CORAM: STRAYER J.A.
B E T W E E N:
HER MAJESTY THE QUEEN
" and "
MacMILLAN BLOEDEL LIMITED
HEARD at Vancouver, British Columbia, on Thursday, May 20, 1999
JUDGMENT delivered at Ottawa, Ontario, on Monday, June 28, 1999
REASONS FOR JUDGMENT BY: STRAYER J.A.
CONCURRED IN BY: DÉCARY J.A.
C O R A M: STRAYER J.A.
B E T W E E N:
HER MAJESTY THE QUEEN
" and "
MacMILLAN BLOEDEL LIMITED
REASONS FOR JUDGMENT
I. This is an appeal from a decision of a Tax Court judge dated July 16, 1997 allowing the respondent's appeal from an assessment by the Minister of National Revenue of the respondent's taxation year ending December 31, 1987. The issue is whether the respondent was entitled to claim a capital loss on the currency fluctuation loss it sustained when it redeemed in U.S. dollars preferred shares which it had issued in U.S. dollars in 1977, 1982, and 1983.
II. The respondent is incorporated in British Columbia and carries on an integrated forest products business in Canada and elsewhere. In 1977, it issued 3,400,000 Series A preferred shares for U.S. $85,000.00 and in 1982 and 1983, it issued 250,000 Class B, Series 4 preferred shares for U.S. $18,000,000. Both classes of shares were redeemable at the option of either the respondent or the holders for an amount equal to their issue price in U.S. dollars. However, the respondent, for the purposes of the Income Tax Act (the "Act"), was required to keep its financial records in Canadian dollars. The Canadian dollar amount of the proceeds from the issue of the Series A shares was $87,954,250 and $23,660,080 for the issue of the Class B, Series 4 shares. In 1987, the respondent redeemed all of the Series A shares and 9,287 of the Class B, Series 4 shares, paying to the shareholders the U.S. dollar amount due on redemption. Because of an increase in the value of the U.S. dollar in relation to the Canadian dollar between the dates the shares were issued and the date they were redeemed, the respondent was required to pay $24,965,399 (Cdn) more on the redemption of the shares than it had received on their issuance. For tax purposes, the respondent treated this difference in price as a foreign exchange loss deemed to be a capital loss by subsection 39(2) of the Act. The Minister reassessed the respondent and disallowed the claim for a capital loss under subsection 39(2) of the Act.
III. Both before the Tax Court and before this Court, the Minister took the position that the difference between the prices paid on issue and on redemption constituted a deemed dividend pursuant to subsection 84(3) of the Act, and could not also qualify for treatment as a capital loss pursuant to subsection 39(2). The Tax Court Judge rejected the argument that the payment constituted a deemed dividend on the ground that subsection 84(3) is intended to prevent a corporation from conferring a disguised benefit in the form of capital on shareholders; therefore, it deems any amount paid to shareholders in excess of the purchase price of the shares to be a dividend. The Tax Court Judge was of the view that in the current case, the shareholders did not receive a benefit since they both paid and received the same amount of U.S. dollars. As a result, it could not be said that a dividend was paid to them. The Tax Court Judge noted that, on the other hand, subsection 39(2) was enacted to deal specifically with gains and losses on currency fluctuations and there was no reason that it should not be applicable to the loss suffered by the respondent on redemption.
IV. Notwithstanding the findings of the Tax Court judge, on appeal the respondent conceded, and we concurred, that the redemption payment was a deemed dividend by virtue of subsection 84(3). The remaining issue for the Court, then, was whether subsections 84(3) and 39(2) could operate concurrently. Counsel for the Minister argued that the finding of a deemed dividend precludes the recognition of a capital loss pursuant to subsection 39(2). He submitted that the deeming provision applies for all the purposes of the Act and that once the payment is considered a dividend, the taxpayer cannot also be said to have "sustained a loss" within the opening words of subsection 39(2).
V. I have concluded that the respondent is entitled to claim a capital loss on the share redemption transaction. The relevant provisions of the Income Tax Act read as follows:
39.(2) Capital gains and losses in respect of foreign currencies " Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year, the following rules apply:
(a) the amount, if any, by which
| (i) the 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) |
| (ii) the total of all such losses sustained by 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), |
| (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.
39.(2) Gains et pertes en capital relatifs aux monnaies étrangères " Malgré le paragraphe (1), lorsque, par suite de toute fluctuation, postérieure à 1971, de la valeur de la monnaie ou des monnaies d'un ou de plusieurs pays étrangers par rapport à la monnaie canadienne, un contribuable a réalisé un gain ou subi une perte au cours d'une année d'imposition, les règles suivantes s'appliquent:
|a)est réputé être un gain en capital du contribuable pour l'année, tiré de la disposition de la monnaie d'un pays étranger, gain en capital qui est le montant déterminé en vertu du présent alinéa, l'excédent éventuel: |
| (i)du total de ces gains réalisés par le contribuable au cours de l'année (jusqu'à concurrence des montants de ceux-ci qui, si l'article 3 était lu de la manière indiquée à l'alinéa (1)a) du présent article, ne seraient pas inclus dans le calcul de son revenu pour l'année ou pour toute autre année d'imposition), |
| (ii)le total des pertes subies par le contribuable au cours de l'année (jusqu'à concurrence des montants de celles-ci qui, si l'article 3 était lu de la manière indiquée à l'alinéa (1)a) du présent article, ne seraient pas déductibles dans le calcul de son revenu pour l'année ou pour toute autre année d'imposition) |
| (iii)si le contribuable est un particulier, 200 $; |
|(b)est réputé être une perte en capital du contribuable pour l'année, résultant de la disposition de la monnaie d'un pays étranger, perte en capital qui est le montant déterminé en vertu du présent alinéa, l'excédent éventuel: |
| (i)du total déterminé en vertu du sous-alinéa a)(ii), |
| (ii)le total déterminé en vertu du sous-alinéa a)(ii), |
| (iii)si le contribuable est un particulier, 200 $. |
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
84(3) Redemption, etc. " Where at any time after December 31, 1977 a corporation resident in Canada has redeemed, acquired or cancelled in any manner whatever (otherwise than by way of a transaction described in subsection (2) any of the shares of any class of its capital stock,
84(3) Rachat, etc. " Lorsque, à un moment donné après le 31 décembre 1977, une société résidant au Canada a racheté, acquis ou annulé de quelque façon que ce soit (autrement que par une opération visée au paragraphe (2)) toute action d'une catégorie quelconque de son capital-actions:
|(a) the corporation shall be deemed to have paid at that time a dividend on a separate class of shares comprising the shares so redeemed, acquired or cancelled equal to the amount, if any, by which the amount paid by the corporation on the redemption, acquisition or cancellation, as the case may be, of those shares exceeds the paid-up capital in respect of those shares immediately before that time; and || |
|a)la société est réputée avoir versé au moment donné un dividende sur une catégorie distincte d'actions constituée des actions ainsi rachetées, acquises ou annulées, égal à l'excédent éventuel de la somme payée par la société lors du rachat, de l'acquisition ou de l'annulation, selon le cas, de ces actions sur le capital versé relatif à ces actions, existant immédiatement avant ce moment; |
|(b) a dividend shall be deemed to have been received at that time by each person who held any of the shares of that separate class at that time equal to that portion of the amount of the excess determined under paragraph (a) that the number of those shares held by the person immediately before that time is of the total number of shares of that separate class that the corporation has redeemed, acquired or cancelled, at that time. || |
|b)chacune des personnes qui détenaient au moment donné une ou plusieurs actions de cette catégorie distincte est réputée avoir reçu à ce moment un dividende égal à la fraction de l'excédent déterminé en vertu de l'alinéa a) représentée par le rapport existant entre le nombre de ces actions que détenait cette personne immédiatement avant ce moment et le nombre total des actions de cette catégorie distincte que la société a rachetées, acquises ou annulées, à ce moment. |
VI. Turning first to subsection 84(3), it prescribes that where a corporation redeems shares at an amount in excess of the paid-up capital in respect of those shares, the corporation is deemed to have paid a dividend in the amount of that excess and the shareholder is deemed to have received a dividend in that amount. It is obvious that the tax consequence of this is that in the hands of the shareholder the dividend is income. There is no necessary tax consequence for the corporation as the payment of a dividend by a corporation does not per se amount to either a capital loss or an expenditure deductible from income. Nor does the subsection contain any language such as "for all purposes of this Act". Therefore in my view subsection 84(3) is neutral in respect of the corporation with respect to the characterization of its deemed payment of a dividend as being either of a capital or of an income nature.
VII. Turning then to subsection 39(2) it is clear from the language of subparagraphs 39(2)(a)(i) and (ii) that a gain or loss caused by currency fluctuation gives rise to a capital gain or loss provided that the amount in question would not otherwise be considered in computing the taxpayer's income. For the reasons which I have just stated, subsection 84(3), while making the payment for redemption of shares to be a deemed dividend, and hence of an income nature in the hands of the shareholder, does not by deeming the corporation to have paid a dividend, make the corporation's expenditure to be of either an income or capital nature. Therefore the amounts paid by the corporation, not otherwise being considered an expenditure deductible from income, are eligible for the application of subsection 39(2).
VIII. According to the plain wording of subsection 39(2) the taxpayer is only required to have sustained a loss by virtue of a currency fluctuation in order to claim a capital loss, if the amount is not otherwise included in computing income. In this case, there is no dispute with respect to the effect of the currency fluctuation; the only question is whether the share redemption payment here falls within the meaning of "loss". According to the common understanding of "loss", the respondent's payment to the shareholders clearly qualifies. That is, in Canadian dollar terms the respondent paid more to redeem the shares than it had initially received. The circumstances here are not unlike those in Tahsis Company Ltd. v. The Queen,1 wherein the Federal Court Trial Division interpreted subsection 39(2)as providing relief to a debtor with respect to payments owed on a loan. There, currency fluctuations forced the taxpayer to pay more Canadian dollars in order to meet his U.S. dollar loan payments. Both that taxpayer and the respondent here sustained what would ordinarily be understood to be a loss. There is nothing in subsection 39(2) to limit the meaning of "loss" such that it would not cover this otherwise straightforward result.
IX. Each of subsections 39(2) and 84(3) is a specific provision, independent of the other, which deals with a particular type of situation. Neither is specifically made to apply notwithstanding other provisions of the Act. While subsection 84(3) deals with the payment of dividends on a share redemption, subsection 39(2) does not address deemed dividends at all, but is rather confined to a consideration of transactions which result in losses or gains due to currency fluctuations. In the end, the operation of subsection 84(3) does not limit the meaning of "loss" in subsection 39(2). Rather, the two provisions deal with different sets of circumstances, both of which apply to the transaction currently under review.
X. The appeal should therefore be dismissed with costs.
Robert Décary J.A.
J.T. Robertson J.A.
1  C.T.C. 78 (F.C.T.D.)