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Citation: 2004TCC468
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Date: 20041018
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Docket: 2002-2695(IT)G
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BETWEEN:
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INCO LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bonner, J.
[1] This is an appeal from an
assessment under the Income Tax Act (the
"Act") for the Appellant's 2000 taxation
year.
[2] Two issues were raised by the
Notice of Appeal. The first was disposed of on May 31 of this
year by decision of this Court upon application under
section 58 of the Tax Court of Canada Rules (General
Procedure). The second issue, which must now be decided,
relates to the Appellant's claim to deduct an amount which it
asserts is a foreign exchange loss which it realized on the
purchase for cancellation and on redemption of certain debentures
which it had issued.
[3] The debenture issues in question
were transactions on capital account. They were denominated in
U.S. dollars. The U.S. dollar appreciated in value against the
Canadian dollar between the time when the debentures were issued
and the time when they were retired. The Appellant relies on
paragraph 20(1)(f) of the Act as authority for the
deduction of the foreign exchange loss which it says was
realized. Paragraph 20(1)(f), which applies
notwithstanding the paragraph 18(1)(b) prohibition of
the deduction of losses of capital, permits a deduction in the
computation of income when the issuer of a debt instrument pays
an amount in satisfaction of the principal amount of the
instrument and the amount paid is greater than the issuer
received when the instrument was issued. Typically, as is
suggested by marginal note, paragraph 20(1)(f) applies to
allow a deduction in respect of bonds, debentures and other debt
instruments which were issued at a discount. However, the
permitted deduction is an amount computed in accordance with a
statutory formula which makes no express reference to discounts
and it is that formula, properly interpreted, which must govern
the outcome here.
[4] The paragraph 20(1)(f)
formula limits the deductible amount by reference (inter
alia) to the 'principal amount of the obligation'. The
central point in dispute is whether, in cases where the
obligation is expressed in a foreign currency, the Canadian
equivalent of the principal amount fluctuates with the value of
the Canadian dollar during the life of the obligation. The
Appellant contends that it does. Moreover, according to the
Appellant, it makes no difference that it did not buy U.S.
dollars for the purpose of repaying the loan. The Respondent
disagrees with the Appellant on both counts.
[5] A further issue arises under
paragraph 20(1)(f). That provision permits the deduction
of "... an amount paid in the year in satisfaction of the
principal amount of any bond, debenture, bill, note ...".
The Appellant claims that the statutory language is broad enough
to encompass not only a direct redemption of bonds but also
transactions whereby it purchased its debentures on the open
market with a view to cancelling them. The Respondent, taking a
rather narrow view of the statutory language, disagrees and
argues that an amount paid by an issuer to buy a debenture which
it has issued is not paid "in satisfaction of the principal
amount" of the instrument.
[6] At this point it is convenient to
set out the text of paragraph 20(1)(f)[1]:
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20(1) Notwithstanding paragraphs
18(1)(a), (b) and (h), in computing a
taxpayer's income for a taxation year from a business
or property, there may be deducted such of the following
amounts as are wholly applicable to that source or such
part of the following amounts as may reasonably be regarded
as applicable thereto:
...
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20(1) Malgré les
alinéas 18(1)a), b) et h), sont
déductibles dans le calcul du revenu tiré par
un contribuable d'une entreprise ou d'un bien pour
une année d'imposition celles des sommes
suivantes qui se rapportent entièrement à
cette source de revenus ou la partie des sommes suivantes
qu'il est raisonnable de considérer comme
s'y rapportant :
[...]
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(f) Discount on certain obligations - an amount
paid in the year in satisfaction of the principal amount of
any bond, debenture, bill, note, mortgage or similar
obligation issued by the taxpayer after June 18, 1971 on
which interest was stipulated to be payable, to the extent
that the amount so paid does not exceed,
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f) Rabais sur émission de certains titres
- une somme payée au cours de l'année en
acquittement du principal de quelque obligation, effet,
billet, hypothèque ou titre semblable émis
par le contribuable après le 18 juin 1971 et sur
lequel un intérêt a été
déclaré payable, dans la mesure où la
somme ainsi payée ne dépasse pas :
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(i) in any case where the obligation was issued for an
amount not less than 97% of its principal amount, and the
yield from the obligation, expressed in terms of an annual
rate on the amount for which the obligation was issued
(which annual rate shall, if the terms of the obligation or
any agreement relating thereto conferred on its holder a
right to demand payment of the principal amount of the
obligation or the amount outstanding as or on account of
its principal amount, as the case may be, before the
maturity of the obligation, be calculated on the basis of
the yield that produces the highest annual rate obtainable
either on the maturity of the obligation or conditional on
the exercise of any such right) does not exceed 4/3 of the
interest stipulated to be payable on the obligation,
expressed in terms of an annual rate on
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(i) chaque fois que le titre a été
émis pour une somme non inférieure aux 97 %
de son principal et que le rendement du titre,
exprimé en pourcentage annuel de la somme pour
laquelle il a été émis (pourcentage
annuel qui doit, si les conditions d'émission du
titre ou les dispositions d'une convention y
afférente donnaient à leur détenteur
le droit d'exiger le paiement du principal du titre ou
de la somme restant à rembourser sur ce principal
avant l'échéance de ce titre, être
calculé sur la base du rendement qui permet
d'obtenir le pourcentage annuel le plus
élevé possible soit à
l'échéance du titre, soit sous
réserve de l'exercice de tout droit de ce genre)
ne dépasse pas les 4/3 de l'intérêt
déclaré payable sur le titre, exprimé
en pourcentage annuel :
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(A) the principal amount of the obligation, if no amount
is payable on account of the principal amount before the
maturity of the obligation, or
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(A) du principal du titre, si aucune somme n'est
payable sur le principal avant l'échéance
du titre;
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(B) the amount outstanding from time to time as or on
account of the principal amount of the obligation, in any
other case,
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(B) de la somme restant à rembourser sur le
principal du titre, dans les autres cas,
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the amount by which the lesser of the principal amount
of the obligation and all amounts paid in the year or in
any preceding year in satisfaction of its principal amount
exceeds the amount for which the obligation was issued,
and
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l'excédent du moins élevé du
principal du titre et du total des sommes payées au
cours de l'année ou d'une année
antérieure en acquittement du principal de ce titre
sur la somme pour laquelle le titre a été
émis,
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(ii) in any other case, 3/4 of the lesser of the amount
so paid and the amount by which the lesser of the principal
amount of the obligation and all amounts paid in the year
or in any preceding taxation year in satisfaction of its
principal amount exceeds the amount for which the
obligation was issued;
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(ii) dans les autres cas, les 3/4 du moins
élevé de la somme ainsi payée et de
l'excédent du moins élevé du
principal du titre et du total des sommes payées au
cours de l'année ou d'une année
d'imposition antérieure en acquittement du
principal du titre sur la somme pour laquelle le titre a
été émis;
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[7] At the hearing of the appeal the
parties filed a statement of agreed facts. The body of the
document reads as follows:[2]
1. The parties
to this appeal agree for the purposes of this appeal only to the
hereinafter recited facts.
2. The
Appellant is a large multinational mining company which was at
all times material to the present appeal resident in Canada and
which carried on large-scale mining operations in Canada and
outside Canada.
3. The 1989
Debentures
a) In or about
June 1989, the Appellant issued sinking fund debentures of U.S.
$150,000,000 at an interest rate of 9.875% per annum, maturing on
June 15, 2019 (the "1989 Debentures").
b) The 1989
Debentures were issued under an indenture dated June 29, 1989
between the Appellant and the Bank of New York.
c) Prior to
June 29, 1989 the Appellant issued to the public a Prospectus and
a Prospectus Supplement regarding the 1989 Debentures. ...
Appendices "A" and "B" are copies of the said
Prospectus and Prospectus Supplement, respectively.
d) The 1989
Debentures were issued to the public at less than their face
amount, namely, at a discount of 2.6%, amounting to U.S.
$3,900,000 in the aggregate (the "Discount"). The
amount which the Appellant received from the public was therefore
97.4% of the face amount of the debentures, or U.S. $146,100,000
as an aggregate dollar amount (the "Discounted
Amount").
e) For income
tax purposes, the Appellant converted the Discount of U.S.
$3,900,000 to Cdn. $4,652,827 at the rate of exchange of
1.19305 in effect at the time of the 1989 Debentures were issued.
The amount had been deducted by the Appellant as financing
expenses under paragraph 20(1)(e) of the Income Tax Act at
20%, or Cdn. $930,565, per annum in the years 1989 to 1993. The
Minister did not challenge these deductions in assessing the
Appellant for the 1989 to 1993 taxation years.
f) After
the deduction of underwriters fees of U.S. $1,312,500 (which
are not in issue), the Appellant used the net proceeds from the
issue of the 1989 Debentures to finance capital expenditures.
g) The terms
of the 1989 Debentures did not provide for an increase of their
face amount owing in U.S. currency.
h) The terms
of the 1989 Debentures provided that the face amount of the
debentures was redeemable only in U.S. dollars, and they did not
contain any provisions allowing the Appellant to redeem them in
amounts of non-U.S. currency equivalent to the stipulated U.S.
dollar amounts or for a hedging of the Appellant's U.S.
dollar obligation against foreign exchange fluctuations.
i) The
Respondent calculated the yield from the 1989 Debentures, as it
set out in Appendix "C" ...
j) The
Appellant did not hedge the U.S. dollar face amount of the 1989
Debentures against a perceived decline in the value of the
Canadian dollar relative to the U.S. dollar.
k) Since the
U.S. dollar face amount of the 1989 Debentures was not hedged
pursuant to their terms against a perceived decline in the value
of the Canadian dollar relative to the U.S. dollar, the face
amount, in Canadian dollar terms, was, for financial purposes,
Cdn. $178,957,500 at the time of their issuance (U.S.
$150,000,000 multiplied by 1.19305 rate of exchange at the time
of issuance).
l) While
the Appellant hedged against perceived appreciations of the value
of the Canadian dollar relative to the U.S. dollar in order to
reduce a potential adverse impact on its future
Canadian dollar production costs, it did not hedge against
any perceived depreciation of the value of the Canadian dollar
relative to the U.S. dollar in order to reduce the potential
adverse impact on its Canadian dollar costs of repaying or
repurchasing the 1989 Debentures.
m) Because the
Appellant received a substantial portion of its revenues in U.S.
dollars, which it deposited in U.S. dollar bank accounts, the
Appellant always had sufficient U.S. dollar funds on hand to
redeem or to purchase in the open market those portions of the
said 1989 Debentures it wished to redeem or purchase, and
therefore found it unnecessary to hedge against any perceived
depreciation of the value of the Canadian dollar relative to the
U.S. dollar with respect to the 1989 Debentures.
n) Under the
terms of the 1989 Debentures, the debentures were redeemable
through the operation of a sinking fund on each June 15,
commencing June 15, 2000 to and including June 14, 2018, at 100%
of the face amount thereof. The annual mandatory sinking fund
payment was U.S. $7,500,000. The Appellant had the option of
making an additional annual sinking fund payment of up to U.S.
$15,000,000.
o) Under
the terms of the 1989 Debentures, the Appellant also had the
option to redeem them on any date on or after June 15, 1999 and
up to June 14, 2009, otherwise than through the sinking
fund, as a whole or in part, at redemption prices ranging from
103.638% to 100.364% of the face amount of the debentures, and
thereafter at 100% of the face amount of the debentures.
p)
Because the said redemption premiums would have been payable by
the Appellant if it exercised its said option to redeem the 1989
Debentures, other than through the sinking fund, the Appellant
purchased, between February 21 and May 9, 2000, a total of U.S.
$29,120,000 of the said 1989 Debentures (the "Purchased
Amount"), as detailed in Appendix "D" ..., in
the open market through various brokers for a total of U.S.
$29,012,850 (the "Purchase Price of the 1989
Debentures"), as also detailed in
Appendix "D" .... On the Appellant's
instructions these purchased debentures were then cancelled on
May 9, 10 and 11, 2000.
q) On
June 15, 2000, the Appellant made mandatory and optional sinking
fund payments to redeem part of the 1989 Debentures with an
aggregate face amount of U.S. $22,500,000 (the "Redeemed
Amount") at 100% of the face amount, as reflected in
Appendix "D" ....
r)
The Appellant obtained all U.S. dollar amounts required for the
said purchases and redemptions of the 1989 Debentures by drawing
on its U.S. dollar bank account and at no time converted any
Canadian dollars into U.S. dollars for these purposes.
s)
The Canadian dollar equivalent of the Purchased Amount,
determined at the exchange rate at the time of issuance, was Cdn.
$34,741,616 (U.S. $29,120,000 x 1.19305).
t)
The Canadian dollar equivalent of the Purchase Price, determined
at the exchange rate at the various dates of purchase between
February and May 2000, was Cdn. $42,943,971, as is also detailed
in Appendix "D" ....
u) The
Canadian dollar equivalent of the Redeemed Amount determined at
the exchange rate at the time of issuance was Cdn. $26,843,625
(U.S. $22,500,000 x 1.19305), as is also reflected in
Appendix "D" ....
v) The
Canadian dollar equivalent of the sinking fund payments,
determined at the exchange rate on June 15, 2000, was Cdn.
$33,284,023 (U.S. $22,500,000 x 1.4793), as is also
reflected in Appendix "D" ....
4. The 1992
Debentures
a) On or
about June 17, 1992, the Appellant issued debentures in the
amount of U.S. $200,000,000 at an interest rate of 9.6% per
annum, maturing on June 15, 2022 (the "1992
Debentures").
b) The
1992 Debentures were issued as a new series of Debt Securities
under an Indenture dated June 29, 1989, as amended and
supplemented by a First Supplemental Indenture dated March 31,
1992.
c) On
March 31, 1992, the Appellant issued to the public a Prospectus
regarding the 1992 Debentures. ... Appendix "E" is
a copy of the said Prospectus.
d) On June 10,
1992 the Appellant issued to the public a Prospectus Supplement
regarding the 1992 Debentures. ... Appendix "F" is
a copy of the said Prospectus Supplement.
e) The 1992
Debentures were issued to the public at their face amount of U.S.
$200,000,000.
f) After
the deduction of underwriters fees of U.S. $1,750,000 and
other expenses (all of which are not in issue), the Appellant
used the net proceeds from the issue of the 1992 Debentures to
repay long-term U.S. dollar indebtedness, consisting of
long-term floating rate bank indebtedness, 11% U.S. Dollar
Notes and Sinking Fund payments of 12 3/8% U.S. Dollar
Debentures.
g) The terms
of the 1992 Debentures did not provide for an increase of their
face amount owing in U.S. currency.
h) The terms
of the 1992 Debentures provided that the face amount of the
debentures was redeemable only in U.S. dollars, and they did not
contain any provisions allowing the Appellant to redeem them in
amounts of non-U.S. currency equivalent to the stipulated U.S.
dollar amounts or for a hedging of the Appellant's U.S.
dollar obligation against foreign exchange fluctuations.
i) The
Respondent did not calculate the yield from the 1992 Debentures,
because these debentures having been issued at par, the
Respondent took the view that the calculated yield would be
approximately equal to the interest or coupon rate of 9.6%.
j) The
Appellant did not hedge the U.S. dollar face amount of the 1992
Debentures against a perceived decline in the value of the
Canadian dollar relative to the U.S. dollar.
k) Since the
U.S. dollar face amount of the 1992 Debentures was not hedged
pursuant to their terms against a perceived decline in the value
of the Canadian dollar relative of the U.S. dollar, the face
amount, in Canadian dollar terms, was for financial purposes,
Cdn. $238,838,000 at the time of their issuance (U.S.
$200,000,000 multiplied by the rate of exchange of 1.1919 at the
time of issuance).
l)
While the Appellant hedged against perceived appreciations of the
value of the Canadian dollar relative to the U.S. dollar in order
to reduce a potential adverse impact on its future Canadian
production costs, it did not hedge against any perceived
depreciation of the value of the Canadian dollar relative to
the U.S. dollar in order to reduce the potential adverse impact
on its Canadian dollar costs of repaying or repurchasing the 1992
Debentures.
m) Because the
Appellant received a substantial portion of its revenues in U.S.
dollars, which it deposited in U.S. dollar bank accounts, the
Appellant always had sufficient U.S. dollar funds on hand to
redeem or to purchase in the open market those portions of the
said 1992 Debentures it wished to redeem or purchase, and
therefore found it unnecessary to hedge against any perceived
depreciation of the value of the Canadian dollar relative to the
U.S. dollar with respect to the 1992 Debentures.
n) Under
the terms of the 1992 Debentures, the debentures were not
redeemable prior to June 15, 2002. On or after June 15, 2002, and
up to June 14, 2012, the debentures were redeemable at the
Appellant's option, as a whole or in part, at redemption
prices ranging from 104.8% to 100.48% of the face amount thereof,
and thereafter at 100% of the face amount.
o)
Because the 1992 Debentures were not redeemable prior to June 15,
2002, the Appellant purchased, between March 3 and November 8,
2000, a total of U.S. $21,692,000 of the said 1992 Debentures
(the "Purchased Amount"), as is also detailed in
Appendix "D", in the open market through various
brokers for a total of U.S. $21,269,708 (the "Purchase Price
of the 1992 Debentures"), as is also detailed in Appendix
"D" .... On the Appellant's instructions these
purchased debentures were then cancelled on February 21,
2001.
p) The
Appellant obtained all U.S. dollar amounts required for the said
purchases of the 1992 Debentures by drawing on its U.S. dollar
bank accounts and at no time converted any Canadian dollars
into U.S. dollars for these purposes.
q) The
Canadian dollar equivalent of the Purchased Amount determined at
the exchange rate at the time of issuance was Cdn. $25,854,589
(U.S. $21,692,000 x 1.1919).
r)
The Canadian dollar equivalent of the Purchase Price determined
at the exchange rates at the different dates of purchase between
March and November 2000 was Cdn. $32,039,855, the details of
which are reflected in Appendix "D" ....
s)
In its income tax return for the 2000 taxation year the Appellant
claimed a loss of Cdn. $20,828,019 it said it sustained on
account of the 1989 Debentures and 1992 Debentures, as detailed
in Appendix "G" .... It claimed the said loss as a
capital loss, but did not deduct any amount on account thereof in
that year, because it had insufficient capital gains in that
year.
t)
The said claim of Cdn. $20,828,019 is a total of foreign exchange
losses which the Appellant says it sustained on the redemption of
the 1989 Debentures and 1992 Debentures. It does not include the
discount on the 1989 Debentures which it deducted in computing
its income, as aforesaid in subparagraph 3(e) thereof.
u) The
said amount of Cdn. $20,828,019 is a total of Cdn. $14,642,753 on
account of the 1989 Debentures and Cdn. $6,185,266 on account of
the 1992 Debentures, as also detailed in Appendix
"D" ....
v) The
said amount of Cdn. $14,642,753 is a total of the amounts of Cdn.
$8,202,355 on account of the Appellant's said open market
purchases of the said U.S. $29,120,000 of the said 1989
Debentures, and Cdn. $6,440,398 on account of the said sinking
fund redemption of the said U.S. $22,500,000 of the said 1989
Debentures, as detailed on Appendix "G"....
w) The said
amount of Cdn. $6,185,266 was all on account of the
Appellant's said open market purchases of the said U.S.
$21,692,000 of the said 1992 Debentures, as reflected in Appendix
"D", ....
5. The
Respondent does not agree that the Appellant sustained any
foreign exchange losses on the said partial redemption and open
market purchases of the 1989 Debentures and on the
Appellant's purchase in the open market of the said portions
of the 1992 Debentures.
6. However, in
the event the Court should find that the Appellant did sustain
foreign exchange losses in the total amount of Cdn. $20,828,019
on the partial redemption and open market purchases of the 1989
Debentures and on the open market purchases of the 1992
Debentures, as alleged by the Appellant, the parties agree
that
a) a
total of Cdn. $14,387,621 was sustained by the Appellant as a
result of the said open market purchases of portions of the 1989
Debentures and the 1992 Debentures, as detailed in Appendix
"H" ..., and
b) Cdn.
$6,440,398 was sustained by the Appellant as a result of the
redemption of a portion of the 1989 Debentures, as detailed
in Appendix "I" ....
7. The parties
to this appeal are at liberty to adduce as additional evidence
only admissible expert evidence regarding the usage of the terms
"principal amount" and "yield" in the
financial/commercial industry and admissible expert evidence
regarding the treatment in the financial/commercial industry of
foreign exchange losses experienced or expected by non-U.S.
corporate issuers of debt obligations in U.S. dollars.
[8] The Respondent adduced evidence of
the sort described in paragraph 7 of the Statement of Agreed
Facts. Counsel filed the statement of
David Wayne Hoyle, an expert with thirty years
experience in the financial services industry. The statement was
filed by agreement and was not challenged by counsel for the
Appellant except as to relevance.
[9] In my view, evidence regarding the
accepted meaning of the term "principal amount" in the industry
most directly involved in dealing with debt instruments is of
assistance in discovering what the legislature had in mind when
it used the term. It is unlikely that the Legislature would
employ language having a meaning foreign to those who work in the
field most directly affected by paragraph 20(1)(f). The
evidence is relevant, it assists the Court and Mr. Hoyle is well
qualified to give it.
[10] The following points are made in Mr.
Hoyle's statement:[3]
1. In the
financial industry, what is understood to be the "principal
amount" in the context of debt instruments issued by a corporate
borrower of funds, such as debentures?
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The face amount of a bond or debenture or the amount owed on a
loan separate from interest.
2. At what
point in time do the issuer of a debenture and its purchaser
consider the "principal amount" of the debenture to come into
existence?
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When the debenture is issued.
3. On the
assumed facts in the present case, what amounts would the
financial industry consider the principal amount of the
debentures which the Appellant issued in 1989 (hereinafter the
"1989 Debentures") and in 1992 (hereinafter the "1992
Debentures") to be?
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1989 Debentures - $150,000,000
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1992 Debentures - $200,000,000
4. In the
practice and experience of the financial industry, can the
"principal amount" of a debenture ever increase beyond its face
amount at the time it is issued?
■
Generally speaking, the face amount owing on the debenture cannot
increase beyond the amount owed.
5. What
factors are responsible for debentures to be issued at less or
more their face value?
■
The coupon rate offered on the debenture may be above or below
the prevailing market rate of interest and this would result in
the price of the debenture being above or below Par.
[11] In argument, counsel for the Appellant
pointed out that paragraph 20(1)(f) affords in
subparagraph (i) a full deduction if both a discount and yield
test are satisfied, and in subparagraph (ii) a fractional
deduction if those tests are not met; that the deduction may only
be made at the time of repayment; and that the amount eligible
for the full or fractional deduction is the lesser of
(i) the principal amount of the obligation, and
(ii) all amounts paid in satisfaction of the principal amount
of the obligation
MINUS
the amount for which the obligation was issued.
[12] Thus, paragraph 20(1)(f)
requires the determination of three amounts, namely:
(a) the principal amount of the
obligation;
(b) the amount for which the
obligation was issued; and
(c) all amounts paid in
satisfaction of the principal amount .
[13] Both counsel agreed that for income tax
purposes all amounts must be reported in Canadian dollars. In
this regard counsel relied on Alberta Gas Trunk Line v.
Minister of National Revenue[4] and on Hope Gaynor v. Her Majesty
the Queen[5]. Both agreed that the (b) and (c) amounts
must be determined by converting U.S. dollars into Canadian
dollars at the rates of exchange in effect when the debentures
were issued and repaid respectively.
[14] It is the timing of the conversion of
the "principal amount of the obligation" on which opposing
counsel differed. If fluctuations in foreign exchange rates
occurring after the issuance of an obligation denominated in
foreign currency do, as the appellant contended, affect the
principal amount of the obligation for purposes of paragraph
20(1)(f), then conversion of the principal amount to
Canadian dollars must take place at exchange rates in effect when
the debenture debt is retired and not, as the Respondent
contends, when the debt is created.[6]
[15] Counsel for the Appellant argued that
reading "principal amount" in paragraph 20(1)(f) as a
reference to principal amount at time of issue requires reading
extra words into the provision. I note in passing that reading
the term to mean principal amount at the time of repayment, as
the Appellant says is required, also involves reading in words
not present in the statutory text. Extra words arguments do not
help either side.
[16] In support of his "conversion of
the principal amount at the time of repayment" argument
counsel for the Appellant seeks support in the
subsection 248(1) definition of "principal amount"
applies. It reads:
"principal amount" - "principal
amount", in relation to any obligation, means the amount
that, under the terms of the obligation or any agreement relating
thereto, is the maximum amount or maximum total amount, as the
case may be, payable on account of the obligation by the issuer
thereof, otherwise than as or on account of interest or as or on
account of any premium payable by the issuer conditional on the
exercise by the issuer of a right to redeem the obligation before
the maturity thereof;
[17] Counsel noted that paragraph
20(1)(f) does not expressly indicate when the principal
amount of the obligation is to be determined and that where, as
here, the debt must be repaid in foreign currency the
"maximum amount payable" referred to in the subsection
248(1) definition cannot by reason of exchange rate fluctuations
be ascertained until the debt is repaid.
[18] Based on this interpretation of
paragraph 20(1)(f), counsel for the Appellant submitted
that subparagraph 20(1)(f)(ii) applies in the
circumstances of this case because the discount test was not met.
The principal amount of the debentures calculated using exchange
rates prevailing when the debt was retired greatly exceeded the
amount for which they were issued. Thus counsel claimed that the
deductible amount was:
Lesser of the amount paid (CDN $108,267,849
and principal amount
(no less than CDN
$108,267,849)
CDN $108,267,849
minus
Amount for which
issued
CDN $85,838,614
CDN $22,429,235
Amount
deducted
CDN $1,601,216
CDN $20,828,019
CDN $13,512,308
[19] Counsel for the Appellant argued next
that calculation of the 20(1)(f) deduction on the basis of
a principal amount which escalates accords with statutory intent
for (a) it permits the deduction of a cost of borrowing where the
borrowing is in foreign currency, and (b) it defers the
determination of whether subparagraph 20(1)(f)(i) or
subparagraph 20(1)(f)(ii) applies until the time when the
deduction is permitted to be taken. I note in passing that it is
not immediately apparent either that the Legislature intended
paragraph 20(1)(f) to permit the deduction of amounts
other than discounts or that foreign exchange conversion costs
may accurately be described as borrowing costs.
[20] Finally counsel argued that the
Respondent's interpretation of paragraph 20(1)(f)
leads to an absurdity, namely, that the amount paid in
satisfaction of the principal amount would exceed the principal
amount where, as here, the Canadian dollar has declined. I note
that I see no such absurd result. The principal amount is one
thing. What is paid in satisfaction of the principal amount of
the instrument is quite another. In the present circumstances it
can only be the cost expressed in Canadian dollars of repayment
of a principal amount expressed in U.S. dollars computed at the
exchange rate in effect at the time of repayment.
[21] Counsel for the Respondent took a
rather different view of the issues. In his submission, the first
issue is whether, absent conversion of Canadian dollars to U.S.
dollars for the purpose of retiring the debentures, the Appellant
sustained a deductible foreign exchange loss on repayment or
redemption of $22,500,000 of the 1989 debentures. This is
the payment referred to in paragraph 3(q) of the Statement of
Agreed Facts and is the only payment which counsel for the
Respondent accepts as "... an amount paid in the year in
satisfaction of the principal amount of any ...
debenture ..." within the opening words of
paragraph 20(1)(f).
[22] The next issue, according to the
Respondent, was whether the Appellant sustained any foreign
exchange loss on the open market purchases of the U.S.
$29,012,850 portion of the 1989 debentures between February and
May, 2000 and on the open market purchases of the U.S.
$21,269,708 portion of the 1992 debentures between March and
November, 2000. He asserted, once again, that no loss was
sustained in the absence of conversion of Canadian dollars into
U.S. dollars for purposes of the purchases.
[23] Counsel argued that the principal
amount of the Appellant's debt was fixed by the terms of the
debentures and, in accordance with those terms, could not
increase after they were issued. Equally, he said, the Canadian
dollar equivalent of the principal amount could not increase
after issuance. Thus the section 248 maximum amount payable under
the terms of the debentures was fixed at the time of issue and
could not be viewed as subject to change by reason of subsequent
events for which provision was not made in the debentures
themselves. What did increase was the Canadian dollar measure of
"amounts paid in satisfaction of the principal amount". Thus, he
said, the entire basis for the Appellant's claim under paragraph
21(f) rests on a confusion of the statutory terms
"principal amount" and "amount paid in satisfaction of the
principal amount".
[24] Next, counsel for the Respondent
addressed the question whether foreign exchange losses, if
sustained or realized (i) in respect of the repayment of the
$22,500,000 portion of the 1989 debentures and (ii) in respect of
the open market purchases of both 1989 and 1992 debentures are
deductible at all. He reiterated his position that
paragraph 20(1)(f) affords the Appellant no relief.
The Appellant was obliged, according to the Respondent, to look
to subsections 39(2) and 39(3) of the Act for relief in
respect of foreign exchange losses, if any were sustained.
[25] It will be noted that both sides
disagree with the decision of this Court in Imperial Oil
Limited v. Canada, 2004 TCC 207 in which Miller J.
held that "Parliament did not intend foreign exchange losses
to be deductible under paragraph 20(1)(f) as they
pertained to the capital element of a borrowing". The Court
stated:
Applying the [20(1)(f)] - formula in the currency of
the obligation and converting the result into current Canadian
dollars, not only makes the most sense in the ordinary and
grammatical sense, but also does not offend any well-established
principle of statutory interpretation.
[26] With respect, I agree with Miller, J.
that paragraph 20(1)(f) does not permit the deduction of
foreign exchange losses arising from the issuance of debt
instruments denominated in foreign currency.[7] My view however rests on grounds
which are somewhat different from those expressed by my
colleague.
[27] The Appellant's claim to the deduction
in issue rests on the assertion that
(a) it realized a foreign exchange
loss on the purchase for cancellation or redemption of the
debentures; and
(b) the loss is deductible under
paragraph 20(1)(f) of the Act.
[28] The loss which the Appellant claims is
somewhat difficult to pin down. In argument, counsel for the
Appellant described it as "... the foreign exchange loss
realized on the purchase for cancellation or redemption of the
debentures ...". Assuming, without deciding, that the cost
of the purchase of a debt instrument is, for purposes of
paragraph 20(1)(f), "an amount paid in satisfaction of the
principal amount", and thus that the entire transaction described
by counsel represents repayment of the debenture debt, the origin
of the loss claimed by the Appellant remains elusive. In 1989 and
1992, the Appellant borrowed U.S. dollars. It deposited them in
its U.S. dollar bank account in one case and used them to repay
previously existing U.S. dollar debt in the other. In 2000, it
obtained the U.S. dollars required to retire both the 1989 and
1992 debentures by drawing on its U.S. dollar bank account. I can
find no basis on the facts for a conclusion that changes in the
value of the Canadian dollar relative to the U.S. dollar during
the term of the debentures resulted in any realized loss or cost
to the Appellant at all.
[29] I reject the notion that the Appellant
sustained a loss because it returned the very thing it had
borrowed. Where a taxpayer borrows something, be it
$5 Canadian, $5 U.S. or a cup of sugar and subsequently
returns the exact thing that was borrowed without intervening
dealings, neither borrower nor lender is richer or poorer as a
result of the transaction. What the Appellant seeks to deduct is
a phantom loss. It is impossible to imagine that the Legislature
in enacting paragraph 20(1)(f) intended to permit a
deduction in the absence of a realized loss or cost. To conclude
otherwise would require an assumption that the Legislature
intended, without apparent reason, to carve out an exception to
the general scheme of the Act which recognizes capital
gains and losses only when realized by disposition.
[30] I have no doubt that for Canadian
income tax purposes the financial results of a taxpayer's
transaction must be reported in Canadian dollars. In Hope
Gaynor v. The Queen, supra, a case much discussed by
both counsel, the Federal Court of Appeal considered the proper
method of computing the capital gain realized by a taxpayer upon
the disposition of shares that had been bought by the taxpayer
using U.S. currency and sold by her for consideration in U.S.
currency. The taxpayer sought to deduct the U.S. dollar cost from
U.S. dollar proceeds and then convert the difference to Canadian
dollars using exchange rates in effect at the time of sale. The
Court held that the gain resulted from the comparison of two
amounts, proceeds of disposition and adjusted cost base and that
the Canadian equivalent of each had to be computed using rates of
exchange in effect at the time of sale and purchase respectively.
I cannot accept the argument that anything said in Gaynor
requires conversion of the principal amount of the obligation for
purposes of paragraph 20(1)(f) using exchange rates in
effect at the time of repayment. No comparison of the sort
required to measure the taxpayer's gain in Gaynor is
needed here because the Appellant repaid exactly what it borrowed
resulting in neither gain nor loss.
[31] In my view the ordinary meaning of the
term "principal amount" as used in paragraph 20(1)(f)
and the meaning in the financial industry as set out by
Mr. Hoyle are one and the same. The principal amount of an
instrument is the face amount. It comes into existence when the
instrument is issued. Logic dictates that conversion, when
required, take place when the face amount is fixed. Moreover, as
counsel for the Respondent submitted, the subsection 248(1)
definition of the term "principal amount" requires that
the principal amount of an obligation be determined "under
the terms" of the obligation. Those terms do not vary. They
are fixed when the obligation is issued. Since the principal
amount of the obligation does not vary after it is issued there
is no basis in logic for adopting the view that the expression of
that principal amount in a foreign currency gives the Canadian
dollar equivalent of the principal amount a variable quality. In
my opinion, the Appellant's suggestion that the Canadian dollar
equivalent of the U.S. dollar principal amount computed at the
time of repayment is the principal amount for purposes of
paragraph 20(1)(f) involves the confusion of two concepts
which the provision treats as distinct, namely, the principal
amount of the obligation and amounts paid in satisfaction
thereof.
[32] The Interpretation Act[8]
provides:
12. Every enactment is deemed remedial, and shall be
given such fair, large and liberal construction and
interpretation as best ensures the attainment of its objects.
The object of paragraph 20(1)(f) is to allow the
deduction, within limits, not of all costs, whether related
closely or distantly to a borrowing, but rather of discounts
which are closely related to interest but do not fall within the
ambit of paragraph 20(1)(c) of the Act. In
Krishna, the Fundamentals of Canadian Income Tax, 7th ed.
(Toronto: Carswell, 2002), the following is said at page 615:
Corporations can issue debt obligations at face value, at a
discount, or at a premium from their face value. A discount or
premium generally reflects economic adjustments to the nominal
rate of interest to bring it into line with the effective market
rate applicable at the time that the obligation is issued.
This view of the purpose underlying paragraph 20(1)(f)
is supported by the marginal note which, although not part of the
enactment[9], may
nevertheless be of assistance.[10]
[33] The Appellant submits that predicating
the deduction in paragraph 20(1)(f) on an escalating term
such as "principal amount" instead of a static term
such as "face amount" accords with the legislative
scheme for it permits the deduction of a cost of borrowing where
debt repayment is in a medium other than Canadian currency. I do
not accept the submission. In my view, foreign exchange
fluctuations neither add to nor subtract from the cost of
borrowing. The point was made succinctly by Templeman L.J. in
Pattison v. Marine Midland Ltd.[11] as follows:
My Lords, a profit or loss may be earned or suffered if a
borrower changes the currency he borrows but that profit or loss
arises from the exchange transaction and not from the
borrowing.
In my opinion, an interpretation of paragraph 20(1)(f)
which treats the term principal amount as an amount which
fluctuates with exchange rates over the life of the instrument
would expand the deduction to include amounts which were never in
the contemplation of the Legislature.
[34] In the circumstances, it is not
necessary to consider whether the consideration paid on the
purchase in the open market of a debt instrument by the issuer of
it constitutes an amount paid in satisfaction of the principal
amount of the instrument for purposes of paragraph
20(1)(f).
[35] For the foregoing reasons this branch
of the appeal fails. It fails as well on the only other issue
which was dealt with by the decision of this Court on the section
58 application referred to in paragraph 2. The appeal will
therefore be dismissed with costs.
Signed at Toronto, Ontario, this 18th day of October 2004.
Bonner, J.
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