Docket: A-532-14
Citation:
2016 FCA 130
CORAM:
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TRUDEL J.A.
STRATAS J.A.
RYER J.A.
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BETWEEN:
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HER MAJESTY THE
QUEEN
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Appellant
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and
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AGNICO-EAGLE
MINES LIMITED
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Respondent
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REASONS
FOR JUDGMENT
RYER J.A.
[1]
This is an appeal by Her Majesty the Queen (the
“Crown”) from a decision of Justice Judith Woods (the “Judge”) of the Tax Court
of Canada dated November 4, 2014 and cited as 2014 TCC 324.
[2]
In her decision, the Judge allowed the appeal of
Agnico-Eagle Mines Limited (the “Taxpayer”) from reassessments (the
“Reassessments”) in which the Minister of National Revenue (the “Minister”)
determined that the Taxpayer had foreign exchange gains as a result of
conversions (each, a “Conversion”) of certain of its United States dollar (“US$”)
denominated debentures (the “Convertible Debentures”) into its common shares (“Common
Shares”) that occurred in each of the Taxpayer’s 2005 and 2006 taxation years.
[3]
The Reassessments were issued pursuant to the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”), which was in force in
each of the taxation years of the Taxpayer that are in issue. Unless otherwise
indicated, all references to legislative provisions shall be to the
corresponding provisions of the Act.
[4]
In allowing the appeals, the Judge concluded
that no foreign exchange gains were realized by the Taxpayer on the Conversions
that occurred in the Taxpayer’s 2005 and 2006 taxation years. This conclusion
was premised upon the Judge’s interpretation of the terms and conditions
stipulated in an indenture, dated February 15, 2002 (the “Indenture”), which
applied to the Convertible Debentures.
[5]
Under her interpretation of these terms and
conditions, holders of Convertible Debentures who exercised their rights to
acquire Common Shares on conversions were essentially completing subscriptions
for Common Shares that they made when they subscribed for and acquired their
Convertible Debentures. With respect, it is my view that, in making this
interpretation, the Judge committed a reviewable error that warrants our
intervention.
[6]
Properly interpreted, the relevant terms and
conditions of the Indenture contemplate that upon a Conversion, the
indebtedness of the Taxpayer that is evidenced by the Convertible Debentures
that were converted was repaid by the issuance of the stipulated number of
Common Shares.
[7]
As will be more fully explained below, this
interpretation leads me to conclude that the gains assessed in the
Reassessments were incorrectly determined. As a result, I conclude that the
appeal should be allowed.
I.
BACKGROUND
[8]
The parties provided a Partially Agreed
Statement of Facts to the Judge. For the purposes of this appeal, the relevant
facts are set forth hereinafter. In these reasons, all dollar amounts are in
Canadian currency (“C$”), except where otherwise indicated.
[9]
The Taxpayer is a public corporation, within the
meaning of subsection 89(1), that is subject to the Ontario Business
Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”).
[10]
Throughout the period from 2002 to 2006, the Common
Shares were listed for trading on the New York Stock Exchange (the “NYSE”) and
the Toronto Stock Exchange (the “TSX”).
[11]
The Directors of the Taxpayer passed resolutions
effective January 30, 2002 (the “Issuance Resolutions”) approving the public
offering of Convertible Debentures, including arrangements with the
underwriters, the filing of a prospectus (the “Prospectus”) and the listing of
the Convertible Debentures for trading.
[12]
The Issuance Resolutions authorized the Taxpayer
to enter into the Indenture with a trust corporation as trustee for and on
behalf of each person (a “Holder”) who acquired a Convertible Debenture. The
principal terms of the Indenture, insofar as this appeal is concerned, are as
follows:
a) each Convertible Debenture constituted a promise by the Taxpayer to
pay to its Holder US$1,000 (the “Principal Amount”) on February 15, 2012 (“Maturity”
or the “Maturity Date”) and was evidenced by a form of security (the
“Convertible Debenture Security Form”) contained in an appendix to the
Indenture;
b) each Convertible Debenture bore interest at the rate of 4.5% per
annum payable semi-annually on its Principal Amount;
c) the indebtedness of the Taxpayer to the Holder of a Convertible
Debenture was subordinate in right of repayment to the prior payment in full of
certain obligations of the Taxpayer that were defined in the Indenture as “Senior Indebtedness”;
d) unless an event of default, as defined in clause 1.1 of the Indenture
(an “Event of Default”), had occurred, on the Maturity Date, the Taxpayer had
the right, exercisable upon written notice, to elect to pay the then
outstanding Principal Amount of the Convertible Debentures, plus all accrued
and unpaid interest thereon (the “Maturity Amount”), in Common Shares, rather
than in cash;
e) at any time on or after February 15, 2006, the Taxpayer had the
right, exercisable upon written notice (a “Redemption Notice”), to redeem (a
“Redemption”) all or any portion of the outstanding Convertible Debentures at a
price (the “Redemption Price”) equal to the aggregate Principal Amount of the
Convertible Debentures selected for redemption, plus any accrued and unpaid
interest thereon. From and after the time of a Redemption Notice, the Redemption
Price of the Convertible Debentures referred to therein became due and payable
on the date specified in that notice (the “Redemption Date”). Provided that no
Event of Default had occurred, the Taxpayer had the right to satisfy its
obligation to pay all or a portion of the Redemption Price in Common Shares;
f) the number of Common Shares that the Taxpayer was obliged to issue
if it elected to pay the Maturity Amount or the Redemption Price in Common
Shares was determined by a formula under which the aggregate Maturity Amount or
Redemption Price was divided by 95% of the amount defined in clause 1.1 of the
Indenture as the “Current Market Price” of a
Common Share, which amount was basically the weighted average trading price of
the Common Shares on the NYSE over a 20-day period stipulated in that
definition;
g) at any time on or before the Maturity Date or any Redemption Date, Holders
had the right to make a Conversion of their Convertible Debentures into 71.429
Common Shares per Convertible Debenture (the “Conversion Rate”), subject to
adjustments in certain circumstances that are not relevant to this appeal, by
notice (a “Conversion Notice”) given by or on behalf of each Holder. Conversions
occurred on the date (the “Conversion Date”) upon which all of the formalities
stipulated in the Convertible Debenture Security Form were completed. As a
consequence of a Conversion, a Holder ceased to be a Holder of the indebtedness
evidenced by each Convertible Debenture that was converted and received the
stipulated number of Common Shares in full satisfaction of such indebtedness.
Except in circumstances that are not relevant to this appeal, a Holder who gave
a Conversion Notice was not entitled to any payment in respect of accrued and
unpaid interest on a Convertible Debenture at the time of the Conversion. An
important provision of the Indenture in this regard is the following portion of
clause 12.3, which reads as follows:
No payment or
adjustment will be made for dividends on or other distributions with respect to
any Common Shares except as provided in this Article 12. The Common Shares
issued on the conversion (together with the cash payment, if any, in lieu of
fractional shares) shall be applied to fully satisfy the Company’s obligation
to repay the Principal Amount.
[Emphasis added]
h) upon a Conversion, the number of Common Shares that were to be issued
to the Holder that gave a Conversion Notice did not include a fraction of one
Common Share. Instead, the Taxpayer was obliged to make a cash payment in lieu
of issuing a fractional share. This was stipulated in clause 12.4 of the
Indenture, which reads as follows:
12.4
Fractional Shares
The Company will
not issue a fractional Common Share upon conversion of a Security. Instead,
the Company will deliver cash for the current market value of the fractional
share, which shall be determined by multiplying the Sale Price (on the
Trading Day in respect of which the Sale Price is determined) on (i) if the
Conversion Date is a Trading Day, the Conversion Date or (ii) if the Conversion
Date is not a Trading Day, the last Trading Day prior to the Conversion Date,
of a full share by the fractional amount and rounding the product to the
nearest whole cent, one-half cent being rounded upward.
[Emphasis added]
i)
the discharge of the liability of the Taxpayer
in respect of the indebtedness evidenced by the Convertible Debentures was
provided for in clause 10.1 of the Indenture, which reads as follows:
10.1 Discharge
of Liability on Securities.
(a) When the
Company shall have delivered to the Trustee all outstanding Securities (other
than Securities replaced pursuant to Section 2.14) for cancellation or (ii) after
the Securities have become due and payable, whether at Maturity, on any
Redemption Date, on a Change of Control Purchase Date, upon an election
by a Holder to convert his Securities or otherwise, and the Company
shall have deposited with the Trustee, the Paying Agent or the Conversion
Agent (as applicable in accordance with this Indenture) cash or Common
Shares, or any combination thereof (as applicable in accordance with this
Indenture) sufficient to pay the entire amount due and payable with respect
to each outstanding Security (other than Securities replaced pursuant to
Section 2.14), and if in either case the Company shall have paid all other sums
payable hereunder by the Company, then this Indenture shall, subject to
Sections 4.2 and 9.8, cease to be of further effect…
[Emphasis added]
[13]
The Issuance Resolutions also dealt with the
issuance of Common Shares upon a conversion, a redemption or the maturity of
the Convertible Debentures. In particular, clause 11 of the relevant portion of
these resolutions (the “Value of Consideration for Share Issuance Resolution”)
reads as follows:
...it is hereby determined that the
aggregate consideration for the issue from time to time of each common share of
the Company issueable upon the conversion, redemption or maturity of the
Debentures or other common shares that may be issued pursuant to the terms
of the Indenture (the “Underlying Common Shares”) shall be described in and on
the terms provided for under the Indenture (the “Consideration”) and that the
fair value of the Consideration is not less than the amount of money that the
Company would have received if the Underlying Common Shares had been issued for
money.
[Emphasis added]
[14]
On or about February 15, 2002 (the “Issuance
Date”):
a) the Taxpayer issued 143,750 Convertible Debentures for
US$143,750,000;
b) the Convertible Debentures were listed for trading on the TSX;
c) the foreign exchange (“F/X”) rate was C$1.588 to US$1.00, with the
result that the principal amount of each Convertible Debenture, determined in
C$, was $1,588;
d) the Common Share trading price on the NYSE was approximately
US$12.68; and
e) using the Conversion Rate, each Common Share would have to increase
in value to US$14 per share before the conversion feature would commence to be “in the money”, i.e., before a Holder would
recover an amount at least equal to the US$1,000 Principal Amount of a
Convertible Debenture upon a Conversion.
[15]
On December 13, 2005, the Directors passed
resolutions (the “Redemption Resolutions”) in which they ratified and confirmed
the Issuance Resolutions and approved the redemption of all of the outstanding
Convertible Debentures. Pursuant to the Redemption Resolutions, on December 20,
2005, the Taxpayer issued Redemption Notices stipulating that:
a)
the Redemption Date would be February 15, 2006;
b) the Redemption Price would be approximately US$1,022.68 per
Convertible Debenture, representing the principal and accrued interest on each
Convertible Debenture, and would be paid by the issuance of 63.4767 Common
Shares; and
c) Holders maintained their conversion rights and, if they exercised
those rights, they would receive 71.429 Common Shares per Convertible
Debenture.
[16]
In 2005 (largely on or after December 20th
of that year), Holders of 10,855 Convertible Debentures gave Conversion Notices
and received 775,359 Common Shares upon the surrender of those Convertible
Debentures and the extinguishment of the indebtedness of the Taxpayer to them
thereunder.
[17]
In 2006, Holders of 131,784 Convertible
Debentures gave Conversion Notices and received 9,413,189 Common Shares upon
the surrender of those Convertible Debentures and the extinguishment of the
indebtedness of the Taxpayer to them thereunder.
[18]
The Conversions occurred on a number of different
Conversion Dates in 2005 and 2006. On those dates, the F/X rate varied from C$1.1443
to 1.1726 per US$1.00. On an aggregate basis, expressed in C$, these Conversions
gave rise to the following results:
2005
Conversions
Principal Amount at
Issuance
|
Principal Amount at
Extinguishment
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Fair Market Value
(“FMV) of Shares Issued
|
$17,237,740
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$12,648,138.90
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17,010,809.77
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2006 Conversions
Principal Amount at
Issuance
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Principal Amount at
Extinguishment
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FMV of Shares Issued
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$209,272,992
|
$152,174,399.90
|
$262,029,721.89
|
[19]
On or about February 15, 2006, 1,111 Convertible
Debentures were redeemed pursuant to the December 20, 2005 Redemption Notice
and 70,520 Common Shares were issued upon the surrender of those Convertible
Debentures and the extinguishment of indebtedness of the Taxpayer thereunder.
Expressed in C$, these Redemptions gave rise to the following results:
2006
Redemptions
Principal Amount at
Issuance
|
Principal Amount at
Extinguishment
|
FMV of Shares Issued
|
$1,764,379
|
$1,282,205.10
|
$1,946,780
|
[20]
In its 2005 income tax return, the Taxpayer did
not report any capital gains in respect of the Conversions that occurred in its
2005 taxation year.
[21]
By Reassessment dated February 11, 2011 (the
“2005 Reassessment”), the Minister reassessed the Taxpayer for its 2005
taxation year on the basis that, pursuant to subsection 39(2), the Taxpayer was
deemed to have realized capital gains in the aggregate amount of $4,499,360 as
a result of the 2005 Conversions. These gains represented the difference
between the Principal Amounts of the Convertible Debentures that were converted
in 2005, determined in C$, on the date of their issuance and on the date of
their Conversions.
[22]
The Taxpayer objected to the 2005 Reassessment,
the Minister confirmed it and the Taxpayer appealed it to the Tax Court of
Canada.
[23]
In its 2006 income tax return, the Taxpayer
reported a capital gain as a result of the 2006 Conversions and the
Redemptions, using a methodology that it now agrees was incorrect.
[24]
By Reassessment dated December 29, 2010 (the
“2006 Reassessment”), the Minister reassessed the Taxpayer for its 2006
taxation year on the basis that, pursuant to subsection 39(2), the Taxpayer was
deemed to have realized capital gains in the aggregate amount of $57,676,430 as
a result of the 2006 Conversions and the Redemptions. These gains were determined
in essentially the same way that the 2005 capital gains were determined.
[25]
The Taxpayer objected to the 2006 Reassessment,
the Minister confirmed it and the Taxpayer appealed it to the Tax Court of
Canada. The Judge heard the Taxpayer’s appeals of the 2005 and 2006
Reassessments together.
II.
THE JUDGE’S DECISION
[26]
The Judge allowed the Taxpayer’s appeal with
respect to the deemed capital gains that were assessed in respect of the 2005
Conversions and the 2006 Conversions but upheld the assessment of deemed
capital gains in respect of the Redemptions.
[27]
The Judge determined that the Convertible
Debentures were extinguished on the Conversions and Redemptions. She then found
that the determination of whether the Taxpayer made a gain as a result of a
foreign currency fluctuation, pursuant to subsection 39(2), required a
comparison of the amount received by the Taxpayer upon the issuance of the
Convertible Debentures and the amount paid by it upon their extinguishment,
with both amounts expressed in Canadian currency.
[28]
Citing Teleglobe Canada Inc. v. R., 2002
FCA 408, 296 N.R. 268 [Teleglobe], the Judge found that the amount the
Taxpayer had paid to extinguish the Convertible Debentures by the issuance of the
Common Shares was not necessarily reflected by the trading price of the Common
Shares at the time of their issuance. Rather, the amount paid was the amount
for which the shares were issued, which was to be determined by the parties’ agreement.
[29]
The Judge rejected the Taxpayer’s assertion that
the Common Shares were issued for an amount equal to the fair market value of
the Convertible Debentures at the time of their Conversion because, in her
view, that assertion did not accurately reflect the transaction documents or
the Taxpayer’s commitment to issue 71.429 Common Shares per Convertible
Debenture upon the Conversion of each Convertible Debenture.
[30]
The Judge found that the amount for which the
Common Shares were issued was US$14 per share because “[t]he
Indenture and the Prospectus clearly contemplate that the Common Shares are to
be issued for US$14.00 per Common Share” (Judge’s reasons at paragraph
52). This led the Judge to conclude that the amount paid by the Taxpayer for
the extinguishment of each Convertible Debenture was US$1,000 (i.e.,
US$14 per Common Share multiplied by 71.429 Common Shares).
[31]
Having determined that the amount paid by the
Taxpayer upon the extinguishment of each converted Convertible Debenture was
US$1,000, the Judge then considered whether and when that amount was required
to be converted to Canadian currency in accordance with subsection 261(2),
which requires an amount expressed in a foreign currency that is relevant in
computing a taxpayer’s Canadian tax results, within the meaning of subsection
261(1) (“Canadian Tax Results”), to be converted into Canadian currency using
the rate effective on the date that the amount arose.
[32]
The Judge concluded that the US$1,000 amount “arose” not at the time of the extinguishment of a
Convertible Debenture but at the time of its issuance. This, she reasoned, was
because that was when the “true consideration”
for the issuance of the Common Shares was received by the Taxpayer.
[33]
As a consequence of this determination, the
Judge concluded that the same amount – $1,588 – was received on the issuance of
each Convertible Debenture and on its extinguishment, and therefore the
Taxpayer realized no foreign exchange gain on any of the Conversions.
III.
RELEVANT STATUTORY PROVISIONS
[34]
In this appeal, the relevant statutory
provisions are subsection 39(2), the definition of “amount”
in subsection 248(1), the definition of Canadian Tax Results in subsection
261(1), and subsection 261(2). These provisions are reproduced later in these
reasons when they are addressed.
IV.
ISSUE
[35]
The issue in this appeal is whether the Judge committed
a reviewable error in concluding that the Minister erred in assessing capital
gains against the Taxpayer under subsection 39(2) as a result of the 2005 and
2006 Conversions.
[36]
In my view, this issue raises the following
questions:
a) whether the Judge committed a reviewable error in her interpretation
of the Indenture;
b) whether the Judge committed a reviewable error in her conclusion
that the amount paid by the Taxpayer to extinguish the indebtedness evidenced
by the Convertible Debentures “arose”, within
the meaning of paragraph 261(2)(b), at the time when such indebtedness
came into existence (i.e., the Issuance Date) and not the time when such
indebtedness was extinguished (i.e., the Conversion Date); and
c) whether the Judge committed a reviewable error in concluding that
the amount paid by the Taxpayer to extinguish the indebtedness evidenced by
each Convertible Debenture that was subject to a Conversion was US$1,000.
V.
STANDARD OF REVIEW
[37]
In appellate review of a decision of the Tax
Court of Canada, this Court applies the standard of correctness with respect to
questions of law and the standard of palpable and overriding error with respect
to questions of fact and mixed fact and law in respect of which there are no
readily extricable questions of law (see Housen v. Nikolaisen, 2002 SCC
33, [2002] 2 S.C.R. 235 at paragraphs 8, 10 and 37 [Housen]).
[38]
During argument of this appeal, we received
submissions concerning the effect of the Supreme Court’s recent decision in Sattva
Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 [Sattva].
In that case, the Supreme Court discussed the standard of review of judges’
interpretations of contracts. Insofar as the Judge’s interpretation of the
Indenture—a contractual document—in this case is concerned, does Sattva
require us to apply a different standard of review from the usual appellate
standard of review in Housen? For the reasons set out below, I would
answer that question in the negative.
[39]
In Sattva, the Supreme Court instructed
us that many issues of contractual interpretation are questions of mixed fact
and law. This is because the goal of interpretation—to ascertain the objective
intentions of the parties—is inherently fact specific, informed as it is by the
surrounding facts and circumstances (Sattva at paragraph 55). In
situations where the question is suffused by facts, the deferential standard of
palpable and overriding error will apply on appeal (Sattva at paragraphs
50-52).
[40]
However, the Supreme Court also stated that where
there is an extricable question of law, such as the application of a wrong
legal standard or incorrect legal principle, failure to consider a required
element of a legal test or failure to consider a legally relevant factor,
correctness is the standard of review (Sattva at paragraph 53).
[41]
This is entirely consistent with Housen at
paragraphs 33 to 36. Therefore, Sattva does not require us to depart
from the usual standard of review that we apply in appeals from the Tax Court
of Canada.
VI.
ANALYSIS
[42]
In order to address the issue at the heart of
this appeal, I will first consider the question of whether, bearing in mind the
standard of review, the Judge’s interpretation of the Indenture must be set
aside, since, in my view, the answer to this question will have a direct impact
upon the other two questions. Thereafter, I will address the statutory
provisions and relevant case law with respect to the taxation of foreign
currency gains under the Act and their application to the facts of this case.
A.
The interpretation of the Indenture
[43]
The Judge’s determination of the income tax
consequences that flowed from the 2005 and 2006 Conversions was premised upon
her interpretation of the terms and conditions of the Indenture, in particular
those dealing with conversions. Accordingly, the necessary first step in
determining whether the Judge made any error that warrants our intervention is
to undertake a review of her interpretation of the terms and conditions of the
Indenture.
[44]
In my view, the Judge appears to have
simultaneously adopted two different, and mutually irreconcilable, characterizations
of the Indenture and the legal rights and obligations created thereunder. This
inconsistency is a legal error of the sort that requires this Court’s intervention.
[45]
In paragraph 45 of her reasons, the Judge concluded
that the Convertible Debentures were extinguished upon Conversion and that the
Common Shares were issued as payment for that extinguishment. In reaching this
conclusion, the Judge must be taken to have determined that upon receipt of
funds from Holders on the Issuance Date, the Taxpayer became indebted to them
in the amount of US$1,000 per Convertible Debenture, agreed to pay interest on
such indebtedness while outstanding and agreed to repay such indebtedness at
the times and in the manners stipulated in the Indenture.
[46]
As I will explain, it is my view that this is
the correct characterization of the Convertible Debentures and the Indenture
under which they were issued.
[47]
However, paragraphs 52 to 67 of the Judge’s
reasons appear to be premised upon a different characterization. In paragraph
55 of her reasons, the Judge concluded that when Holders tendered US$1,000 per
Convertible Debenture as the subscription price for each Convertible Debenture that
they agreed to purchase, they did so in payment of the subscription price (US$14
per share) of the Common Shares that might, at some future time, be issued to them
if they issued Conversion Notices to the Taxpayer. In other words, the Judge
concluded that the subscription price tendered by Holders on the Issuance Date
ought to be characterized not as a subscription for an indebtedness of the
Taxpayer as evidenced by the Convertible Debentures but rather as the subscription
price of Common Shares that might, at some future time, be issued if and to the
extent that such Holders decided to convert their Convertible Debentures
pursuant to the conversion provisions of the Indenture.
[48]
The Judge rejected the assertion that a Conversion
constituted a repayment of the indebtedness evidenced by the Convertible
Debentures by the issuance of Common Shares. In doing so, at paragraph 65 of
her reasons, the Judge found that the portion of clause 12.3 of the Indenture (reproduced
above), which, in my view, stipulates that the issuance of Common Shares on a Conversion
constitutes repayment of the Principal Amount of the converted securities, was “buried in a lengthy section dealing with conversion
procedures, and [had] a more limited purpose”.
[49]
At paragraph 66 of her reasons, the Judge
concluded:
[66] All that section 12.3 appears to
accomplish is to ensure that the debt has been satisfied on a conversion. But
the issuance of the Common Shares does more than satisfying the debt. It also
satisfies Agnico’s commitment to issue Common Shares that is embedded in the
conversion right.
[50]
Although the consequences of the Redemptions are
not in issue in this appeal, it is noteworthy that at paragraph 73 of her
reasons, the Judge concluded that the Common Shares issued by the Taxpayer on
the Redemptions were issued in satisfaction of the Redemption Price of the
Convertible Debentures. While the Judge uses the phrase “in satisfaction of the Redemption Price,” it is my
view that she meant nothing more than that there had been a repayment of the
indebtedness evidenced by the Convertible Debentures plus accrued interest on
the Redemptions.
[51]
In my view, the Judge characterized the rights
and obligations created by the Indenture as a subscription by Holders for
71.429 Common Shares at a subscription price of US$1,000 where the Convertible
Debentures held by such Holders were converted into Common Shares. On the other
hand, the Judge characterized the rights and obligations in respect of Redemptions
under the Indenture as repayments of the Principal Amount of the indebtedness
evidenced by the Convertible Debentures plus accrued interest (i.e., the
Redemption Price) by the issuance of Common Shares.
[52]
In other words, the Judge found that the
Indenture constituted a subscription for shares in respect of those Holders who
exercised their Conversion rights under the Indenture but that the Indenture
did not constitute a share subscription for those Holders whose Convertible
Debentures were redeemed.
[53]
The characterization of the rights and
obligations of Holders and the Taxpayer under the Indenture must be determined
as of the time that the Indenture was entered into and became operative. At
that time, it would not have been possible to know whether the Convertible
Debentures would be redeemed, converted or repaid on the Maturity Date. With
great respect, it appears to me that the Judge characterized the Indenture and
the rights and obligations thereunder on an ex post facto basis and, in
doing so, she made inconsistent interpretations. To repeat, according to the
Judge’s analysis, the Indenture constituted a subscription for shares for Holders
whose Convertible Debentures were converted into Common Shares, while it
constituted a subscription for a debt security in respect of which the
indebtedness was repayable in shares for those whose Convertible Debentures
were redeemed.
[54]
In my view, this ex post facto
characterization is the product of legal error and thus we must intervene.
[55]
Moreover, it seems illogical to say that Holders
who acquired Common Shares on Conversions that they initiated over three years
after they acquired their Convertible Debentures would have agreed that the
subscription price of each of those shares would be US$14 when the very reason
for the Conversions was that the fair market value of each Common Share at the
time that the Conversion Notices were issued was an amount in excess of US$14.
In other words, the reason that the Holders were prepared to forgo receipt of
US$1,000 for each Convertible Debenture on Maturity or 63.4767 Common Shares on
the Redemptions stipulated in the December 20, 2005 Redemption Notices (which
had an aggregate fair market value of around US$1,000) was precisely because
the fair market value of the Common Shares which they would receive on the
Conversion of each Convertible Debenture was greater than US$1,000 on the
Conversion Dates, i.e., the Conversion feature was “in the money.”
[56]
Finally, as mentioned above, in examining clause
12.3 of the Indenture, the Judge (at paragraph 65 of her reasons) effectively
read out words from that clause on the basis that they were “buried” in it. In my view, it was a legal error for
the Judge to read out these words on the basis that they are not particularly
prominent in the Indenture. In the interpretation of any contract, a judge is
legally obligated to consider all words used by the parties in ascertaining the
objective meaning of the terms and conditions of the agreement.
[57]
In my view, then, the Judge’s interpretation of
the conversion provisions was vitiated by legal error. This requires us to
intervene under the standard of review prescribed in Housen and,
incidentally, also in Sattva.
[58]
It is now incumbent on me to provide my
interpretation of the provisions of the Indenture that are relevant for the
purposes of this appeal.
[59]
In interpreting a contractual document, it is
necessary to consider the entirety of that document. In undertaking this
exercise, I start with the Convertible Debenture Security Form, which indicates
an issuance date of February 15, 2002 and stipulates a promise to pay an amount
in US currency on February 15, 2012. This form states that it is subject to the
terms and conditions that are included on that form and also those contained in
the Indenture. I conclude that, upon issuance, each Convertible Debenture
represented an indebtedness of the Taxpayer to its Holder in an amount of US
dollars that was repayable in US$1,000 on the Maturity Date.
[60]
The Indenture contains terms and conditions that
contemplate repayments of the indebtedness evidenced by the Convertible
Debentures on dates other than the Maturity Date and using a repayment medium
other than US currency.
[61]
Article 3 of the Indenture contemplates Redemptions
at the option of the Taxpayer, at any time on or after February 15, 2006, upon
payment of the Redemption Price on the Redemption Date. In this context, it is
my view that a Redemption of a Convertible Debenture means nothing more than a
repayment of the indebtedness of the Taxpayer that is evidenced by the
Convertible Debenture that is the subject of the applicable Redemption Notice
on a date other than its Maturity.
[62]
Clause 2.7 of the Indenture permits the Taxpayer
to repay Convertible Debentures that have matured or have been called for Redemption
pursuant to a Redemption Notice by the issuance and delivery of Common Shares,
pursuant to the Share Payment Option.
[63]
Article 12 of the Indenture permits the Holders
to convert their Convertible Debentures into Common Shares at any time prior to
the earlier of their Maturity Date or any applicable Redemption Date into a
fixed number of Common Shares per Convertible Debenture. The Taxpayer asserted
that the Judge correctly concluded that the Indenture provided that Conversions
were share subscriptions and not repayments of the indebtedness evidenced by
Convertible Debentures that were converted. However, nothing in the language of
Article 12 of the Indenture indicates that a Holder who issues a Conversion
Notice is thereby subscribing for Common Shares. The form of Conversion Notice
stipulates only that the Convertible Debentures therein described are to be
converted into Common Shares.
[64]
Clause 12.3 of the Indenture stipulates that
Common Shares issued on a Conversion of a Convertible Debenture are “applied to fully satisfy the Company’s obligation to repay
the Principal Amount” (my emphasis) of that Convertible Debenture. In my
view, this provision stipulates that the indebtedness of the Taxpayer to a
Holder of a Convertible Debenture who issues a Conversion Notice is repaid on
the Conversion Date. More particularly, each such Holder relinquishes such
Holder’s right to receive US$1,000 per Convertible Debenture, in cash, on its
Maturity Date, along with all of its other rights under the Indenture, as
consideration for the issuance to such Holder of 71 Common Shares plus a
payment of an amount of US$ cash in lieu of the fractional share, as provided
for in clause 12.4 of the Indenture. However, I would add that this provision of
clause 12.3 of the Indenture says nothing about the amount or quantum of the
repayment made by the issuance of Common Shares (and the payment of US$ cash,
if any, in lieu of fractional shares) upon a Conversion. Rather, it signifies
an agreement, as between the Taxpayer and Holders who convert, that the
Principal Amount of each Convertible Debenture will have been fully repaid upon
the issuance of the Common Shares, and US$ cash in lieu of any fractional
share, in respect of each Conversion. Whether it may be said that such
repayment was made for an amount greater or less than the Principal Amount of
each Convertible Debenture is not specifically addressed by this provision.
Moreover, whether or not the issuance of a Conversion Notice may be, in effect,
a subscription for Common Shares by the issuing Holder, does not, in my view,
change the legal effect of the Conversion, which is the repayment of the
indebtedness of the Taxpayer that is evidenced by the Convertible Debentures
referred to in the Conversion Notice by the issuance of Common Shares and cash
in lieu of any fractional Common Share.
[65]
This interpretation is consistent with the
Maturity and Redemption provisions under which the indebtedness evidenced by
the Convertible Debentures is repaid on the applicable date using the repayment
medium that the Taxpayer is required or permitted to use.
[66]
The appropriateness of this consistency in
treatment is evident from clause 10.1 of the Indenture, which is reproduced
earlier in these reasons. The effect of clause 10.1 is to provide that the
Indenture will cease to have effect (except for limited purposes that are not
relevant to this appeal) when there has been sufficient payment of the amount
due and payable under the Convertible Debentures – in cash or in Common Shares
– as a consequence of the occurrence of the Maturity, the Redemption or the
Conversion of such Convertible Debentures. This provision clearly contemplates
the payment of the indebtedness evidenced by the Convertible Debentures upon
their Conversion by the issuance of Common Shares. In this regard, it is to be
recalled that, under clause 3.5 of the Indenture, the December 20, 2005
Redemption Notice had the effect of rendering the entire indebtedness of the
Taxpayer under the Convertible Debentures immediately due and payable.
[67]
In conclusion, it is my view that, by issuing
Conversion Notices, Holders were enforcing their rights to repayment of the
indebtedness of the Taxpayer to them that was evidenced by their Convertible
Debentures by the issuance of 71.429 Common Shares per Convertible Debenture, subject
only to the fractional share limitations in clause 12.4 of the Indenture. In
doing so, such Holders chose (for obvious commercial reasons) to receive 71.429
Common Shares per Convertible Debenture rather than to receive the 63.4767
Common Shares per Convertible Debenture that they would otherwise have been
paid if their Convertible Debentures had been redeemed pursuant to the December
20, 2005 Redemption Notice. It follows, in my view, that Holders who issued
Conversion Notices had the indebtedness of the Taxpayer to them that was
evidenced by their Convertible Debentures repaid by the issuance of Common
Shares in accordance with the terms of Article 12 of the Indenture.
[68]
Having determined the correct interpretation of
the applicable provisions of the Indenture, I will now refer to the legislative
and jurisprudential context in which that interpretation must be applied.
B.
The legislative and jurisprudential context
[69]
Prior to the enactment of section 261, taxpayers
generally computed their income tax results under the Act in Canadian currency.
Subsection 261(2) was apparently enacted to ensure that this practice would
continue, notwithstanding some obiter dicta in Imperial Oil Ltd. v.
Canada, 2006 SCC 46, [2006] 2 S.C.R. 447 suggesting that conversions of
foreign currency amounts to Canadian currency were not always required. That
provision reads as follows:
Canadian
currency requirement
|
Monnaie
canadienne — exigences
|
261.(2) In determining the Canadian tax results of a taxpayer for a
particular taxation year,
|
261.(2) Les règles ci-après s’appliquent au
calcul des résultats fiscaux canadiens d’un contribuable pour une année
d’imposition :
|
(a)
subject to this section, other than this subsection, Canadian currency is to
be used; and
|
a) sous
réserve du présent article, à l’exception du présent paragraphe, la monnaie à
utiliser est le dollar canadien;
|
(b)
subject to this section, other than this subsection, subsection 79(7) and
paragraphs 80(2)(k) and 142.7(8)(b), if a particular amount
that is relevant in computing those Canadian tax results is expressed in a
currency other than Canadian currency, the particular amount is to be
converted to an amount expressed in Canadian currency using the relevant spot
rate for the day on which the particular amount arose.
|
b) sous
réserve du présent article, à l’exception du présent paragraphe, du
paragraphe 79(7) et des alinéas 80(2)k) et 142.7(8)b), toute
somme prise en compte dans le calcul de ces résultats qui est exprimée dans
une monnaie autre que le dollar canadien est convertie en son équivalence en
dollars canadiens selon le taux de change au comptant affiché le jour où elle
a pris naissance.
|
[70]
Importantly, section 261 goes further than just
confirming the requirement to compute Canadian income tax results in Canadian
currency. It allows taxpayers, in limited circumstances, to make an election (a
“Functional Currency Election”), pursuant to subsection 261(3), to determine
their Canadian Tax Results in a currency other than Canadian currency.
According to the Department of Finance Technical Notes, the Functional Currency
Election was meant to facilitate compliance and to promote more representative
financial reporting for taxpayers who maintain their books and records in a
foreign currency.
[71]
In approaching the issues in this appeal in the context
of the statutory obligation upon taxpayers to compute their Canadian Tax Results
in Canadian currency, pursuant to subsection 261(2), it seems logical to first
consider the requirements of that provision.
[72]
Where, as in this case, no Functional Currency
Election is made, paragraph 261(2)(a) mandates that the Canadian Tax Results
of a taxpayer for a particular taxation year are to be determined using
Canadian currency. Canadian Tax Results is broadly defined as follows:
Definitions
|
Définitions
|
261.(1) The following definitions apply in this section.
|
261.(1) Les définitions qui suivent
s’appliquent au présent article.
|
…
|
[…]
|
Canadian
tax results of a taxpayer for a taxation year
means
|
résultats
fiscaux canadiens En ce qui concerne un contribuable pour une année d’imposition
|
(a) the
amount of the income, taxable income or taxable income earned in Canada of
the taxpayer for the taxation year;
|
a) son
revenu, revenu imposable ou revenu imposable gagné au Canada pour l’année;
|
(b) the
amount (other than an amount payable on behalf of another person under
subsection 153(1) or section 215) of tax or other amount payable under this
Act by the taxpayer in respect of the taxation year;
|
b) son
impôt, ou toute autre somme, à payer pour l’année en vertu de la présente
loi, à l’exception d’une somme à payer au nom d’une autre personne en
application du paragraphe 153(1) ou de l’article 215;
|
(c) the
amount (other than an amount refundable on behalf of another person in
respect of amounts payable on behalf of that person under subsection 153(1)
or section 215) of tax or other amount refundable under this Act to the
taxpayer in respect of the taxation year; and
|
c) l’impôt,
ou toute autre somme, qui lui est remboursable pour l’année en vertu de la
présente loi, à l’exception d’une somme remboursable au nom d’une autre
personne au titre de sommes à payer au nom de celle-ci en application du
paragraphe 153(1) ou de l’article 215;
|
(d) any
amount that is relevant in determining the amounts described in respect of
the taxpayer under paragraphs (a) to (c).
|
d) toute
somme qui est prise en compte dans le calcul des sommes visées aux alinéas a)
à c).
|
[73]
This definition has been framed by reference to
various “amounts”. Similarly, paragraph 261(2)(b)
contemplates that an otherwise relevant “amount”
may be expressed in a currency other than Canadian currency and then mandates
the conversion of that “amount” into Canadian
currency. Specifically, the foreign currency amount must be converted to
Canadian currency using a stipulated rate of exchange on the date that the
foreign currency amount first “arose”.
[74]
The legislation provides no specific guidance as
to the interpretation of the term arose. The parties disagree as to the
determination of one of two foreign currency amounts that must be translated
into Canadian currency pursuant to paragraph 261(2)(b). The first amount
is agreed upon. It is the US$1,000 paid by Holders to acquire Convertible
Debentures on the Issuance Date. According to the Crown, the second amount is
the amount paid by the Taxpayer to extinguish the indebtedness evidenced by the
Convertible Debentures upon their Conversions. The Crown asserts that this
extinguishment amount “arose” on each Conversion
Date, when the indebtedness evidenced by Convertible Debentures was extinguished,
and had to be translated into Canadian currency on each such date. In contrast,
the Taxpayer asserts that the Judge correctly determined that the second amount
was also US$1,000 but that such amount constituted the subscription price that
Holders of Convertible Debentures who undertook Conversions agreed to pay for
the Common Shares that were the subject of their subscriptions. The Taxpayer
thus asserts that this subscription amount “arose”
on the Issuance Date and had to be translated into Canadian currency on that
date.
[75]
In this appeal, the ultimate issue is whether
the Taxpayer realized a capital gain, pursuant to subsection 39(2), as a result
of the 2005 and 2006 Conversions. Because the Taxpayer did not make a
Functional Currency Election in the taxation years in issue, the application of
subsection 261(2) must be considered. In particular, the existence of foreign
currency amounts must be identified, their relevance to the Canadian Tax
Results of the Taxpayer for its 2005 and 2006 taxation years must be determined
and, if relevant, the time at which such amounts are required to be converted
into Canadian currency must also be determined.
[76]
The gains that were the subject of the
Reassessments were assessed pursuant to subsection 39(2), which read as
follows:
Capital gains and losses in respect of foreign currencies
|
Gains et pertes en capital relatifs aux monnaies éstrangères
|
39.(2) Notwithstanding subsection
39(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:
|
39.(2) 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) the
amount, if any, by which
|
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) 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)
|
(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),
|
exceeds
|
sur :
|
(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
|
(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) 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
|
(iii) si le
contribuable est un particulier, 200 $;
|
(b) the
amount, if any, by which
|
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) the
total determined under subparagraph 39(2)(a)(ii),
|
(i) du
total déterminé en vertu du sous-alinéa a)(ii),
|
exceeds
|
sur :
|
(ii) the
total determined under subparagraph 39(2)(a)(i), and
|
(ii) le
total déterminé en vertu du sous-alinéa a)(i),
|
(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.
|
(iii) si le
contribuable est un particulier, 200 $.
|
[77]
While subsection 39(2) refers to both gains and
losses, the issue in this appeal is limited to a determination of whether, by
virtue of any fluctuation in the C$/US$ F/X rate, the Taxpayer “made a gain” in its 2005 and 2006 taxation years as a
result of the Conversions of Convertible Debentures that occurred in those
years.
[78]
In these circumstances, as discussed above, the
Indenture mandates that the 2005 and 2006 Conversions must be viewed as
repayments by the Taxpayer of the indebtedness evidenced by the Convertible
Debentures that were extinguished on those Conversions. In other words, the
Taxpayer repaid its indebtedness of US$1,000, evidenced by each Convertible
Debenture, by the issuance to the Holder of each such Convertible Debenture of
71.429 Common Shares, subject to the fractional share limitation described
above. Thus, the question is whether, as a consequence of these debt repayments,
the Taxpayer made a gain for the purposes of subsection 39(2). As will be more
fully discussed below, in my view, this question is essentially whether, in C$ terms,
the Taxpayer paid less on the repayment of its indebtedness evidenced by the
Convertible Debentures, on their Conversions in 2005 and 2006, than it received
on the issuance of those Convertible Debentures in 2002.
[79]
The interpretation and application of subsection
39(2) is relatively straightforward where an indebtedness denominated in a
foreign currency is repaid in cash denominated in that same currency.
[80]
If in this case, the repayment of the
indebtedness evidenced by a Convertible Debenture was made by a tender of
US$1,000 in cash to the Holder of that Convertible Debenture, then the Crown’s
position ‒ that the Taxpayer realized a gain as a result of the relative
increase in the value of the C$ against the US$ between the time at which that Convertible
Debenture was issued and the time of its repayment ‒ would appear to be
unassailable. The US$ cash tendered on repayment would be converted into
Canadian currency on the repayment date and a comparison of the amount so
determined to be the amount for which the Convertible Debenture was issued
(here, $1,588) would determine the extent, if any, to which the Taxpayer had a
gain.
[81]
However, a different approach is required where
the repayment consideration is other than US currency. More particularly, a
determination is required with respect to the amount or value in Canadian
currency of the consideration given by the Taxpayer to satisfy its repayment
obligations in respect of the Convertible Debentures on the Conversions. Once
determined, the amount of the repayment consideration must then be compared to the
amount initially borrowed, also stipulated in C$.
[82]
In my view, this approach is consistent with
that taken by this Court in Minister of National Revenue v. MacMillan
Bloedel Ltd. (1999), 243 N.R. 388, [1999] 3 C.T.C. 652 (F.C.A.) [MacMillan
Bloedel]. In that case, Justice Strayer determined that the question of
whether a Taxpayer realized a loss, for the purposes of subsection 39(2), on a
redemption of preferred shares that were denominated in US currency was whether,
in C$ terms, the Taxpayer paid more to redeem the shares than it received on
their issuance.
[83]
In the circumstances of this appeal, where we
must determine whether subsection 39(2) operates to require the Taxpayer to
recognize a gain on the 2005 and 2006 Conversions, I interpret MacMillan
Bloedel as requiring a comparison, in Canadian currency, of the amount of
the consideration given up by the Taxpayer on the repayment of Convertible
Debentures, on their Conversion, to the amount received by the Taxpayer upon
their issuance.
[84]
Having determined the correct interpretation of
the Indenture and examined the relevant statutory and jurisprudential context, I
will now turn to the issue in this appeal.
C.
Did the Judge commit a reviewable error
in concluding that the Taxpayer did not make a gain for the purposes of
subsection 39(2) as a result of the 2005 and 2006 Conversions?
[85]
In light of the determinations that I have made,
it must be determined whether, by issuing Common Shares, plus US$ cash
equivalent to the value of any fractional Common Share, to repay its US$
denominated indebtedness evidenced by the Convertible Debentures that were converted,
the Taxpayer had a gain that was attributable to foreign currency fluctuations,
within the meaning of subsection 39(2).
[86]
As I have stated, the determination of whether the
Taxpayer has made a foreign currency gain, for the purposes of subsection
39(2), requires a comparison of two amounts initially expressed in US currency:
the amount of US$ received by the Taxpayer upon the issuance of the
indebtedness evidenced by the Convertible Debentures (the “Issuance Amount”)
and the amount paid by the Taxpayer upon its repayment of such indebtedness
(the “Repayment Amount”). By virtue of subsection 261(2), each of these two US$
amounts must be converted into Canadian currency, using the applicable F/X
rate, on the date upon which each such amount arose. If the Issuance Amount
exceeds the Repayment Amount, then the Taxpayer will have a foreign currency
gain, for the purposes of subsection 39(2).
[87]
In this appeal, the parties agree that the
Issuance Amount in respect of the indebtedness evidenced by the Convertible
Debentures arose on the Issuance Date. However, as noted above, the parties
disagree as to the nature of the second amount that is required to be
translated into Canadian currency under paragraph 261(2)(b). Having
determined that the Judge committed a reviewable error in interpreting the conversion
provisions of the Indenture as including share subscriptions by Holders of
Convertible Debentures who undertook Conversions and that the proper interpretation
of those provisions is that Conversions constituted repayments of the
indebtedness evidenced by the Convertible Debentures by the issuance of Common
Shares and US$ cash in respect of any fractional Common Share, it is my view
that each Repayment Amount arose on the date of each such repayment, i.e.,
on each Conversion Date. To this extent, I accept the Crown’s assertion that
the foreign currency amount that relates to each such repayment “arose” on the date of each such repayment. However,
the determination of when the Repayment Amount arose does not determine the quantum
of the Repayment Amount.
[88]
The parties agree that the Issuance Amount is
approximately $1,588 (being the C$ equivalent of the US$1,000 that the Taxpayer
received upon the issuance of each Convertible Debenture). Similarly, both
parties assert that the second foreign currency amount that was required to be
translated into Canadian currency was also US$1,000, but they disagree as to
the nature of such amount and when it arose for the purposes of such
translation.
[89]
Having determined that the second foreign
currency amount is the Repayment Amount, which is the amount paid or given up
by the Taxpayer on the Conversions to repay the indebtedness evidenced by the
Convertible Debentures, and that the Repayment Amount was paid by the issuance
of Common Shares and US$ cash to the extent of any fractional Common Share, I
reject the parties’ assertions that the Repayment Amount was US$1,000 per
Convertible Debenture. Holders of Convertible Debentures that were converted
did not receive US$1,000 per Convertible Debenture from the Taxpayer upon the
Conversions.
[90]
Given that the Repayment Amount is an “amount”, for the purposes of paragraph 261(2)(b),
in the absence of any indication in the Indenture as to how the quantum of the Repayment
Amount must be determined, I would look to the definition of “amount” in subsection 248(1) for assistance. The
relevant portion of that provision reads as follows:
Definitions
|
Définitions
|
248.(1) In this Act,
|
248.(1) Les définitions qui suivent
s’appliquent à la présente loi.
|
…
|
[…]
|
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, except that,
|
montant Argent, droit ou chose exprimés sous
forme d’un montant d’argent, ou valeur du droit ou de la chose exprimée en
argent. Toutefois :
|
…
|
[…]
|
[91]
If applicable, this definition may well have led
me to conclude that the Repayment Amount was the “value”
of the Common Shares issued upon the repayment of each Convertible Debenture.
In this regard, it seems to me that the value of a Common Share on each
Conversion Date may well have been an amount determinable by reference to the
trading price of a Common Share on the NYSE or TSX on each such date because
the Taxpayer could, in all likelihood, have received such an amount if it had
undertaken a treasury offering of its Common Shares on each such date.
[92]
In this context, the establishment of the value
of a Common Share on each Conversion Date would likely require evidence as to
the relationship between the trading price of the Common Shares and the price
at which underwriters would agree to market such shares. In this regard, the
practice might be to price the treasury shares at a discount to the trading
price of such shares on the applicable market. An example of this may be seen
in the Indenture, in which the value of Common Shares issued on Redemptions was
stipulated to be 95% of the “Current Market Price”
of the Common Shares, as defined in clause 1.1 of the Indenture.
[93]
Fortunately, the terms and conditions of the
Indenture provide an answer as to how the quantum of the Repayment Amount was
intended to be determined. The resolution of this matter is assisted by clause
12.4 of the Indenture, which has been reproduced above.
[94]
This provision of the Indenture stipulates that
upon the Conversion of Convertible Debentures, no fractional shares will be
issued. Instead, the Holder is entitled to cash equal to the “current market value of the fractional share”, which
is stipulated as the amount of the fraction multiplied by the “Sale Price” of a Common Share on the Conversion Date
(if a “Trading Day” as defined in clause 1.1 of
the Indenture). For this purpose, “Sale Price”
is defined in clause 1.1 of the Indenture by reference to the trading price of
the Common Shares on the NYSE. Further, clause 1.1 of the Indenture stipulates
that “cash” refers to US currency.
[95]
The operation of clause 12.4 of the Indenture
may be illustrated by way of an example. If a Holder owned a single Convertible
Debenture, clause 12.4 of the Indenture would apply with the result that, upon
the Conversion of that Convertible Debenture, such Holder would receive 71
Common Shares and a US$ cash payment equal to the product of 0.429 times the “Sale Price” of a Common Share on the Conversion Date.
[96]
Thus, the Indenture specifically provides a
formula for the determination of the portion of the Repayment Amount that is
represented by any fractional Common Share that would otherwise be issuable as
partial repayment of the indebtedness evidenced by a Convertible Debenture upon
its Conversion. In my view, it may be readily inferred that the parties
intended that this formula would apply equally to the determination of the
quantum of the balance of the Repayment Amount that was paid by the issuance of
a whole number of Common Shares upon each Conversion.
[97]
In my view, this approach is consistent with Teleglobe
in that the question of what was given up by the Taxpayer, when it repaid its
indebtedness evidenced by the Convertible Debentures by the issuance of Common
Shares upon the Conversions, is determined by reference to the terms and
conditions of the Indenture, which reflect the agreement of the Taxpayer and
Holders of Convertible Debentures.
[98]
My approach appears to bring about the same
result as if the approach referred to above, in which the application of the
definition of “amount” in subsection 248(1), had
been used.
[99]
More importantly, my approach is essentially the
same approach taken by the Directors in the Value of Consideration for Share
Issuance Resolution. When the Directors of the Taxpayer passed the Value of
Consideration for Share Issuance Resolution, it appears that they were
complying with subsection 23(4) of the OBCA, which reads as follows:
Value
determined by directors
|
Fixation
de la valeur par les administrateurs
|
23.(4) The directors shall, in connection with the issue of any share
not issued for money, determine,
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23.(4) Lors de l’émission d’une action contre
un apport autre qu’en numéraire, les administrateurs établissent :
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(a) the
amount of money the corporation would have received if the share had been
issued for money; and
|
a) le
montant que la société aurait reçu si l’action avait été émise contre un
apport en numéraire;
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(b)
either,
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b) et,
selon le cas :
|
(i) the
fair value of the property or past service in consideration of which the
share is issued, or
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(i) la
juste valeur des biens ou du service rendu qui sert d’apport,
|
(ii) that
such property or past service has a fair value that is not less than the
amount of money referred to in clause (a).
|
(ii) le
fait que la juste valeur de ces biens ou de ce service rendu n’est pas
inférieure à la somme d’argent visée à l’alinéa a).
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[100] Having adopted the language of this provision of the OBCA in the
Value of Consideration for Share Issuance Resolution, at least in part, it is
apparent that the Directors were of the view that when the Taxpayer issued
Common Shares on the Conversions, the consideration received by it for the
issuance of those Common Shares was not money. Indeed, the Value of
Consideration for Share Issuance Resolution provides that the consideration for
the issuance of Common Shares on Conversions was the consideration that each
Holder gave to the Taxpayer as stipulated in the Indenture.
[101] Under my interpretation of the conversion provisions of the Indenture,
each Holder gave up such Holder’s right to receive US$1,000 per Convertible
Debenture, in cash, at Maturity, along with all of such Holder’s other rights
under the Indenture, when the indebtedness of the Taxpayer to such Holder was
repaid upon each Conversion. Thus, the relinquishment of such rights
constituted the consideration given by each Holder to the Taxpayer for the
issuance of 71 Common Shares per Convertible Debenture plus the US$ cash
payment in lieu of a fractional Common Share.
[102] The Value of Consideration for Share Issuance Resolution then goes
on to address paragraph 23(4)(b) of the OBCA and contains the Directors’
determination that the fair value of the consideration receivable by the
Taxpayer for the issuance of 71 Common Shares per Convertible Debenture “is not less than the amount of money” that the
Taxpayer would have received if it had issued such shares for money, rather
than the rights relinquished by each Holder on the Conversions. In my view,
this amount of money is essentially the same as the “Sale
Price” of a Common Share, as defined in clause 1.1 of the Indenture.
[103] Applying the approach to the determination of the Repayment Amount
that is, in my view, provided for the Indenture, it follows that the Repayment
Amount in respect of each Convertible Debenture was, in essence, the US$ amount
determined when the “Sale Price” of a Common
Share, on each Conversion Date, as determined for the purposes of clause 12.4
of the Indenture, was multiplied by 71.429.
[104] The resulting US$ amount would then be converted to C$, in
accordance with subsection 261(2) on each Conversion Date, and the
determination of whether the Taxpayer made a gain, for the purposes of
subsection 39(2), would be made by comparing the C$ amount, so determined, with
$1,588, the C$ amount received by the Taxpayer on the Issuance Date. This
calculation would be required with respect to each Conversion, as the Repayment
Amounts would not necessarily be identical in respect of all Conversions. If
the Repayment Amount in respect of any particular Conversion is less than the
related Issuance Amount, the Taxpayer would have a gain, for the purposes of
subsection 39(2), in respect of that Conversion.
VII.
DISPOSITION
[105] For the foregoing reasons, I would allow the appeal, set aside the judgment
of the Tax Court of Canada and, rendering the decision that the Judge ought to
have made, remit the matter back to the Minister for reassessment in accordance
with these reasons.
[106] While the Crown is successful in that I would allow the appeal, the
Reassessments will not stand, thus confirming the appropriateness of the
Taxpayer’s appeal to the Tax Court of Canada. Accordingly, on balance, I
consider success to have been divided and, as such, I would order no costs here
or below.
"C. Michael Ryer"
“I agree
Johanne Trudel
J.A.”
“I agree
David Stratas.
J.A.”