) (f)(i); what portion was deductible under s. 20(1) (f)(ii); and, what portion was a capital loss under s. 39(2) ?

B.  Inco

3                                  In 1989, Inco issued sinking fund debentures of US$150,000,000 at a discount of 2.6% (or US$3,900,000).  It converted the discount to Canadian dollars ($4,652,827) at the exchange rate in effect when the debentures were issued, and deducted 20% of the converted amount as a financing expense under s. 20(1) (e) of the ITA  in each of the taxation years 1989 to 1993.  The Minister did not challenge these deductions.  Inco receives a substantial portion of its revenues in U.S. dollars, which it deposits in U.S. dollar bank accounts.  The proceeds of the issuance were deposited in U.S. dollar accounts or used to pay debts denominated in U.S. dollars.  Inco had sufficient U.S. funds on hand in the United States to redeem or purchase the debentures in the open market.  Between February 21 and May 9, 2000, Inco purchased US$29,120,000 of the 1989 debentures in the open market, paying US$29,012,850 for them.  On June 15, 2000, by mandatory and optional payments into the sinking fund, it redeemed more of the 1989 debentures with an aggregate face amount of US$22,500,000. In 1992, Inco issued debentures with a face amount of US$200,000,000. Between March 3 and November 8, 2000, Inco purchased US$21,692,000 of the 1992 debentures in the open market, paying US$21,269,708 for them.  In computing its income for 2000, Inco deducted, under s. 20(1) (f) of the ITA , a foreign exchange loss allegedly resulting from the purchase of the 1989 debentures.  The Minister disallowed the deduction and Inco appealed to the Tax Court of Canada.

III.  Judicial History

A.  Imperial Oil Limited

(1) Tax Court of Canada, [2004] 2 C.T.C. 3030, 2004 TCC 207

4                                  Miller J. mostly agreed with the Minister on the outcome of the appeal filed in the Tax Court of Canada.  However, he did not agree with any of the interpretations of s. 20(1) (f) advanced by the taxpayer or the Minister.  The result was that he made a minor adjustment to the assessment and that, in the end, Imperial Oil lost their appeal.

5                                  Miller J. began by noting that the parties agreed that s. 20(1) (f)(i) applied rather than s. 20(1) (f)(ii).  The deduction under s. 20(1) (f)(i), he observed, equals the lesser of the principal amount and the amount paid in the year in satisfaction of the principal amount less the amount for which the obligation was issued.  Miller J. added that the parties also agreed that the exchange rate at the time of redemption applied to “the amount paid in satisfaction” and that the exchange rate at the time of issuance applied to “the issue amount”, but disagreed as to what rate applied to the “principal amount”.  He concluded that no ambiguity arose if the calculation was done entirely in U.S. dollars and only the resulting loss was converted into Canadian dollars using the rate at the time of redemption.  In his opinion, s. 20(1) (f)(i) was not intended to apply to foreign exchange gains or losses. 

6                                  Miller J. rejected an interpretation of Gaynor v. The Queen, 91 D.T.C. 5288 (F.C.A.), according to which every transaction resulting in an asset, liability, revenue item or expense must be converted into Canadian dollars at the exchange rate in effect on the date of the transaction.   He concluded that Gaynor applies only to computations of capital gains and that nothing in Gaynor requires that it be applied to income computations or dictates that the word “amount” refers to “Canadian amount” wherever it appears in the ITA .  Miller J. distinguished capital gains, which result from the change in the value of an asset over time, that is, between the times of acquisition and disposition, from income expenses, which require a snapshot at the time of payment without the measurement of a change in value over time.  He decided that the formula under s. 20(1) (f)(i) does not address increases or decreases in value but applies at a single point in time and that it was therefore sufficient to convert only the resulting loss into Canadian dollars.  He added that, if he was wrong in this respect, the object of the section required that each amount of the formula  be converted at the 1999 exchange rate because the “one time snapshot rate” has to be the rate at the time of redemption (para. 46).

7                                  Miller J. concluded that Parliament had not intended foreign exchange losses to be deductible under s. 20(1) (f), as they pertained to the capital element of borrowing.  He stated that s. 20(1) (f) deals with obligations issued at less than face value and allows the discount to be deducted at the time of payment.  In his view, foreign exchange losses incurred in the course of borrowing are not akin to the other costs of borrowing listed as deductible expenses in s. 20(1) .  He noted that foreign exchange losses are not specifically identified as a capital item to be treated as a current expense and that the other costs for which deductions are available are known at the time of the contract and derive from the contract of origin.  Miller J. concluded that the deduction in s. 20(1) (f) encompasses only original issue discounts and the part of the foreign exchange loss that pertains specifically to the deductible discounts.  On that basis, he held that $1,548,325 was deductible under s. 20(1) (f)(i), that nothing was deductible under s. 20(1) (f)(ii), and that there was a capital loss of $26,283,387.

(2) Federal Court of Appeal, [2005] 1 C.T.C. 65, 2004 FCA 361

8                                  Imperial Oil appealed and the Minister cross-appealed.  The Court of Appeal allowed Imperial Oil’s appeal in part.  It allowed a deduction of 75% of the foreign exchange loss under s. 20(1) (f)(ii), but refused any further deduction.

9                                  Sharlow J.A., for the court, concluded that the principal amount of a debt denominated in foreign currency fluctuates with the exchange rate for the purposes of s. 20(1) (f) and that, in the instant case, the amount increased between the dates of issuance and redemption.  She concluded that Gaynor was binding and that, according to it, each element of a computation under s. 20(1) (f) must be converted into Canadian dollars at the exchange rate prevailing at the time of the transaction in question.  She calculated the principal amount at the time of redemption using the exchange rate on the redemption date, and the issue amount using the exchange rate on the date of issue, and concluded that the principal amount had increased from $102,517,158 to $129,119,689.  Sharlow J.A. concluded that a principal amount can increase during the term of a loan if the increase is mandated by a contractual term governing the debt, and that a foreign currency loan implicitly involves such a contractual term.  Because a foreign currency loan is for units of foreign currency on terms that require the same number of units of the foreign currency to be returned at the end of the term, the effect is that the Canadian dollar equivalent of the repayment may be more or less than the Canadian dollar equivalent of the borrowed amount.  She found that s. 248(26)  of the ITA  does not compel a conclusion that the principal amount was necessarily the same at the times of issuance and redemption, because all it does is clarify s. 80 , and even if it were applied to s. 20(1) (f), it would merely confirm that the original principal amount was $102,517,158. 

10                              Sharlow J.A. stated that the deduction provided for in s. 20(1) (f) is available where the threshold test established in the opening words of the provision is met and that this provision most commonly applies when debt is issued at a discount, although it may also apply in other circumstances.  Because the full deduction under s. 20(1) (f)(i) is available only where the obligation was issued for not less than 97% of the principal amount, and because this condition had not been met in the case at bar, the respondent was entitled only to the 75% deduction under s. 20(1) (f)(ii).  Sharlow J.A. rejected an argument that the non‑deductible 25% was excluded from the computation of income and fell by default into s. 39(2)  as a deemed capital loss.  She concluded that s. 248(28) prevents double counting and that the total redemption cost falls within s. 20(1) (f)(ii).  She observed that the deduction is designed to be equivalent to the tax relief for a capital loss and that to allow a further deduction under s. 39(2)  would be to allow more relief than Parliament had intended.  In light of these conclusions, Sharlow J.A. was of the view that there was no need to address the Minister’s cross-appeal.

B.  Inco Limited

(1) Tax Court of Canada, [2005] 1 C.T.C. 2096, 2004 TCC 468

11                              Bonner J. heard the appeal in Inco after the decision of his colleague Miller J. in Imperial Oil.  He stated that he did not agree with parts of Miller J.’s reasoning and wrote his own reasons for dismissing the appeal and confirming the assessment.

12                              Bonner J. held that s. 20(1) (f) of the ITA  did not permit the deduction of the foreign exchange losses.  He noted that Inco had borrowed U.S. dollars in 1989 and 1992, had either deposited the funds in U.S. dollar accounts or used them to repay U.S. dollar debt, and had then drawn on U.S. dollar accounts to retire the debentures.  He found that the change in the value of the Canadian dollar during the term of the debentures had not resulted in any realized loss or cost to Inco and that Inco was seeking to deduct what was, in his opinion, a phantom loss.  In his view, it was impossible to imagine that s. 20(1) (f) was intended to permit a deduction in the absence of a realized loss or cost.  The foreign exchange fluctuations neither added to nor subtracted from the cost of borrowing. He rejected an argument that, for the purposes of s. 20(1) (f), the “principal amount” of a borrowing fluctuates with exchange rates over the life of the instrument.  In his opinion, the “principal amount” referred to in s. 20(1) (f) is the face amount of the instrument when it is issued, which does not vary, and there is no basis in logic for a view that the expression of that principal amount in a foreign currency gives the Canadian dollar equivalent of the principal amount a variable quality.  He stated that treating the principal amount as one that fluctuates with exchange rates would include amounts in the deduction that were never in Parliament’s contemplation.  Given his conclusion, he declined to consider whether s. 20(1) (f) would apply to purchases of obligations on the open market for cancellation by the debtor.

(2) Federal Court of Appeal, [2005] 1 C.T.C. 369, 2005 FCA 38

13                              Inco’s appeal to the Federal Court of Appeal was successful.  Nadon J.A. held that the Court had decided the relevant issues in its previous decision in the Imperial Oil case and that the two cases could not be distinguished.  For these reasons, he set aside the Tax Court’s decision and sent the matter back to the Minister for reassessment.

IV.  Analysis

A.  Issues

14                              The parties disagree on the tax treatment of foreign exchange losses incurred upon redemption or, at least in part in the Inco case, upon repurchase and cancellation of debentures issued in U.S. dollars.  The outcome of the appeals turns on the interpretation of s. 20(1) (f) of the ITA , which permits the following deduction when computing business income:

20. (1) . . .

(f)  an amount paid in the year in satisfaction of the principal amount of any bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation issued by the taxpayer after June 18, 1971 on which interest was stipulated to be payable, to the extent that the amount so paid does not exceed,

(i)  in any case where the obligation was issued for an amount not less than 97% of its principal amount, and the yield from the obligation, expressed in terms of an annual rate on the amount for which the obligation was issued (which annual rate shall, if the terms of the obligation or any agreement relating thereto conferred on its holder a right to demand payment of the principal amount of the obligation or the amount outstanding as or on account of its principal amount, as the case may be, before the maturity of the obligation, be calculated on the basis of the yield that produces the highest annual rate obtainable either on the maturity of the obligation or conditional on the exercise of any such right) does not exceed 4/3 of the interest stipulated to be payable on the obligation, expressed in terms of an annual rate on

(A) the principal amount of the obligation, if no amount is payable on account of the principal amount before the maturity of the obligation, or

(B)  the amount outstanding from time to time as or on account of the principal amount of the obligation, in any other case,

the amount by which the lesser of the principal amount of the obligation and all amounts paid in the year or in any preceding year in satisfaction of its principal amount exceeds the amount for which the obligation was issued, and

(ii) in any other case, 3/4 of the lesser of the amount so paid and the amount by which the lesser of the principal amount of the obligation and all amounts paid in the year or in any preceding taxation year in satisfaction of its principal amount exceeds the amount for which the obligation was issued;

15                              On a proper interpretation, is the deduction in this provision limited to original issue discounts?  Should it be viewed as encompassing a broader range of financing costs, including foreign exchange losses?  Are such losses deductible only as capital losses under s. 39  of the ITA ?  In these two appeals, although the parties purport to base their arguments on the same principles of interpretation of tax statutes, their answers to these questions and their propositions regarding the scope of s. 20(1) (f) are in stark conflict.

16                              The scope of the present litigation has been narrowed and clarified since the Minister  issued his assessments.  Imperial Oil now relies solely on s. 20(1) (f)(ii) and asks for only 75% of its currency exchange loss, as permitted by that provision.  It no longer claims a full deduction under s. 20(1) (f)(i) or a capital loss under s. 39  for the remaining 25%. In Inco, the Minister has abandoned the argument that the taxpayer’s currency losses are purely notional or phantom losses.  In this appeal, the Minister’s factum raises an issue which is specific to Inco, namely whether currency losses incurred as a result of a repurchase of debt instruments on the open market are deductible only under s. 39(3).  There are no real evidentiary difficulties.  The two cases proceeded on the basis of joint statements of facts.  In addition, in Inco, the Minister presented expert evidence about the meanings attributed by the financial industry to some of the terms used in s. 20(1) (f).  In essence, the two appeals raise similar issues.  Before I turn to those issues, I will outline the statutory framework that governs the present litigation.

B.  Statutory Framework

17                              Despite its undeniable — and growing — complexity, the current federal ITA  displays some fundamental structural characteristics.  One of these characteristics, which is provided for in s. 3 , is the distinction between income and capital.  Capital gains are only partially brought into income for taxation purposes.  The rules governing the computation of  income, gains and losses are found in ss. 9  to 37 .  They include a general rule stated in s. 18(1) (b), which prohibits the deduction of capital amounts unless another provision of the ITA  expressly authorizes such a deduction:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of  . . .

(b)  an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

18                              A series of exceptions to this rule are set out in s. 20, which provides for a broad range of deductions in respect of a variety of financing costs, such as interest (s. 20(1) (c)), financing expenses, including commissions to securities dealers (s. 20(1) (e)), and annual fees on debt (s. 20(1) (e.1)).  Section 20(1) (f) is a part of this list.

19                              Section 39 then sets out the meaning of capital gains and losses.  It includes express rules in s. 39(2)  for the treatment of gains and losses resulting from currency fluctuations:

39. . . .

(2) 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 total 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 the taxpayer’s income for the year or any other taxation year)

exceeds

(ii)  the total 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 the taxpayer’s income for the year or any other taxation year), and

(iii) if the taxpayer is an individual, $200,

shall be deemed to be a capital gain of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital gain is the amount determined under this paragraph; and 

(b) the amount, if any, by which

(i) the total determined under subparagraph (a)(ii),

exceeds

(ii) the total determined under subparagraph (a)(i), and      

(iii) if the taxpayer is an individual, $200,

shall be deemed to be a capital loss of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital loss is the amount determined under this paragraph.

20                              In addition, s. 39(3) provides specific rules in respect of gains and losses arising out of purchases of bonds on the open market:

39. . . .

(3) Where a taxpayer has issued any bond, debenture or similar obligation and has at any subsequent time in a taxation year and after 1971 purchased the obligation in the open market, in the manner in which any such obligation would normally be purchased in the open market by any member of the public,

(a) the amount, if any, by which the amount for which the obligation was issued by the taxpayer exceeds the purchase price paid or agreed to be paid by the taxpayer for the obligation shall be deemed to be a capital gain of the taxpayer for the taxation year from the disposition of a capital property, and

(b) the amount, if any, by which the purchase price paid or agreed to be paid by the taxpayer for the obligation exceeds the greater of the principal amount of the obligation and the amount for which it was issued by the taxpayer shall be deemed to be a capital loss of the taxpayer for the taxation year from the disposition of a capital property,

to the extent that the amount determined under paragraph (a) or (b) would not, if section 3 were read in the manner described in paragraph (1)(a) and this Act were read without reference to subsections 80(12) and (13), be included or be deductible, as the case may be, in computing the taxpayer’s income for the year or any other taxation year.

C.  Positions of the Parties

21                              In the Minister’s opinion, s. 20(1) (f) is clear in its wording and purpose.  It establishes a specific deduction for discounts on the issuance of debt instruments.  The provision was never intended to address the tax consequences of foreign exchange losses related to the issuance and redemption of foreign currency bonds or debentures, or, in the Inco case, to the purchase of such bonds or debentures on the open market. Section 39(2)  applies, and it treats such losses as capital losses, which can only be set off against capital gains. 

22                              The taxpayers, too, rely on the clarity of the wording of s. 20(1) (f).  In their opinion, this provision, properly understood, simply means that foreign exchange losses in respect of debt instruments are deemed to be deductible from profits for income tax purposes.  Section 39(2)  merely plays the role of a residual basket clause which applies only when other provisions do not.

23                              Whichever way we turn, therefore, this is another classic case of interpretation of tax statutes.  What are these provisions? How do they interrelate?  Given the nature of this problem, a brief review of the principles of interpretation applicable to tax statutes is appropriate.

D.  Principles of Interpretation Applicable to Tax Statutes

24                              This Court has produced a considerable body of case law on the interpretation of tax statutes.  I neither intend nor need to fully review it.  I will focus on a few key principles which appear to flow from it, and on their development.

25                              The jurisprudence of this Court is grounded in the modern approach to statutory interpretation.  Since Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, the Court has held that the strict approach to the interpretation of tax statutes is no longer appropriate and that the modern approach should also apply to such statutes:

[T]he 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 . . . .

(E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87; Stubart, at p. 578, per Estey J.; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62, at para. 36, per Iacobucci J.)

26                              Despite this endorsement of the modern approach, the particular nature of tax statutes and the peculiarities of their often complex structures explain a continuing emphasis on the need to carefully consider the actual words of the ITA , so that taxpayers can safely rely on them when conducting business and arranging their tax affairs.  Broad considerations of statutory purpose should not be allowed to displace the specific language used by Parliament (Ludco, at paras. 38-39).

27                              The Court recently reasserted the key principles governing the interpretation of tax statutes — although in the context of the “general anti-avoidance rule”, or “GAAR” — in its judgments in Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54, and Mathew v. Canada, [2005] 2 S.C.R. 643, 2005 SCC 55.  On the one hand, the Court acknowledged the continuing relevance of a textual interpretation of such statutes.  On the other hand, it emphasized the importance of reading their provisions in context, that is, within the overall scheme of the legislation, as required by the modern approach.

28                              In their joint reasons in Canada Trustco, the Chief Justice and Major J. stated at the outset that the modern approach applies to the interpretation of tax statutes.  Words are to be read in context, in light of the statute as a whole, that is, always keeping in mind the words of its other provisions:

It has been long established as a matter of statutory interpretation that “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”: see 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at para. 50. The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole. [para. 10]

29                              The Chief Justice and Major J. then addressed the underlying tension between textual interpretation, taxpayers’ expectations as to the reliability of their tax and business arrangements, the legislature’s objectives and the purposes of specific provisions or of the statute as a whole:

As a result of the Duke of Westminster principle (Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)) that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable, Canadian tax legislation received a strict interpretation in an era of more literal statutory interpretation than the present. There is no doubt today that all statutes, including the Income Tax Act , must be interpreted in a textual, contextual and purposive way. However, the particularity and detail of many tax provisions have often led to an emphasis on textual interpretation. Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe. [para. 11] 

(See also Mathew, at paras. 42-43.)

30                              Keeping in mind those principles and the tension between them, our Court must now determine the meaning of s. 20(1) (f).  The provision includes a rough equation or mathematical formula.  The problem is understanding what should go into this equation.

E.  Disagreement About the Section 20(1) (f) Formula

31                              As we have seen, s. 3  of the ITA  establishes the basic formula for the calculation of income under the ITA .  Specifically, it sets out the various sources of income and provides that capital gains and losses are to be determined independently of income from sources such as employment, business and property.  Section 9  defines income from a business as the taxpayer’s profit from that business.  Section 9  is subject to s. 18 , which prohibits the deduction of certain amounts in computing income from business or property.  Section 18(1) (b) prohibits the deduction of amounts paid on account of capital.  

32                              The respondents in both cases issued the debentures to raise financial capital and the borrowing is accordingly on capital account.  Any costs related to that borrowing are therefore “payment[s] on account of capital” within the meaning of s. 18(1) (b) of the ITA  and, as such,  are not deductible from income unless the deduction thereof is expressly permitted.  Similarly, any foreign exchange loss on the debentures would be a payment on account of capital because the characterization of a foreign exchange gain or loss generally follows the characterization of the underlying transaction: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 68; Tip Top Tailors Ltd. v. Minister of National Revenue, [1957] S.C.R. 703, at p. 707.  As was mentioned above, s. 20  of the ITA  provides for a number of deductions for capital outlays “[n]otwithstanding paragraphs 18(1) (a), (b) and (h)”.  The instant cases turn on the proper interpretation of the deduction encompassed by s. 20(1) (f).  Specifically, the question is whether the deduction provided for in para. (f) is exclusively one for original issue discounts or whether it is instead a broader deduction that applies more generally to the capital cost of borrowing.

33                              The formula described in s. 20(1) (f) is as follows:

                                               X = [lesser of A or B] – [C]

where

X is the amount of the deduction;

A is the principal amount of the obligation;

B is all amounts paid in the year or in any preceding year in satisfaction of the principal amount; and

C is the amount for which the obligation was issued.

34                              The parties agree that all the amounts must be converted into Canadian dollars.  They further agree that C (the issue amount) must be converted at the exchange rate on the date of issue (1989) and that B (the amounts actually paid) must be converted at the exchange rate on the date of disposition (1999 and 2000).  The parties disagree about the exchange rate applicable to the calculation of A (the principal amount).  The appellant submits that A is a fixed amount in Canadian dollars as of the issue date, while the respondents submit that for an obligation issued in foreign currency, the principal amount (A) fluctuates with the exchange rate and is not fixed until the date of disposition.

35                              In Imperial Oil, Miller J. concluded that the calculation could be performed entirely in U.S. dollars, with the result (X) then being converted into Canadian dollars.  In the alternative, he stated that all the amounts (including the issue amount) should be converted into Canadian dollars as of the date of disposition.  The result of Miller J.’s approach is to include the foreign exchange loss attributable to the discount amount in the s. 20(1) (f) deduction, but to leave the whole of the foreign exchange loss on the redeemed debentures for the computation of a capital gain or loss under s. 39 of the Act.  At the Federal Court of Appeal, Sharlow J.A. agreed with the respondents that all elements of the formula must be converted into Canadian dollars and that the principal amount (A) of the obligation is not fixed until the date of disposition.  The result of Sharlow J.A.’s approach is to include the whole of the foreign exchange loss on the debentures in the s. 20(1) (f) deduction. 

36                              It is interesting to note that the interpretive difficulty in the cases at bar seems to stem primarily from the introduction of a foreign exchange element into the statutory formula.  If the debentures had been issued in Canadian dollars, the meaning and application of s. 20(1) (f) would be relatively clear.  In such a case, it appears that the only clear referent of s. 20(1) (f) would be original issue discounts — shallow discounts in subpara. (i) and deep discounts in subpara. (ii).  When a loan obligation denominated in foreign currency is involved, the application of s. 20(1) (f) becomes less clear.  The Minister’s position puts a greater emphasis on discerning Parliament’s intent, from both extrinsic and intrinsic evidence, while the respondents’ position leans more towards a textual interpretation, starting from the definition of “principal amount” in s. 248(1)  and the use of that same expression in other provisions of the ITA .  While the Minister argues that s. 20(1) (f) is limited to original issue discounts, the respondents argue that s. 20(1) (f) was intended to cover both discounts and other capital costs of borrowing. 

37                              In my opinion, the greatest difficulty with these appeals stems from the fact that all parties agree, as did the Federal Court of Appeal, that Gaynor stands for the proposition that each element of a statutory formula in the ITA  must be converted into Canadian dollars in order to determine the amount that may be deducted pursuant to the provision in question.  The effect of this position would be to make it easier to roll foreign exchange gains and losses over into other deductions, such as the s. 20(1) (f) deduction at issue in the instant cases.  Miller J. rejected this position in Imperial Oil, concluding that the amount referred to in s. 20(1) (f) could be determined in foreign currency, with only the result being translated into Canadian dollars.  If Gaynor does not compel the conversion of each element of a statutory formula into Canadian dollars, then the interpretive exercise is simpler and it is possible to focus more squarely on discerning whether Parliament intended the foreign exchange losses to be deductible under s. 20(1) (f).

38                              To resolve this problem, I will begin by addressing a line of cases cited by the respondent, Imperial Oil, for the proposition that foreign currency is no different from any other commodity under Canadian tax law.  If this proposition holds, it would strengthen the case for bringing fluctuations in the value of foreign currency into the s. 20(1) (f) equation.  I will then turn to a discussion of Gaynor and the related U.K. case law examined by Miller J. in Imperial Oil. 

F.  Money as a Commodity

39                              Imperial Oil submits that, in Canada, foreign currency does not differ from any other commodity.  A foreign amount is unknown to Canadian law unless it is converted into Canadian dollars.  Such a conversion is required in order to properly interpret and apply the s. 20(1) (f) formula.  Imperial Oil argues that a strong body of case law supports its position.  But do the cases it cites really stand for this proposition and for the legal consequences it draws from them?  I will now turn to the cases in question to determine what principles can be drawn from them.

40                              In Tip Top Tailors, the taxpayer company purchased quantities of cloth in Great Britain.  The taxpayer’s normal practice was to pay for each lot by purchasing sterling at the prevailing exchange rate.  In 1948, the taxpayer foresaw that the pound sterling would be devalued and arranged for a line of credit on a British bank account that would not have to be repaid until the end of the year.  The taxpayer recorded the individual purchases in the Canadian dollar amount at the exchange rate prevailing at the time of the purchases.  At the end of the year, when the line of credit was repaid, the pound had in fact been devalued and the taxpayer realized a profit.  The issue was whether that profit was a capital gain or on income account.  The Court held that the debt had been created in the course of trade and that any foreign exchange gain realized on the debt was on income account.

41                              The facts in Eli Lilly and Co. (Canada) Ltd. v. Minister of National Revenue, [1955] S.C.R. 745, were analogous.  In that case, the taxpayer company purchased goods from its U.S. parent company.  The taxpayer was billed in U.S. dollars but did not settle the account for a number of years, entering the amount of indebtedness for each year in its books in Canadian dollars.  In the tax year in question, the Canadian dollar attained parity with the U.S. dollar and the taxpayer settled the account.  The taxpayer sought to claim the “Foreign Exchange Premium Reduction” as a capital gain.  Estey J., writing for the majority, held that the cost of exchange arising out of fluctuations in foreign currency is an ordinary expense in relation to foreign trade and that it must be accounted for in the computation of income tax. 

42                              In Alberta Gas Trunk Line Co. v. Minister of National Revenue, [1972] S.C.R. 498, the taxpayer entered into a contract for the transportation of natural gas.  The payments the taxpayer received on that contract were partly in Canadian dollars and partly in U.S. dollars.  The taxpayer argued that the U.S. dollar portion of the payments were in fact part of a second promise to indemnify the taxpayer for any losses it might incur on certain USD amounts it had borrowed.  The Court rejected this characterization, concluding that the USD amounts received were in payment of services rendered.  It accordingly held that the full (i.e., Canadian dollar) value of the amounts had to be included in income under s. 3  of the ITA . 

43                              Imperial Tobacco Co. v. Kelly, [1943] 2 All E.R. 119 (C.A.), is analogous to the Canadian cases.  In that case, the taxpayer company was a tobacco manufacturer that had purchased large quantities of tobacco leaf from the United States.  In order to finance these purchases, the company had purchased quantities of U.S. dollars sufficient to cover its U.S. dollar purchases and expenses for the year.  When the war broke out in 1939, at the request of the Treasury, the taxpayer stopped all further purchases of tobacco leaf in the United States and was, as a result, left with a large holding of U.S. dollars.  The taxpayer sold its surplus dollars to the Treasury, as it was required to do, and realized a profit on that exchange.

44                              The taxpayer argued that the profit was a capital gain realized on a temporary investment in foreign currency.  The Court of Appeal disagreed, concluding that the foreign exchange gain was directly linked to the taxpayer’s ordinary commercial operation and that it should be included in income.  Lord Greene, M.R., stated that the company “ha[d] sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account” (p. 121).  He added that in the circumstances, the U.S. dollars functioned as a commodity in that, like other commodities, their value in relation to sterling was a fluctuating one.  I doubt that this observation can, as the respondent suggests, be fairly interpreted to mean that foreign currency necessarily has the character of a commodity.  It seems to follow from the characterization of the foreign currency as inventory such that any profits arising out of its sale would be on income, not on capital, account.

45                              In my view, the above cases stand for the proposition that foreign exchange gains and losses incurred in relation to foreign trade cannot be separated from the underlying transaction such that the foreign exchange gain or loss would be on capital account while the underlying transaction would be on income account.  In such a case, the foreign exchange gain or loss is an intrinsic element of the price received or paid for a company’s goods and must be included in the computation of income.  Where, as in Kelly, the underlying transaction falls through for some reason, a foreign exchange gain that was incurred in relation to that transaction is not transformed into a capital transaction.  The effect of converting foreign currency amounts into Canadian dollars is simply to consider the foreign exchange gain or loss to be on the same account as the underlying transaction.  The above cases are not of assistance in the cases at bar, where it is common ground that but for an express statutory provision, the foreign exchange loss would be on capital account because the borrowing was on capital account.  The difficulty here lies in discerning whether Parliament intended, in enacting s. 20(1) (f), to make the capital cost of borrowing in a foreign currency deductible from business income.

G.  Conversion Under Gaynor v. The Queen and Related British Case Law

46                              While both parties rely on Gaynor in seeking the proper interpretation of s. 20(1) (f), each of them puts its own spin on that decision.  Given the importance that appears to have been attached to the so-called “Gaynor principle” in the courts below and in this Court, it is worth having a good, hard look at that case.  At the same time, it will be helpful to consider the related British cases reviewed by Miller J. in his discussion of Gaynor in order to determine whether the “Gaynor principle” really exists and whether it justifies the proposition that all elements of a statutory formula in Canadian tax law must be converted into Canadian dollars.

47                              In Gaynor, the taxpayer was a U.S. citizen who was ordinarily resident in Canada.  In the tax year at issue, she disposed of certain U.S. securities and reinvested the proceeds of that disposition into other U.S. securities.  As the proceeds were never converted into Canadian dollars, the taxpayer calculated her capital gains using the exchange rate prevailing on the date of disposition to convert both her adjusted cost base and the proceeds of disposition, the result being that any gain or loss in the Canadian dollar value of the securities was excluded from her calculation.  At the Tax Court of Canada, Sarchuk T.C.J. rejected the argument that the foreign exchange gain or loss should be reported only when foreign currency was  actually exchanged: 87 D.T.C. 279.  He held that capital gains and losses are by statutory definition the difference between the adjusted cost base and the proceeds of disposition and that each of these amounts had to be converted into Canadian dollars at the exchange rate prevailing at the relevant time.  Sarchuk T.C.J.’s decision was upheld by Pinard J. of the Federal Court—Trial Division (88 D.T.C. 6394) and Pratte J.A. of the Federal Court of Appeal (91 D.T.C. 5288).  Pratte J.A. noted that Canadian currency “is the only monetary standard of value known to Canadian law” (p. 5289) and that both the cost of the capital asset and the proceeds of disposition had to be expressed in Canadian dollars.  The parties in the instant case rely on this to argue that every amount in a statutory formula must be converted into Canadian dollars.  Miller J. disputed this view and turned for assistance to a line of British cases dealing with the same issue the court had grappled with in Gaynor.

48                              In one of those cases, Bentley v. Pike (1981), 53 T.C. 590, the facts were analogous to the facts in Gaynor.  The High Court of Justice (Chancery Division) took the same approach to the conversion of foreign currency amounts into sterling as the Federal Court of Appeal would take in Gaynor.  Vinelott J. acknowledged that the taxpayer was being called on to pay capital gains tax on a (notional) foreign exchange gain arising out of the devaluation of sterling, but he held that this was the only justifiable approach under the capital gains tax legislation.

49                              In Pattison (Inspector of Taxes) v. Marine Midland Ltd., [1984] A.C. 362 (H.L.), the taxpayer was an international banking company.  In 1971, the taxpayer had borrowed US$15 million by issuing loan stock and had used that money to lend U.S. dollars to its banking customers.  In 1976, the loans to its banking customers had all been repaid (in U.S. dollars) and the taxpayer redeemed the loan stock.  Between 1971 and 1976, the pound had depreciated such that the sterling equivalent of the amount the taxpayer had to repay in 1976 was greater than the sterling equivalent of the amount it received in that year.  The inspector of taxes sought to characterize that loss as a capital loss that was not deductible in computing the taxpayer company’s profits.  He also sought to characterize as an income profit the correlative foreign exchange gain that the taxpayer (notionally) had realized on the loans it had made to its banking customers.  At all material times, the taxpayer had sufficient U.S. dollar assets to meet its U.S. dollar liabilities, and the dollars were never converted into sterling.  The House of Lords held that there was no gain or loss on either capital or income account, because no profit can arise from the simple return of the very thing borrowed.  Lord Templeman explained that “a profit or loss may be earned or suffered if a borrower changes the currency he borrows but that profit or loss arises from the exchange transaction and not from the borrowing” (p. 372).  Because there had been no conversion of the U.S. dollar, there could be no profit or loss in the circumstances.

50                              The decision in Pattison is illustrative because, as the taxpayer had pointed out, the inspector’s position was predicated on a conversion of the principal sums into sterling  amounts.  Without such a conversion, the amount repaid (US$15 million) would equal the amount borrowed and there would be no profit or loss to report in the company’s tax return.  The taxpayer argued that only profits actually realized should be converted into their sterling amounts.  It seems implicit that in accepting the taxpayer’s position, the House of Lords rejected the proposition that the principal sums had to be converted into sterling amounts.   

51                              In Capcount Trading v. Evans (1992), 65 T.C. 545 (C.A.), the taxpayer argued that Pattison and Pike were inconsistent and that Pattison ought to prevail such that the capital gain the taxpayer had realized on the disposition of certain (foreign) shares could be calculated by deducting the foreign currency cost from the foreign currency proceeds and converting the result into sterling at the rate prevailing on the date of disposition.  The effect would have been to exclude foreign exchange gains from the calculation.  Nolan L.J. held that the two cases were not inconsistent because Pattison concerned income while Pike concerned capital gains.

H.  Implications and Application of Gaynor and Related Cases

52                              In my opinion, Gaynor does not support the proposition that all elements of a statutory formula must be converted into their Canadian dollar value at the relevant time. The implications of Gaynor are narrower than that.  The decision was premised on the prior conclusion that the foreign exchange gains in issue were capital gains.  Converting the amounts in the statutory formula merely simplified the method of calculating the amount of the capital gain in that case, which did not purport to establish a new general principle.  The British cases I have reviewed do not lend support to such a proposition either.

53                              Pattison, the only one of those cases in which conversion of the amounts at issue into sterling was not required, is distinguishable from the other two cases in two ways.  First, the underlying assets in both Pike and Capcount Trading were capital assets, while the underlying asset in Pattison was (arguably, at least) on income account because the business of the taxpayer bank was borrowing and lending money.  In the latter case, no conversion was necessary because the measurement of income is not concerned with the appreciation or depreciation of particular assets.  Second, in both Pike and Capcount Trading, there was a disposition of the capital asset, while Pattison involved a borrower-lender relationship.  Lord Templeman observed in Pattison that where there is no disposition, but merely a return of the very thing that was borrowed, the return cannot in itself trigger a profit or loss.  Any such profit or loss must be rooted in an actual currency exchange transaction. 

54                              Miller J. in the Tax Court below, concluded that the U.K. cases were consistent with Gaynor, but that the principles articulated in those cases did not apply to the facts before him.  Specifically, he opined that currency conversion is appropriate in the capital gains context and suggested, citing Capcount Trading, that the conceptual basis for this distinction may lie in the fact that a capital gain, by its very nature, involves measuring the appreciation or depreciation of a particular asset over time, while business income does not.  It is not immediately clear how this can be reconciled with the line of cases discussed above.  Both Tip Top Tailors and Eli Lilly involved the repayment of debts that were held to be on income account, and in both cases the Court held that there had been a foreign exchange gain on the repayment of the foreign currency debt obligation.  I believe that this can be explained by the facts that the borrower-lender relationship in those cases arose directly out of the purchaser-vendor relationship and that there was an actual currency conversion (and, as a result, an actual foreign exchange gain), such that the foreign exchange gain was an integral part of the purchase price of the goods.   

55                              The cases at bar are analogous to Pattison in that they involve not a disposition, but only the repayment of principal by a debtor to a creditor.  Although they are distinguishable in that the underlying transactions are on capital account, whereas the underlying transactions in Pattison were on income account, I think that the analysis applicable to the borrower-lender relationship is unique and is not necessarily affected by whether the debt is on income or capital account.  It was rightly held in Pattison that without a conversion of currency, the mere repayment of the principal — the very thing that was borrowed — cannot yield a profit or a loss.  Any appreciation or depreciation of the principal amount does not result from the simple fact that it has been borrowed and repaid.  If there is a profit or loss, it must arise from something other than the borrower-lender relationship per se.  In the capital gains context, the disposition of a capital asset has been treated in the cases as an event triggering taxation of the appreciation or depreciation of that asset in addition to any foreign exchange gains or losses, whether actual or notional.  In the income context, foreign exchange gains and losses have been treated as an ordinary expense in carrying out foreign trade such that, even when incurred in separate transactions, they must be accounted for in determining the price paid or received for traded goods.  In such cases, an actual disposition of inventory occurs, and this disposition triggers a valuation in order to determine the actual price received for it (in domestic currency). 

56                              The issue then becomes more narrowly focussed.  It will not be resolved by finding somewhere else a specific statutory rule or judge-made principle that would mandate the conversion of all statutory formulas in the ITA  into Canadian dollars.  In the end, the question is still whether s. 20(1) (f) was intended by Parliament to apply to the appreciation or depreciation of the obligation, in which case the calculation would be analogous to the computation of a capital gain, or whether it was intended to apply to an income expense or, more accurately, a point-in-time expense that would, but for that section, be a payment on account of capital.  The solution will be found in the text of s. 20(1) (f), read in context, according to the principles of interpretation recently reaffirmed by this Court in Canada Trustco and Mathew.  None of the interpretive aids invoked by the parties, which I will now briefly turn to, are determinative.

I.  Interpretive Aids

57                              The parties have called upon various auxiliary interpretive tools to back up their submissions on the interpretation and scope of the statute.  The Minister has even sought support for his position in the marginal notes, which refer to a “discount”.  Although marginal notes are not entirely devoid of usefulness, their value is limited for a court that must address a serious problem of statutory interpretation.  I would be loath to rely on one for that purpose and will return to the text of the statute itself, after considering some additional interpretive arguments raised by the litigants.

58                              The Minister also relies on statements made in the House of Commons at the time of the addition of s. 20(1) (f) to the ITA , and on Technical Notes issued by the Department of Finance to explain the addition of, and amendments to s. 20(1) (f).  Putting aside the question of the weight that should be given to these interpretive aids, the difficulty with the Minister’s arguments is that although both of these sources support the view that discounts were in the contemplation of Parliament when it enacted s. 20(1) (f), neither goes so far as to suggest that s. 20(1) (f) is restricted to discounts.  Since this is the very restriction the respondents are contesting, the interpretive aids invoked by the Minister are not dispositive of the issue, although they may shed some light on Parliament’s intention.

59                              The question of the impact of the interpretive practice allegedly adopted by the Minister is more troubling.  Imperial Oil puts a heavy emphasis on conflicting applications of s. 20(1) (f) by the Minister in respect of various categories of transactions.  In particular, it raises the tax treatment of commodity based loans to prairie farmers in the 1980s or later and the case of a class of debt instruments known as “exchangeable debentures”: Income Tax Rulings Directorate, Technical Interpretation No. 9703377, April 17, 1997; Income Tax Rulings Directorate,  Advance Income Tax Ruling No. 2000-0060103, January 1, 2001.  The appellant has offered no clear explanation why, in the Minister’s view, s. 20(1) (f) would apply to variations in the principal amounts of debt instruments of those classes.  However, much as they are to be deplored, inconsistent administrative practices are not the determinative factor in statutory interpretation.  We must nevertheless return to the statute itself and to the scope of its application in respect of the specific transactions at issue in these appeals (Nowegijick v. The Queen, [1983] 1 S.C.R. 29, at p. 37).  If an interpretation is wrong, it does not make law.  Estoppel by interpretation has not yet become a recognized doctrine of statutory construction.

60                              In addition to Gaynor, the parties rely on a number of statutory provisions in support of the proposition that all amounts referred to in the ITA  must be converted into Canadian dollars.  Section 248(1)  of the ITA  defines “amount” as “money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing”.  The parties rely on that definition in conjunction with the provisions of the Currency Act, R.S.C. 1985, c. C-52 , to argue that wherever the word “amount” appears in the ITA , it must refer to an amount in Canadian dollars.  Section 14  of the Currency Act  provides that “[a]ny sum mentioned in dollars and cents in . . . any Act of Parliament shall, unless it is otherwise expressed, be construed as being a sum in the currency of Canada.”  Section 3(1) of the same statute provides that the monetary unit of Canada is the dollar.  In my opinion, these provisions do not go so far as to support the parties’ contention that wherever the word “amount” is used in the ITA , it must refer to an amount in Canadian dollars.

J.  Interpretation of Section 20(1) (f)

61                              The respondents’ argument places much emphasis on the statutory definition of “principal amount” in s. 248(1)  of the ITA , which contemplates the possibility that the principal amount can fluctuate (e.g., where an obligation is repaid in increments and “principal” refers to the outstanding portion of the obligation).  However, that definition does not expressly address whether or how foreign currency fluctuations are to be taken into account in determining the “principal amount” of an obligation denominated in foreign currency.  In my opinion, the 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.  Whether foreign exchange losses are covered by s. 20(1) (f) must be ascertained with respect to the text, scheme and context of that provision. 

62                              Although the word “discount” does not appear in s. 20(1) (f), the opening words of s. 20(1) (f)(i) set out what is commonly accepted as the definition of a discount.  Moreover, there is no express mention in s. 20(1)(f) of a foreign currency exchange.  These facts suggest that the primary referent of s. 20(1) (f) is something other than foreign exchange losses, namely, payments in the nature of discounts.  As a result, the appropriate approach is to begin by determining the meaning of s. 20(1) (f) in the context of Canadian dollar obligations, and then to consider whether foreign currency losses are comparable such that they would also be covered by that provision.  Where an obligation is denominated (and repayable) in Canadian dollars, the issue of a fluctuating principal amount does not arise.  In such cases, the formulas in s. 20(1) (f) have the effect of isolating the difference between the face value (principal amount) of the obligation and the amount for which it was issued (i.e., the “discount”).  Where the discount is 3% or less (i.e., a “shallow discount”), it is fully deductible from income under s. 20(1) (f)(i), and where it is more than 3% (i.e., a “deep discount”), it is deductible at the capital rate (75% at the relevant time for the instant case).  In the context of debts issued and repayable in Canadian dollars, each branch of s. 20(1) (f) has a clear application and together they encompass what are generally referred to as original issue discounts (see V. Krishna, The Fundamentals of Canadian Income Tax (8th ed. 2004), at pp. 353 and 722).  In this context, the deduction in s. 20(1) (f) is in respect of a point-in-time expense that is actually incurred only when the debt is repaid — it does not encompass the appreciation or depreciation of the principal amount over time (see reasons of Miller J. at para. 44).

63                              The question in the case at bar is whether, where the obligation is denominated or repaid in something other than Canadian dollars, s. 20(1) (f) encompasses the cost of dealing in commodities or foreign currencies.  To address this question, a closer look at the wording of s. 20(1) (f) is required.  Section 20(1) (f)(i) applies “in any case where the obligation was issued for an amount not less than 97% of its principal amount”, while s. 20(1) (f)(ii) applies “in any other case”.  In its factum, the respondent Imperial Oil concedes that the words of s. 20(1) (f)(i) describe “shallow discounts of the principal amount of up to 3% to account for market fluctuations in the interest rate between the time of setting the rate and the time of issue” (Imperial Oil’s factum, at p. 8).  It argues, however, that s. 20(1) (f)(ii) contemplates the capital cost of all borrowing (including deep discounts) such that it encompasses the foreign exchange losses incurred in the present case.  The question, then, is whether the opening words — “in any other case” — of s. 20(1) (f)(ii) refer to “any case in which the obligation was issued for an amount less than 97%” or to “any case in which the cost of repaying the principal amount exceeds the amount for which the debt was issued”. 

64                              In my opinion, Parliament intended s. 20(1) (f)(i) to apply to shallow discounts.  Further, the better reading of the opening words of s. 20(1) (f)(ii) is the one that preserves a higher degree of parallelism of expression (i.e., “any case in which the obligation was issued for an amount less than 97%”).  This reading is consistent with the Technical Notes issued by the Minister in 1988 (reasons of Miller J., at para. 56).  This does not dispose of the matter, however, because if the “principal amount” can fluctuate with the cost of repayment in Canadian dollars, then the “discount amount” can be ascertained in relation to the value of the principal in Canadian dollars at the time of repayment, rather than in relation to the face value of the obligation (i.e., the term “discount” may not be limited to “original issue discounts” but may encompass discounts that arise out of fluctuations of commodity or currency prices over time).  To resolve this issue, it is necessary to determine whether Parliament intended foreign exchange losses to be covered by s. 20(1) (f) in the same way as discounts.

65                              As the respondent Imperial Oil notes, Parliament encourages companies to raise capital by allowing them to deduct virtually all costs of borrowing under the provisions of s. 20(1) .  The respondent accordingly argues that a restrictive approach to the interpretation of s. 20(1) (f) is not warranted.  On the other hand, the appellant refers to s. 18(1) (b), which provides that payments on account of capital may not be deducted from business income unless the deduction thereof is expressly permitted.  Like Miller J. and Bonner J., I am not convinced that the cost of dealing in a foreign currency is an intrinsic cost of borrowing for the purposes of the ITA  (see reasons of Bonner J., at para. 19).  While the other deductions in s. 20(1)  relate to expenses that arise directly out of the borrower-lender relationship, a foreign exchange loss is a cost of borrowing only where the thing borrowed is foreign currency.  For this reason, I am not persuaded by the respondents’ argument that the scheme of s. 20 , which provides deductions for virtually all costs of borrowing, implies that foreign exchange losses are also deductible under s. 20 .  The other costs enumerated in s. 20  are intrinsic costs of borrowing, such as interest payments and premiums.  Foreign exchange losses arise only where the debtor chooses to deal in foreign currency.  They belong to a different class than the costs referred to in s. 20 .  As a result, the scheme of s. 20 , although not dispositive, does not assist the respondent. 

66                              If s. 20(1)(f) applied to foreign exchange losses, the section would operate quite differently in relation to obligations denominated in foreign currency than it does in relation to obligations denominated in Canadian dollars.  In the context of foreign currency obligations, the deduction would reflect the appreciation or depreciation of the principal amount over time, whereas in the context of Canadian dollar obligations, the deduction would reflect a point-in-time expense.  In the context of foreign currency obligations, the s. 20(1)(f) deduction would accordingly be available even where, as in Inco, there was no original issue discount.  The respondents’ approach also has the effect of altering the distinction between the two branches of s. 20(1)(f).  Where fluctuations in the principal amount are not at issue, the distinction between the two branches is based on the “depth” of the discount.  This is an amount that the taxpayer fixes when the debt instruments are issued and, as a result, a differential tax treatment can create incentives to structure obligations in a particular way.  On the respondents’ approach, the distinction between shallow and deep discounts is collapsed and replaced by a distinction of a different nature — one that can be ascertained only at the time of repayment.

67                              In my view, s. 20(1)(f) was never intended to apply to foreign exchange losses.  As we have seen above, a number of factors, which generally relate to the wording of the provision, are determinative in this respect.  This interpretation best reflects the structure of the ITA  and the intent of Parliament.  The purpose of the provision is to address a specific class of financing costs arising out of the issuance of debt instruments at a discount.  The interpretation advanced by the respondents in these appeals, on the other hand, turns s. 20(1) (f) into a broad provision allowing for the deductibility of a wide range of costs attendant upon financing in foreign currency, in the absence of any mention of such costs in the text of the ITA , and despite the fact that such costs are usually regarded as being on capital account.

68                              The respondents’ interpretation thus conflicts with the general treatment of capital gains and losses in the ITA .  In particular, it indicates a failure to properly appreciate the role of s. 39 .  Although it is true that s. 39  is a residual provision, this section is also a statement of Parliament’s intent to treat foreign exchange losses as capital losses.  In addition, if Inco’s submissions were correct, s. 20(1) (f) would apply to a class of financing costs that clearly lie beyond its reach.  Section 20(1) (f) was designed to address the consequences of repayment of the debenture, not of its repurchase on the open market for cancellation purposes.

V.  Disposition

69                              For these reasons, I would allow the appeals, set aside the judgments of the Federal Court of Appeal, and confirm the Minister’s assessments, as varied by Miller J. in the Imperial Oil case, with costs throughout.

The reasons of Binnie, Fish and Charron JJ. were delivered by

Binnie J. (dissenting) _

I.  Introduction

70                              Canadian capital markets are of relatively modest size, and it is common for corporations requiring significant amounts of capital to look elsewhere in the world for financing.  Foreign lenders are prepared to give a preferred interest rate for a debt denominated in a currency with which they are familiar and which they consider stable, such as the U.S. dollar, a reserve currency.  However, in the nature of things foreign currencies fluctuate in value against the Canadian dollar.  These fluctuations are not incidental or collateral to the foreign debt transaction but are as inherent and inescapable as if the debt was denominated in bars of silver.  The respondent taxpayers in these cases both issued debentures denominated in U.S. dollars, which they subsequently retired at a time when the U.S. dollar was trading at a higher premium to the Canadian dollar than it had at the date of issuance.

71                              In discharging the foreign debt any adverse swing in the foreign exchange rate since its issuance will add to the “maximum total amount . . . payable on account of the obligation” (definition of “principal amount”:  Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 248(1) ) that is to be taken into account in determining the appropriate income tax deduction of the “amount paid in the year in satisfaction of the principal amount of any . . . debenture . . . or similar obligation” (s. 20(1) (f)).  The Federal Court of Appeal therefore allowed the respondent taxpayers to deduct the excess cost to them of purchasing the requisite U.S. funds to satisfy their U.S. debenture obligations over and above the amount in Canadian dollars received by them at the date of issuance.

72                              I have read the reasons of my colleague LeBel J. proposing to allow the Crown’s appeals.  I respectfully disagree with his conclusion that the language of s. 20(1)(f) should be read as limited to “original issue discounts”.  As he notes, no such restriction is expressed in the section and I would not imply it.  For the reasons that follow, I believe the taxpayers’ claim fits squarely with s. 20(1)(f) and I would dismiss the Crown’s appeals.

II.  Analysis

A.  Overview

73                              The Income Tax Act  is the battlefield on which over 21 million Canadian taxpayers engage with the Minister of National Revenue (“Minister”) and his or her various tax assessors, adjudicators and collectors.  The rules of engagement, hammered out in countless rulings, adjudications and statutory amendments, are immensely complex.  Issues of interpretation can be approached with a degree of confidence that in the various detailed provisions of the Act, Parliament can be taken at its word (or will quickly introduce an amendment if this turns out not to be the case).  As the Court pointed out in Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54:

. . . the particularity and detail of many tax provisions have often led to an emphasis on textual interpretation. Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe. [para. 11]

74                              My colleague has fully outlined the relevant facts and background.  I agree with him that “the question is whether the deduction provided for in para. (f) is exclusively one for original issue discounts or whether it is instead a broader deduction that applies more generally to the capital cost of borrowing” (para. 32 (emphasis added)).  I note, parenthetically, that in the course of oral argument the Court raised the question of whether Inco’s purchase of 1992 debentures on the open market (described by LeBel J. at para. 3) was an amount paid “in satisfaction of [its] principal amount” within the meaning of s. 20(1)(f).  The Crown indicated that it did not construe s. 20(1)(f) to exclude “those repurchases” (transcript, at  p. 23).

75                              LeBel J. and I also agree that the interpretation of the Income Tax Act , as with any statute, must proceed on the basis of a “textual, contextual and purposive analysis” while keeping in mind, as the Court said when interpreting the Income Tax Act  in Canada Trustco, at para. 10, that “[w]hen the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process” (a point reiterated by my colleague at para. 28).

76                              I would add (and there seems to be no disagreement on this point as well) that Canadian tax law knows only Canadian dollars: Eli Lilly and Co. (Canada) Ltd. v. Minister of National Revenue, [1955] S.C.R. 745, at p. 750.  This means that for calculations required by the Income Tax Act  an “amount” of foreign currency must at some point be converted into Canadian dollars.  The dispute between the Minister and the taxpayers, simply put, is whether this conversion should be done at the foreign exchange rate prevailing at the date of issuance of the debentures (as the Minister contends) or the foreign exchange rate at the date of redemption, when the actual cost to the taxpayer can be ascertained (as the taxpayers contend).

77                              We have the advantage of full and meticulous reasons from Sharlow J.A. of the Federal Court of Appeal in the Imperial Oil case ([2005] 1 C.T.C. 65, 2004 FCA 361), adopted by a different panel of that court in the Inco case ([2005] 1 C.T.C. 369, 2005 FCA 38).  I agree substantially with her analysis.  When the relevant language of s.  20(1)(f) and s. 248(1)  is read in light of the statutory purpose, the only way the “maximum total amount . . . payable on account of the obligation” can be ascertained is by using the exchange rate prevailing when the obligation becomes payable.  It was at that time the “obligation” arose on the part of the taxpayers to purchase U.S. dollars to retire their debt.  Those U.S. dollars cost the taxpayers more Canadian dollars than would have been the case at the exchange rate prevailing when the debentures were issued.  The extra cost of buying the U.S. dollars payable to satisfy the requirements of the debentures was part of the cost of the financing arising directly out of the debtor-creditor relationship.  The source of the taxpayers’ cost was “the obligation” they had undertaken to pay their debts on the due date in U.S. dollars.  As it was put by Sharlow J.A.:

A foreign currency loan is the loan of a specified number of units of foreign currency on terms that require the same number of units of that foreign currency to be returned to the lender at the end of the term.  It is implicit in the terms of repayment that the Canadian dollar equivalent of the repayment may be more or less than the Canadian dollar equivalent of the amount borrowed.  Thus, the fluctuation in the “principal amount” of the debt, as that term is defined in the Income Tax Act , is mandated by the contractual terms governing the debt. [para. 48]

78                              The Crown’s argument rests on its attempt to bifurcate a single foreign loan transaction into a “loan” contract and a “foreign exchange” loss, which is really a variation of what the Crown unsuccessfully argued in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622.  In that case, the Crown tried to conflate a series of debenture agreements entered into by the taxpayer with the taxpayer’s separate forward exchange contract.  The conflation would have resulted in a higher tax liability than without conflation.  The Court rejected the Crown’s argument because “absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer’s legal relationships must be respected in tax cases” (para. 39).  Here, instead of conflation the Crown seeks to bifurcate, but whether it is bifurcation or conflation the essential legal objection remains, namely that the Crown’s argument does not respect the precise nature of the taxpayer’s actual legal relationships and obligations.

79                              My colleague LeBel J. initiates his analysis of s. 20(1)(f) by looking at its operation in the context of a Canadian dollar debenture (para. 36).  This reflects to some extent the Crown’s attempt to bifurcate the transaction into a loan transaction and a foreign exchange transaction.  In the same vein, my colleague concludes at para. 65 that:

While the other deductions in s. 20(1) relate to expenses that arise directly out of the borrower-lender relationship, a foreign exchange loss is a cost of borrowing only where the thing borrowed is foreign currency. [Emphasis in original.]

In my view, with respect, the foreign currency obligation is a cost that does arise directly out of these debtor-creditor relationships.  The “thing borrowed” is the very essence of the contract that defines their relationship.  As we will see, a foreign currency loan is not the only type of debt repayment tied to commodity prices considered under s. 20(1)(f).  Some forms of debt are required to be repaid in the commodities themselves (e.g.  convertible or exchangeable debentures).  In such cases, the Minister has routinely allowed a s.  20(1)(f) deduction.  The Minister has not (and nor should the Minister have) taken the view that s.  20(1)(f) is limited to “original issue discounts”.  There is no principled reason to treat foreign currency loans differently.  On this point, I agree with the observation of Sexton J.A. in a related context:

I do not believe that it is possible to separate the currency of the borrowed funds from the borrowing itself so as to make the denomination of the borrowing a discrete transaction in and of itself.  It is the borrowing which is the transaction, not the denomination of the currency.

(Canada v. Canadian Pacific Ltd., [2002] 3 F.C. 170, 2001 FCA 398, at para. 23)

80                              Having identified the transaction as a loan in the nature of a commodity obligation, I turn to a “textual, contextual and purposive” interpretation of s.  20(1)(f).

B.  The Text of the Act

81                              The Act contains a general prohibition in s. 18(1) (b) against the deduction of capital amounts in computing a taxpayer’s income, subject to a number of express exceptions which are found at s. 20.  Under s. 20, various capital amounts are effectively deemed to be income and may thus be deducted against income from business or property rather than only against allowable capital gains.  I agree with my colleague that unless the cost of borrowing at issue in this case falls within the scope of s. 20, it retains its character as a capital amount and cannot be deducted against income.

82                              Section 20(1)(f) permits the taxpayer to deduct:

20. (1) . . .

(f)  an amount paid in the year in satisfaction of the principal amount of any bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation . . . on which interest was stipulated to be payable, to the extent that the amount so paid does not exceed,

(i)  in any case where the obligation was issued for an amount not less than 97% of its principal amount, and the yield from the obligation, expressed in terms of an annual rate . . . does not exceed 4/3 of the interest stipulated to be payable on the obligation, expressed in terms of an annual rate on

(A)  the principal amount of the obligation, if no amount is payable on account of the principal amount before the maturity of the obligation, or

(B)  the amount outstanding from time to time as or on account of the principal amount of the obligation, in any other case,

the amount by which the lesser of the principal amount of the obligation and all amounts paid in the year or in any preceding year in satisfaction of its principal amount exceeds the amount for which the obligation was issued, and

(ii)  in any other case, 3/4 of the lesser of the amount so paid and the amount by which the lesser of the principal amount of the obligation and all amounts paid in the year or in any preceding taxation year in satisfaction of its principal amount exceeds the amount for which the obligation was issued;

83                              Section 20(1)(f) thus permits a deduction of the amount by which the original issue proceeds of the debt are exceeded by the amount paid in satisfaction of the principal amount of the debt.  In the present case, the threshold conditions of s. 20(1)(f) are unquestionably met by the debentures issued by both Imperial and Inco.  What remains to be determined is whether the deduction is pursuant to s. 20(1)(f)(i) or (ii) and, more importantly, the extent of the deduction.  Specifically, does it include only the original issue discount (as LeBel J. finds) or does the provision further capture the increase in the cost to the taxpayers of buying U.S. dollars between the date the obligations were issued and the date they were satisfied (as held by the Federal Court of Appeal)?

84                              The repetitive use of the expression “principal amount” nine times in the course of s. 20(1)(f) signals its importance to the analysis.  The Crown treats it in this context as equivalent to the “face” amount of the debenture, but that is not how Parliament has defined “principal amount” in s. 248(1) :

248. (1) In this Act,

. . .

“principal amount”, in relation to any obligation, means the amount that, under the terms of the obligation or any agreement relating thereto, is the maximum amount or maximum total amount, as the case may be, payable on account of the obligation by the issuer thereof, otherwise than as or on account of interest or as or on account of any premium payable by the issuer conditional on the exercise by the issuer of a right to redeem the obligation before the maturity thereof;

85                              As Sharlow J.A. put it, “the question in this case becomes this: what was the maximum amount payable on account of the debentures immediately before they were redeemed on October 15, 1999 (disregarding interest and the redemption premium)?” (para. 43)

86                              It is in the nature of a contract to pay at a future date foreign currency (or bars of silver, or any other commodity whose price is subject to market fluctuation) that the maximum total amount actually “payable on account of the obligation by the issuer thereof” is unknown and unknowable at the date of issuance.  The amount that must be paid “in satisfaction of its principal amount” (s. 20(1)(f)) may, depending on market swings, be either higher or lower than the equivalent in Canadian dollars of the face value of the U.S. dollar debentures at the rate prevailing at the date of issue.  The number of Canadian dollars “payable” to buy the units of foreign currency necessary to satisfy the contractual obligation can only be ascertained at the date fixed for redemption.  It is the redemption not the issuance that triggers the tax deduction.  The only time Canadian dollars are deployed “in satisfaction of its principal amount” (to quote s. 20(1)(f)(ii)) is the date of redemption.  It follows that the relevant exchange rate is the rate prevailing at the date of redemption.  It is not until that date that it is possible to determine the “maximum amount . . . payable on account of the obligation” as required by the statutory definition of “principal amount”.  The Crown’s interpretation, by way of contrast, is that “principal amount” should be taken to mean the Canadian amount the taxpayers would have required to purchase enough U.S. dollars to retire the debentures on the date of their issuance (which, of course, was not part of the obligation the taxpayers actually entered into).  Such a construction has nothing to do with the reality of the taxpayers’ obligations and should, I believe, be rejected.

87                              In light of my conclusion that the principal amount of the obligation must be ascertained at the date of redemption, the debentures in these cases do not meet the criteria of s.  20(1)(f)(i).  Consequently, the taxpayers are entitled only to the deduction permitted by s.  20(1)(f)(ii).

C.  The Minister’s Treatment of Other Commodity-Type Loans Under Section 20(1)(f)

88                              The Crown’s argument that s. 20(1)(f) is limited to “original issue discounts” is not only inconsistent with its text, as I have endeavoured to show, but is also contradicted by the Minister’s acknowledged practice of applying s. 20(1)(f) to exchangeable, convertible and commodity-linked debt in a manner that clearly does not limit s. 20(1)(f) to an “original issue discount”.  Ministerial practice is not binding in the Court’s interpretation of course, but

[b]y considering administrative interpretations, the courts are merely recognizing a real or presumed expertise.  At times, an administrative agency may be required to interpret enactments which it has itself drafted.  Such authentic interpretation (i.e., by the author) deserves particular consideration.

. . .

The rationale is obvious: usage creates expectations, and the application of a contrary interpretation will sometimes cause serious prejudice.  A settled interpretation, if consistent with the text of the enactment, should not be overruled without good reason.

(P.-A. Côté, The Interpretation of Legislation in Canada (3rd ed.  2000), at pp. 548-49)

89                              There are a number of relevant instances of ministerial rulings under s. 20(1)(f) in respect of commodity-based loans, one of which was cited by Sharlow J.A. (at para. 47): in the 1980s, the Farm Credit Corporation offered prairie farmers a favourable ten-year mortgage interest rate of 6%, but required that the principal of the mortgage would increase to the extent that the price of the corn and wheat grown on the land increased over those ten years.  It was to that extent a commodity-based loan, and the Minister ruled that

where it can be said that the taxpayer has paid an amount on account of principal in excess of the amount for which the obligation was issued, then paragraph 20(1)(f) would apply.  It is our view that for purposes of paragraph  20(1)(f) the principal amount under the terms of the [commodity-based loan] is [the] total amount paid on maturity plus the total of all payments in satisfaction of principal paid over the life of the obligation. [Emphasis added.]

(Income Tax Rulings Directorate, Technical Interpretation No. 9703377, April 17, 1997)

90                              Similarly, the Minister ruled in 1990 that where a debenture may be exchanged at maturity for shares (called “target” shares),

[t]he Issuer would be entitled to a deduction under paragraph 20(1)(f) of the Act with respect to the difference between the fair market value of the Target Shares (the amount paid in satisfaction of the principal amount) and the face amount of the debenture (the amount for which it was issued). [Emphasis added.]

(Income Tax Rulings Directorate, Advance Income Tax Ruling No. 90063-3, July 30, 1990)

91                              Again, in the case of convertible debentures, i.e., where the shares to be delivered are those of the issuing corporation, the Minister ruled in 2000:

[translation] The provisions of paragraph 20(1)(f) of the Act will be applicable in the event that an Issuer is required to repay debentures following the exercise of exchange rights of the holders . . . and that the amount which the Issuer is required to pay [i.e., the fair market value of the shares] exceeds the sum for which the debentures were issued (including the premium on issuance).

(Income Tax Rulings Directorate, Advance Income Tax Ruling No. 1999-0008753, January 1, 2000)

92                              In none of these situations did the Minister take the view (nor, in my view, was the Minister entitled to take the view) that s. 20(1)(f) was restricted to original issue discounts.  Nor did the Minister think that the principal amount of the obligation within the meaning of s. 20(1)(f) should be calculated at the price prevailing at the date of issuance rather than at the price prevailing at the date the borrower was required to buy (or issue) the commodity to retire the obligation.  The reason is obvious.  The “principal amount” could not be calculated until the date of payment, issuance, or redemption because of the fluctuations inherent in commodity pricing, and it was only on that date that the actual cost of satisfying the “obligation” could be ascertained in Canadian dollars.

93                              My colleague acknowledges as “troubling” (para. 59) the Minister’s consistent position until now that s. 20(1)(f) is not limited to original issue discounts.  In each of those other instances, the Minister interpreted the “principal amount” as the maximum total amount payable at the date of redemption or discharge “on account of the obligation” (s. 248(1) ) and allowed a deduction for the difference in “commodity price” between the date of issuance and the date of payment.

94                              I believe the Minister was correctly interpreting s. 20(1)(f) in those other cases and is wrong now to try to read down the words to encompass only original issue discounts.

95                              In my view, there is no principled basis to distinguish a debt obligation denominated in a foreign currency and the above-mentioned instances of a debt obligation requiring repayment in, or based on the price of, a commodity, the value of which is not known at the time of the borrowing.

96                              Equally, as pointed out by counsel for the intervener Teck Cominco Limited, “there is no reason justifying a treatment different between debt obligations issued at a discount and debt obligations repaid at a premium: in both situations the borrower has repaid more than it has borrowed” (factum, at para. 9).

97                              Accordingly, unless some latent ambiguity or difficulty is raised by a consideration of the words of s. 20(1)(f) in the larger context of the Income Tax Act  as a whole or overriding conflict with some demonstrated legislative purpose, the conclusion of the Federal Court of Appeal in these cases should be upheld.

D.  The Context of the Act

98                              I agree with my colleague that the marginal notes referring to “discounts” relied on by the Crown are unhelpful because everyone agrees s. 20(1)(f) applies to discounts.  The question is whether, as my colleague says, s. 20(1)(f) is “restricted to discounts” (para. 58 (emphasis in original)).

99                              The Crown puts some reliance on the inter-relationship between s. 20(1)(f) and s. 39(2) .  The latter section says in effect that a gain or loss on capital account that is caused by a change in the value of a foreign currency relative to Canadian currency is deemed to be a capital gain or loss from the disposition of foreign currency.  However, by its own terms, s. 39(2)  is confined to a residual status and applies only to the extent that a foreign currency loss is not otherwise deductible in computing income. As observed by Miller J. in his trial judgment in Imperial Oil:

[The Crown’s] approach however puts the cart before the horse.  In the ordering of the Act, foreign exchange losses under subsection 39(2)  only follow after the appropriate deduction under section 20 has been taken. So, I do not accept that one can calculate what may seem logical under subsection 39(2)  and work back to limit a paragraph 20(1)(f) deduction.  This is not a matter of specific provisions overriding general provisions, but is more a matter of how the Act provides a road map for the computation of income, primarily in section 3 .

([2004] 2 C.T.C. 3030, 2004 TCC 207, at para. 16)

100                          More relevant, it seems to me, is that in sections of the Income Tax Act  dealing with specific situations such as mortgage foreclosure (s. 79 ) and debt forgiveness (s. 80 ), Parliament has specified that the calculations are to be based on the value of the foreign debt in Canadian currency at the time of the issuance date.  There is no such specification in s. 20(1) (f), which has a much broader focus and purpose, as is shown by the Minister’s treatment of exchangeable, convertible and commodity-based debt.

101                          Notwithstanding these observations, I agree with my colleague LeBel J. that there is little help to be had from other sections of the Act. In these circumstances, subject to overall considerations of purpose, the text of s. 20(1)(f) and s. 248(1)  provide the best guidance to Parliament’s intent with respect to the deductibility of foreign exchange losses in this context under the Income Tax Act .

E.  The Purpose of the Act

102                          My colleague concludes that s. 20(1)(f) is designed “to address a specific class of financing costs arising out of the issuance of debt instruments at a discount” (para. 67).  Such a narrow focus, as stated earlier, is nowhere expressed in the Act, although it would have been a simple thing to say so if that was Parliament’s intent.  Of relevance at this point are the observations of McLachlin J. in Shell Canada:

. . . courts must therefore be cautious before finding within the clear provisions of the Act an unexpressed legislative intention . . . . Finding unexpressed legislative intentions under the guise of purposive interpretation runs the risk of upsetting the balance Parliament has attempted to strike in the Act. [para. 43]

103                          On the other hand, I agree with my colleague’s observation at para. 65 that “Parliament encourages companies to raise capital by allowing them to deduct virtually all costs of borrowing under the provisions of s. 20(1).”  It was not always thus.  In Montreal Coke and Manufacturing Co. v. Minister of National Revenue, [1944] A.C. 126 (P.C.), affirming this Court’s decision, [1942] S.C.R. 89 (sub nom. Montreal Light, Heat and Power Consolidated v. Minister of National Revenue), it was held that costs incurred in refinancing a company’s debt (being referable to the capital account) are not deductible against revenue for the purpose of calculating income tax.  Parliament subsequently recognized that capital borrowings used productively generate income, which may itself be taxed, and are to be encouraged:  Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, at p. 45; Tennant v. M.N.R., [1996] 1 S.C.R. 305, at para. 16. Parliament therefore enacted a series of provisions to “deem” various costs of capital borrowings to be deductible.   Viewed in that light, the decisions of the Federal Court of Appeal herein advance Parliament’s purpose whereas the conclusion reached by my colleague would act as a deterrent.  With respect, it would be counterproductive in a global economy to discourage foreign borrowings.  Nor is there any principled reason to impose disadvantageous tax treatment on such borrowings when compared with the treatment given to comparable domestic borrowings such as exchangeable, convertible and commodity linked debt.

104                          It all comes back to the simple proposition that in Canadian tax terms foreign currency is a commodity, and its fluctuations will inevitably carry costs (or benefits).  Had the Canadian dollar appreciated against the U.S. dollar in the relevant period of time, for instance, the taxpayers would have lost the original issue discount to which they might otherwise have been entitled.  What the taxing authority loses on the swings it will make up on the roundabouts.  At the end of the day it will have its just desserts.

III.  Conclusion

105                          For the foregoing reasons, I would affirm the decisions of the Federal Court of Appeal and dismiss the appeals.

Appeals allowed with costs, Binnie, Fish and Charron JJ. dissenting.

Solicitors for the appellant: Department of Justice, Ottawa.

Solicitors for the respondent Imperial Oil Limited:  Osler, Hoskin & Harcourt, Toronto. 

Solicitors for the respondent Inco Limited:  Thorsteinssons, Toronto.

Solicitors for the intervener:  Ogilvy Renault, Montréal.