Agnico-Eagle - Tax Court of Canada finds that the U.S. dollar principal of a convertible debenture should be considered on conversion to have been settled at the historical exchange rate

Woods J applied Teleglobe for the proposition that where a debt is repaid with shares, the debt should be considered to have been settled for the amount for which such shares were issued.  She found that when U.S. dollar convertible debentures of Agnico-Eagle were converted after the underlying shares had substantially appreciated in Canadian dollar terms (as well as in depreciated U.S. dollars), the "true consideration" for the shares issued on conversion should be considered to have been received by Agnico when the debentures were previously issued and the conversion price was agreed to.  Accordingly, the repayment proceeds of 71.4 common shares per debenture received on conversion, which (applying the above fiction of valuing those shares at the original conversion price) was U.S.$1,000 per debenture, should be converted to Canadian dollars at the exchange rate prevailing at the time of debenture issuance rather than at the time of conversion (when the U.S. dollar had depreciated considerably).  Therefore, no FX gain was realized under s. 39(2) on conversion.

Although the Agnico board in fact had not assigned a dollar stated capital to such shares, the effect was similar to setting their dollar stated capital as the Canadian dollar equivalent at the date of debenture issue of their U.S. dollar conversion price, and then finding that this Canadian-dollar stated capital was what the debentures were repaid for. Agnico’s alternative argument, that s. 51(1) "provides that on a conversion ... there was no transaction that could give rise to a gain," was not considered.

This case has broader implications than FX treatment of corporate convertible debentures.  For example, it suggests that convertible debentures of income funds should be considered to be repaid for their principal rather than their appreciated value, so that no deemed interest arises under ss. 214(7) and (14).

Neal Armstrong.  Summaries of Agnico-Eagle Mines Limited v. The Queen, 2014 TCC 324 under s. 261(2) and General Concepts - Evidence.