Gaynor v. The Queen, 88 DTC 6394, [1988] 2 CTC 163 (FCTD), aff'd 91 DTC 5288 (FCA)

Pinard, J.:—These are appeals by the plaintiff from the judgment of the Tax Court of Canada dated April 10, 1987 dismissing plaintiffs appeals from income tax assessments for her 1979, 1980 and 1982 taxation years.

These appeals were heard together on common evidence. The proceeding in this Court is a trial de novo and the evidence, by consent of the parties, consisted of the same evidence as that adduced at the Tax Court of Canada. An excerpt of the transcript of the relevant testimonies was also filed.

The plaintiff is a citizen of the United States of America who has been ordinarily resident in Canada since June 21, 1971. She filed a return of income in Canada for each of the years 1972 to 1982 inclusive as a Canadian resident.

The plaintiff owns a portfolio of securities managed by the United States Trust Company of New York, of 45 Wall Street, New York, New York, U.S.A., under Account number 627-072. That portfolio, which consists of United States securities, was owned by the plaintiff at the time she moved from the United States of America to Canada. The securities were purchased and sold in the currency of the United States of America and none of such securities were purchased by converting Canadian dollars to U.S. currency.

In computing the gain or loss realized on the disposition of the securities, the plaintiff calculated the adjusted cost base and proceeds of disposition of the securities in Canadian dollars at the average exchange rate prevailng in the year in which the securities were sold. The plaintiff has consistently reported the gains arising on the disposition of the securities in the same manner. The average exchange rate adopted by the plaintiff was that published by the Department of National Revenue for each of the years in which the securities were sold.

The Minister of National Revenue reassessed the plaintiff for her 1979, 1980, 1981 and 1982 taxation years. As the plaintiff failed to file a notice of objection in respect of her 1981 taxation year as required by the Act, the Tax Court of Canada correctly stated it had no jurisdiction to hear an appeal from that assessment.

In assessing the plaintiff's tax liability, the Minister of National Revenue computed the gain realized by her on the disposition of the securities on the basis that the adjusted cost base and the proceeds of disposition of the securities should be calculated in Canadian dollars at the exchange rate prevailing at the time of acquisition and time of disposition respectively. In so doing, the Minister found that the plaintiff realized taxable capital gains in the 1979 and 1980 taxation years from the disposition of the securities in the total amounts of $7,464.81 and $38,870.37, respectively; the Minister also found that the plaintiff had no allowable capital losses from previous years to be applied to the 1982 taxation year.

The plaintiff objected to the notices of reassessment with respect to her 1979, 1980 and 1982 taxation years within the time prescribed by the Act. She then filed an appeal to the Tax Court of Canada with respect to those taxation years, which appeal was dismissed by the judgment of that Court dated April 10, 1987.

In the statement of claim as well as in the agreed statement of facts, it is expressly stated that "in computing the gain or loss realized on the disposition of the securities, the plaintiff calculated the adjusted cost base and proceeds of disposition of the securities in Canadian dollars at the average exchange rate prevailing in the year in which the securities were sold." (Emphasis is mine.)

At trial, however, counsel for the plaintiff argued that conversion ought to be made only when liability for tax occurs and that, therefore, in the case at bar, the adjusted cost base and the disposition ought to have been first calculated in U.S. dollars before converting any gain or loss to Canadian dollars.

In any event, the plaintiff's essential argument is that the average exchange rate prevailing at the time of acquisition ought not to have been considered because at that time the plaintiff was in possession of U.S. funds and paid for the securities in those funds, with the result that there was not any conversion. I do not agree.

The relevant provisions of the Income Tax Act are contained in subsections 40(1), 53(1), paragraphs 54(a) and 54(h) and section 248.

Subsection 40(1) of the Act defines “gain from the disposition of any property" and “loss from the disposition of any property" as follows:

40. (1) General rules. — Except as otherwise expressly provided in this Part

(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which

(b) a taxpayer's loss for a taxation year from the disposition of any property is,

(i) if the property was disposed of in the year, the amount, if any, by which . . .

(ii) in any other case, nil.

[Emphasis added. I

Subsection 53(1) of the Act states what must be considered in computing the adjusted cost base as follows:

53. (1) Adjustments to cost base. — In computing the adjusted cost base to a taxpayer of property at any time, there shall be added to the cost to him of the property such of the following amounts in respect of the property as are applicable:

[Emphasis added.]

Paragraphs 54(a) and 54(h) of the Act define “adjusted cost base" and "proceeds of disposition” as follows:

54. Definitions. In this subdivision,

(a) "adjusted cost base”. — "adjusted cost base” to a taxpayer of any property at any time means, except as otherwise provided,

(i) where the property is depreciable property of the taxpayer, the capital cost to him of the property as of that time, and,

(ii) in any other case, the cost to the taxpayer of the property adjusted, as of that time, in accordance with section 53,

except that

(h) “proceeds of disposition". — "proceeds of disposition” of property includes,

(i) the sale price of property that has been sold,

[Emphasis added.]

Finally, section 248 of the Act defines "amount" as follows:

248. (1) Definitions. — In this Act,

"amount". — "amount" means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing. . . .

These statutory definitions make it clear that when computing the gain or loss realized on the disposition of property such as that of the plaintiff, money must be the measure, and this is so at each and every stage or step that needs to be considered under the Act in establishing such a gain or loss.

One must also keep in mind that capital gain should not be computed according to the same rules as income from a business or property; indeed, the Income Tax Act provides special rules for the computation of capital gain (see The Queen v. Geoffrey Sterling, [1985] 1 C.T.C. 275 at 276; 85 D.T.C. 5199 at 5200).

Now, in that context, when the Income Tax Act, a Canadian statute, requires that a gain, a loss, a cost or a price be established or considered, that must be done in Canadian dollars at the relevant time, i.e. at the average exchange rate prevailing at the time such gain or loss occurs, and such cost or price is encountered. Income is assessed under the Act in terms of Canadian dollars. Any reference to valuation contained therein with regard to capital gain refers in principle to value in Canadian dollars. I therefore fully agree with the view that in the definition of "adjusted cost base" in subparagraph 54(a)(ii) the reference to "the cost to the taxpayer” must mean the Canadian cost to the taxpayer.

In my view, this interpretation is consistent with the modern rule of construction of statutes defined by E.A. Dreidger and referred to by the Supreme Court of Canada in Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305. In that case, the Supreme Court of Canada was dealing with provisions of the Income Tax Act and stated the following, at page 316 (D.T.C. 6323):

While not directing his observations exclusively to taxing statutes, the learned author of "Construction of Statutes”, 2nd ed., (1983), at p. 87, E.A. Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, 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.

I find this interpretation also consistent with the view expressed by MacGuigan, J. of the Federal Court of Appeal, in Lor-Wes Contracting Limited v. The Queen, [1985] 2 C.T.C. 79 at 83; 85 D.T.C. 5310 at page 5313:

The only principle of interpretation now recognized is a words-in-total-context approach with a view to determining the object and spirit of the taxing provisions.

Finally, in adopting this interpretation it will be obvious that I fully agree with the comments made by the following authors on the subject:

— in a paper entitled "The Meaning of Cost in Canadian Income Tax" (Canadian Tax Paper No. 60-C.T.F. September 1982) D. Keith McNair states, at pages 105 and 106:

The courts frequently define “capital cost" in terms of cost, actual cost, historical cost or similar terms. For example, in Ottawa Valley Power Co. President Jackett of the Exchequer Court made the following statements:

There has been no suggestion that there is any difference between "cost" and “capital cost” in the circumstances of this case. I should have thought that where property is acquired as capital assets of a business there is probably no difference between the ideas of "cost" and "capital cost”. The situation may be different where capital assets, such as goodwill or the supply contract in the appeal, arise as a result of the current operations of a business.

Similarly, in Cockshutt Farm Equipment Ltd. the Tax Appeal Board defined capital cost in the following manner:

. . . the only conclusion to be reached is that the expression "capital cost to the taxpayer" as used in paragraph (a) of subsection (11) of the Income Tax Act [now 20(1)(a)] refers to the actual, factual, or historical cost to the appellant of the depreciable property when acquired."

(Ottawa Valley Power Co. v. M.N.R. is reported at 69 D.T.C. 5166 — Cockshutt Farm Equipment Ltd. v. M.N.R. is reported at 66 D.T.C. 544.)

The author also states, at pages 109 and 110:

Where a depreciable property is acquired in a transaction requiring payment of a foreign currency, the capital cost of that property is the Canadian dollar equivalent of the foreign currency amount, calculated at the rate of exchange prevailing at the time of the transaction. Fluctuations in the exchange rate resulting in the eventual payment of more or less than the capital cost amount do not affect that capital cost. This position reflects the decision of the Tax Appeal Board in Cockshutt Farm Equipment, where it was held that the phrase “capital cost to the taxpayer” refers to "the actual, factual, or historical cost to the appellant of the depreciable property when acquired,” without adjustment for subsequent events.

This also appears to be the treatment recommended by the accounting profession.

— in a paper entitled "Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes" (Canadian Tax Paper No. 71-C.T.F. July 1983), B.J. Arnold writes, at pages 187 and 188:

For income tax and accounting purposes, it is clear that every transaction involving foreign currency must be restated in Canadian dollars at the exchange rate applicable on the date of the transaction or at an average rate. For example, where a taxpayer acquires inventory and the purchase price is stated in a foreign currency, for the purposes of Canadian accounting and taxation, the purchase price of the goods is translated into Canadian dollars at the exchange rate effective on the date of the sale. Every transaction resulting in an asset, liability, revenue item, or expense is treated in this way. Similarly, when an asset is sold and the sale price is stated in foreign currency, the sale price must be converted into Canadian dollars at the appropriate exchange rate. The gain or profit on the transaction for Canadian tax purposes is then measured in the ordinary way as the excess of the selling price in Canadian dollars over the cost in Canadian dollars. It must, however, be recognized that the resulting gain or loss may have been either increased or reduced as a result of foreign exchange fluctuations between the time of acquisition of the property and the time of disposition.

For all these reasons, I find that the Minister of National Revenue was correct in reassessing the plaintiff as he did. Judgment will be rendered accordingly, with costs against the plaintiff.

Appeals dismissed.