Waltz v. The Queen, docket 98-2959-IT-G

Date: 20010402

Docket: 98-2959-IT-G

BETWEEN:

STEFFEN E. WALTZ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

P.R. Dussault, J.T.C.C.

[1]            This is an appeal from an assessment, notice of which is dated July 28, 1998, concerning the 1990 taxation year and from a determination of loss dated September 20, 1999 for the 1991 taxation year.

[2]            In this case, the parties had some difficulty precisely defining the points at issue. The essential issues between them are ultimately to be found in an amended reply ("Amended Reply") to a notice of appeal, which itself was amended twice, and in an agreement on facts. To simplify the presentation, I shall refer to subparagraphs 11.a to f of the Amended Reply in order to define the only point at issue for 1990. For 1991 I shall refer mainly to the agreement on facts since the only point at issue for that year is a point of law.

[3]            With respect to 1990, subparagraphs 11.a to f of the Amended Reply read as follows:

a.              During the 1990 and 1991 taxation years, the Appellant was a shareholder of S.E. Waltz Co. Ltd. (the company).

b.              During the 1990 taxation year, the Appellant received loans from the company Ltd. totalling $ 122,842.

c.              The amount of the loans totalling $ 122,842 was not repaid to the company.

d.              During the Appellant’s audit by the Minister, the Appellant requested that the Minister annul the debit balance of $ 122,842 in the shareholder account by converting the debt that the company had towards Mr. Eric Waltz, the Appellant’s father, as being an advance by the Appellant.

e.              At the time of the audit in 1994, the accounting records of the company did not reflect any transfer of the debt owed to Mr. Eric Waltz to his son.

f.               There has not been any bona fide repayment by the Appellant of the loans be received from the company in 1990.

               

[4]            For 1991, paragraphs 10 to 20 of the agreement on facts are relevant to the point still at issue. They read as follows:

10.            During the 1991 taxation year, the Appellant owned a 18.5 percent interest in Cantex Joint Venture IX (hereinafter "Cantex").

11.            On November 27, 1978, Haystack Fort-Worth borrowed U.S. $ 2,200,000 from the New York Life Insurance Company (hereinafter "NY Life") and U.S. $ 2,600,000 from the Crown Life Insurance Company (hereinafter "Crown Life"). Both loans were guaranteed by mortgages.

12.            On August 17, 1987, Cantex acquired the Bennington Heights Apartments (hereinafter "Bennington") located in Tarrant County, Texas and took over the existing mortgages. At that time, the exchange rate on U.S. dollars was 1.32 percent.

13.            During the months of April and May 1991, Crown Life and NY Life foreclosed on the loans. At the time of foreclosure, the balance of the Crown Life loan was U.S. $ 1,949,575 and the balance on the NY Life loan was U.S. $ 2,330,315. At that time, the exchange rate on U.S. dollars was 1.15 percent.

14.            The Appellant claimed a terminal loss of $ 426,361, using an exchange rate of 1.15 percent.

15.            The Respondent modified the calculation of the terminal loss as follows:

a)              the cost of the improvements to the building was calculated using the exchange rates at the time the improvements were made to the buildings;

b)             10 percent of the terminal loss was converted into a capital loss;

c)              the resulting terminal losses and capital losses were calculated using an exchange rate of 1.32 percent.

16.            The net result is that the Appellant’s loss was decreased by an amount of $ 126,976 since the terminal loss was decreased from $ 412,594 to $ 292,722 (a difference of $ 149,872), and since the Respondent added a net capital loss of $ 22,896.

17.            In his notice of objection, the Appellant objected to the conversion of part of the terminal loss into a capital loss and objected to the calculation of the resulting terminal and capital losses using an exchange rate of 1.32 percent. The Appellant accepted the Respondent’s calculation of the cost of the improvements.

18.            In relation to paragraph 15a), the difference between the net loss calculated by the Appellant and the Respondent is an amount of $ 7,612.

19.            In relation to paragraph 15b), the conversion of part of the terminal loss into a capital loss creates a difference of $ 7,632.

20.            In relation to paragraph 15c), the calculation of the proceeds of disposition using a rate of 1.32 percent instead of a rate of 1.15 percent, creates a difference of $ 111,732.

[5]            At the hearing, counsel for the appellant stated that the appellant no longer disputed the conversion of 10 percent of the terminal loss into a capital loss. This conversion was done by Revenue Canada to reflect the fact that the foreclosure of mortgages in 1991 resulted not only in the disposition of a depreciable asset ("the building") but also in that of a non-depreciable asset ("the land"). For the purposes of paragraph 79(c) of the Income Tax Act (the "Act"), 90 percent of the cost and of the deemed proceeds of disposition had been allocated to the building and 10 percent to the land. Thus, the only point still at issue for 1991 is the exchange rate applicable to the U.S. currency for the purpose of making the conversion to Canadian dollars for the application of paragraph 79(c) of the Act.

1990

[6]            The respondent contends that, in 1990, S.E. Waltz Co. Ltd. (the "corporation") gave the appellant a loan of $122,842, which he never repaid, and that, as a result, subsection 15(2) of the Act is applicable in the instant case. The appellant claims that his father Erich Waltz, had advanced numerous amounts to the corporation since the early 1980s. In 1989, Erich Waltz apparently assigned his claim to the appellant, so that it was more a repayment that the debtor corporation was making when it remitted the sum of $122,842 to the appellant in 1990. Thus, according to the appellant, the payment of this amount to him in 1990 did not represent a loan by the corporation.

Summary of the Evidence

[7]            On August 25, 1999, the Court held a special hearing at the Bell Videoconference Centre in Montréal at which Erich Waltz testified from Stuttgart, Germany, with the aid of an interpreter in Montréal. Although he was never directly involved in S.E. Waltz and Co. Ltd., Erich Waltz stated that he had lent it a total of $654,000 to December 31, 1988. Erich Waltz said that he had gotten the impression from his conversations with his son that the corporation was in financial difficulty and that he had feared it might eventually declare bankruptcy. He therefore decided on his own initiative to transfer his claim to his son who, he said, was a safer debtor in the circumstances. Thus, he said, he had himself prepared a typewritten letter dated January 4, 1989 transferring to the appellant his claim for $654,000, which the corporation owed as of December 31, 1988, for the sum of one dollar and other considerations[1]. This letter was apparently certified by two witnesses the next day, on January 5, 1989. The witnesses were Erich Waltz's daughter and a long-serving household worker. Mr. Waltz testified that the transfer of his claim against the corporation to his son did not constitute a gift since there had been an oral agreement whereby his son would repay him the amount of the debt with interest at a rate of 5 percent, that rate being the same as that applicable to the loans granted to the corporation. Erich Waltz stated that his son had repaid him the amount owed in instalments when he was in a financial position to do so. The repayments were apparently made through bank transfers. Thus, declared Erich Waltz, the amount owed had been almost entirely repaid by the time of his testimony and he had records kept by his tax adviser attesting to the repayments. He said that the interest paid had been reported to the German tax authorities.

[8]            In his testimony, Erich Waltz also acknowledged a letter dated July 8, 1993 and signed by him which had apparently been written by his son.[2] That letter, which is addressed to a certain Louis Racine of Revenue Canada, reads as follows:

                Dear Mr. Racine:

                This is to confirm that I have transferred the loan owed to me by S.E. Waltz & Co. Ltd. to my son Steffen E. Waltz. This transfer is effective as per June 30, 1989.

                Sincerely,

                Erich Waltz

                c.c.:          S.E. Waltz & Co. Ltd.

                                Steffen E. Waltz

[9]            Erich Waltz was unable to explain why the date indicated was June 30, 1989 rather than December 31, 1988, other than stating that the former date corresponded to the date decided upon for the purposes of his son's personal balance sheet.

[10]          Erich Waltz also testified that the corporation had never repaid him anything in respect of the loans which he had granted to it over the years and that he had records of those loans.

[11]          At the end of Erich Waltz's testimony, counsel for the respondent asked him to forward the records of the loans he had made to the corporation, those concerning the loan to his son—that is to say the documents concerning the repayments made over the 10-year period—and the bank records of the transfers made. Mr. Waltz undertook to do what he could to comply with those requests as soon as possible, while noting that his accountant was on vacation at that time and would not be returning until September 5, 1999. Despite this undertaking, Mr. Waltz never forwarded any of the documents requested.

[12]          The appellant also testified. He stated that the corporation had been incorporated in late 1977 or early 1978 for real estate investment purposes. It was initially financed through equal contributions from two shareholders, including himself, and through loans obtained from a German bank and guaranteed by his father. In the early 1980s, the appellant apparently parted company with his business associate and agreed with his father to finance the corporation directly through loans from his father. Thus, the appellant said, although Erich Waltz had never been a shareholder himself, he lent money to the corporation in 1981, 1982 and 1983 at rates varying between 6 percent and 10 percent per annum.

[13]          A record of the corporation concerning the advances made by Erich Waltz was filed in evidence.[3] The appellant testified that this document was prepared by one Claude Aubé, who was responsible for keeping the ledger for the corporation in the late 1980s. The document indicates that advances were made to the corporation by Erich Waltz in 1987 and 1988, but also that repayments were made in 1988. On June 30, 1993, the balance of $654,019.19 was cancelled, with the inscription "See letter dated January 4, 1989." The appellant indicated that this inscription referred precisely to the letter of January 4, 1989 by which his father had transferred his claim against the corporation for the sum of one dollar on the understanding that the appellant himself would owe that amount to his father. The appellant testified that he had been present at his parents' home in Germany during the Christmas vacation when the letter was signed by his father on January 4, 1989. Contrary to what his father stated, however, either he or his sister had typed the letter since his father did not know how to type. According to the appellant, the transaction between his father and him can be explained by the particular circumstances in which it occurred. The appellant had just been divorced and the corporation's investments in Montréal and the United States were in some difficulty. His father was therefore worried about the corporation's financial situation and preferred to have the appellant undertake personally to repay the corporation's debt.

[14]          Finding it hard to explain certain entries in the record filed in evidence, the appellant emphasized that, at the time, a number of persons had done the bookkeeping, in addition to the accountant who completed the income tax returns. He stated, however, that it was Mr. Aubé who had been responsible for keeping the ledger and that the last entry in the record dated June 30, 1993, cancelling the balance of $654,019.19, was made by him at the accountant's request. The appellant attempted to explain why there was some confusion in the bookkeeping by saying that he had been travelling a great deal at the time, that there had been a lack of communication among the various persons responsible for the corporation's bookkeeping and that, to a certain degree, they had failed to draw the necessary distinction between his father and him. However, he asserted that the amount of some $122,000 which had been remitted to him by the corporation in 1990 did not constitute a loan but essentially a disbursement or a payment. He also stated that, in 1990, he had repaid his father out of income from the United States which had apparently been paid directly to his father.

[15]          With respect to the above-cited letter of July 8, 1993 from his father to Mr. Racine of Revenue Canada, the appellant stated that it had been required by Mr. Racine himself, who demanded confirmation of the transfer of the $654,000 claim.

Appellant's Position

[16]          Counsel for the appellant obviously raises the crucial question of the date of writing of the letter of January 4, 1989 as it relates to the entries in the corporation's record concerning Erich Waltz's advances, since the two definitely do not correspond. He also notes that the letter, which was not prepared by a lawyer, is not clear since it refers to a transfer of a claim, whereas it appears from the testimony that Erich Waltz wanted his son to become personally liable for that debt instead of the corporation.

[17]          Referring to the majority opinion of the Supreme Court of Canada in Hickman Motors Limited v. Canada, [1997] 2 S.C.R. 336, paragraph 87, counsel for the appellant contends that it is not the accounting entries that count but rather the reality of the facts they are supposed to reflect. In his view, the issue in the instant case is essentially one of credibility with respect to the transfer of a claim which allegedly occurred in 1989. If such a transfer actually took place in 1989, the corporation's remittance to the appellant of the sum of $122,000 in 1990 must be seen not as a loan but as a payment to the appellant, who subsequently in turn paid his father.

Respondent's Position

[18]          Counsel for the respondent also contends that this case involves a question of credibility. First he points out, as is moreover stated in subparagraph 11.e of the Amended Reply, that, at the time of the audit in 1994, the corporation's books of account indicated no transfer of the claim from Erich Waltz to his son.

[19]          The letter dated January 4, 1989 refers to the transfer of a claim of $654,000 on December 31, 1988 for the sum of only one dollar. Counsel for the respondent argues that the assignee of the claim did not become the assignor's debtor as a consequence of this transfer. There were two separate transactions. Counsel for the respondent also points to the fact that the letter states that the $654,000 claim existed on December 31, 1988, whereas the corporation's record filed in evidence shows a balance of $528,700 in June 1988, of $508,700 following a $20,000 debit in July 1988 and of $408,700 following a debit of $100,000 in April 1989. Subsequently, a credit of $44,140, the date of which is not known, and another credit of $215,815.80 brought the balance up to $668,655.80 in June 1990. Lastly, a debit of $14,696.61 reduced the balance to $654,019.19 in February 1991. The last entry in the record is the debit of $654,019.19 for June 30, 1993, which is the amount referred to in the letter of January 4, 1989. Counsel for the respondent thus contends that the balance at December 31, 1988 could not have been $654,000, even if accumulated interest were taken into account, as the appellant suggested should be done. According to counsel for the respondent, all this shows that the transaction referred to in the letter of January 4, 1989, namely a transfer of a claim, corresponds neither to that described by Erich Waltz and the appellant nor to that reflected in the accounting entries.

[20]          Lastly, counsel for the respondent emphasized in this regard the absence of any documentation from Erich Waltz, despite the request made to him at the time of his testimony on August 25, 1999. Counsel for the respondent thus argues that the appellant did not discharge his burden of showing that he did not owe the corporation $122,000 in 1990 and that it was rather the corporation that was indebted to him at that time.

Analysis

[21]          I agree with counsel for the respondent. I find that the appellant has not shown on a balance of probabilities that he did not owe the corporation the amount of $122,000 which it had remitted to him in 1990, since he did not show, contrary to his contentions, that it was the corporation that was indebted to him.

[22]          First, the transaction described by both Erich Waltz and the appellant is different from that referred to in the letter dated January 4, 1989. Further, the transaction they described is not consistent with the accounting entries in the record filed in evidence. Thus there is inconsistency with respect to the balance shown in the record at various dates and inconsistency also to the extent that the record shows debits which cannot be seen as anything other than amounts repaid to Erich Waltz. This contradicts Erich Waltz's testimony that the corporation never repaid him any amount whatever.

[23]          The contradiction between Erich Waltz's testimony and that of the appellant with respect to the interest rate demanded by Mr. Waltz on his advances to the corporation over the years may also be noted.

[24]          Lastly, the failure of both Erich Waltz and the appellant himself to file any objective evidence at all of the alleged advances by Erich Waltz to the corporation or of the repayments by bank transfer which were allegedly made by the appellant to his father between 1989 and 1999 raises serious doubts as to the reality of the transaction and as to its very nature, or at least as to the date on which it was carried out. Where a person declares that he has records and tax and banking documents in his possession and is unable to produce a single such document, one can do no other than doubt that person's credibility. The same is true where the other party to the transaction is also unable to produce any objective and independent evidence of the repayments and bank transfers allegedly made. The fact that no document could be filed in evidence on this point certainly does nothing to substantiate the version of the appellant and his father.

[25]          In view of the above, the appeal from the assessment for 1990 is dismissed.

1991

[26]          As stated above, the only point still at issue for 1991 is the determination of the rate of exchange for the conversion of U.S. currency into Canadian dollars for the purposes of the then paragraph 79(c) of the Act. In 1991, the relevant part of section 79 provided as follows:

Section 79: Mortgage foreclosures and conditional sales repossessions. — Where, at any time in a taxation year, a taxpayer who

                (a)            was a mortgagee or other creditor of another person who had previously acquired property, or

                (b) . . .

has acquired or reacquired the beneficial ownership of the property in consequence of the other person's failure to pay all or any part of an amount (in this section referred to as the "taxpayer's claim") owing by him to the taxpayer, the following rules apply:

(c) there shall be included, in computing the other person's proceeds of disposition of the property, the principal amount of the taxpayer's claim plus all amounts each of which is the principal amount of any debt that had been owing by the other person, to the extent that it has been extinguished by virtue of the acquisition or reacquisition, as the case may be;

(d) any amount paid by the other person after the acquisition or reacquisition, as the case may be, as, on account of or in satisfaction of the taxpayer's claim shall be deemed to be a loss of that person, for his taxation year in which payment of that amount was made, from the disposition of the property;

. . .

[27]          The essential facts, stated more fully in the agreement on facts filed by the parties and in the Amended Reply (subparagraphs 11.g to o), may be summarized as follows:

•                On November 27, 1978, Haystack Fort-Worth No. 1 borrowed U.S. $2,000,000 from the New York Life Insurance Company ("N.Y. Life") and, on August 30, 1979, borrowed U.S. $2,600,000 from the Crown Life Insurance Company ("Crown Life").

•                Both loans were guaranteed by mortgages on a property known as the Bennington Heights Apartments ("Bennington Building") located in Tarrant County, Texas.

•                On August 17, 1987, the Bennington Building was acquired by Performance Properties Corporation, which resold it that same day to Cantex Joint Venture IX ("Cantex").

•                Cantex assumed the balance owing on the mortgage loans. At that time, the exchange rate on the U.S. dollar was 1.32 percent.

•                The appellant held an 18.5 percent interest in Cantex.

•                In 1991, Cantex ran into financial difficulties and N.Y. Life and Crown Life foreclosed on the mortgages in April and May and repossessed the Bennington Building.

•                At the time of the foreclosure, the debt owed to Crown Life was U.S. $1,947,575 and that owed to N.Y. Life was U.S. $2,330,315. The exchange rate on the U.S. dollar was 1.15 percent at the time.

•                The appellant calculated his loss under paragraph 79(c) of the Act using the exchange rate in effect at the time of the foreclosure, that is, 1.15 percent. In assessing the appellant, Revenue Canada instead used the rate of 1.32 percent, which was the rate in effect when Cantex acquired the Bennington Building and assumed the mortgage debts.

Respondent's Position

[28]          In subparagraph 11.n of the Amended Reply, the respondent states that the two loans were taken out to purchase a capital asset and that, as such assets have always been entered at their historical cost, the Minister converted the deemed proceeds of disposition under paragraph 79(c) at the historical rate of 1.32 percent.

[29]          In 1991, section 79 of the Act contained no provision specifying the exchange rate applicable to a debt denominated in foreign currency.

[30]          In 1995, section 79 underwent significant amendments applicable to property acquired or reacquired after February 21, 1994 (S.C. 1995, c. 21, s. 26(1)). Subsection 79(7) was added to provide, for the purposes of the calculations required under the new subsection 79(3), that a debt denominated in a foreign currency had to be converted into Canadian dollars at the exchange rate in effect at the time the debt was issued.

[31]          Counsel for the respondent argues that this new provision did not have the effect of amending the law as it previously stood but simply clarified its application. He refers to subsection 45(2) (the former subsection 37(2)) of the Interpretation Act, S.R.C. 1985, c. I-21, in asserting that it may not be assumed that the amendment of a statutory enactment effects a change to the previous law. On this point, he relies on the decisions in MCA Television Limited v. The Queen, 94 DTC 6379, at page 6389; Woodward Stores Limited v. The Queen, 91 DTC 5090, at page 5100, and HSC Research Development Corporation v. The Queen, 95 DTC 225, at page 233.

[32]          Lastly, counsel for the respondent refers to the explanatory notes accompanying the proposed addition of subsection 79(7).[4] These notes refer to the notes concerning a similar rule proposed in the new paragraph 80(2)(k)[5] of the Act. In the notes, it is stated that the intent was to clarify the treatment applied under section 80 on the settlement of an obligation where that obligation is denominated in a foreign currency. The notes state that the purpose of the rule is to ensure that foreign exchange fluctuations after a debt is issued are disregarded for the purposes of section 80 of the Act since the amount subject to a settlement will be determined using the exchange rate in effect at the time the debt was issued.

[33]          Counsel for the respondent argues that paragraph 79(c) applies in the instant case without there having been an actual disbursement. The principal of the outstanding debt is deemed to be the proceeds of disposition of the property as a result of the foreclosure. It is therefore normal, in his view, that the "historical" exchange rate, namely that in effect at the time the debt was issued, should be used.

[34]          As I myself observed that Revenue Canada in the instant case had not used the exchange rate applicable when the debt was issued, which was, for each of the debts in question, the rate for 1978 and for 1979 respectively, but had rather used the exchange rate in effect at the time the debts were taken over by Cantex in 1987, counsel for the respondent maintained with respect to Cantex, and thus the appellant, that the debt had to be considered as having been issued in 1987. According to counsel for the respondent, the exchange rate in effect in 1987 is in fact more appropriate since, in 1978 and 1979, Cantex and the appellant had nothing to do with the Bennington Building or with the debts that had been issued at the time.

Appellant's Position

[35]          Counsel for the appellant contends that, for the purposes of applying paragraph 79(c) with respect to 1991, the time of the foreclosure must be considered. Thus, where the debt is denominated in a foreign currency, the exchange rate in effect at that time should be applied, not the "historical" exchange rate, that is to say, the rate in effect at the time the debt was issued. While acknowledging the consequence of the amendments made by the introduction of the new subsection 79(7) and the new paragraph 80(2)(k), namely that foreign exchange fluctuations are disregarded for the purposes of sections 79 and 80, counsel for the appellant contends, contrary to what counsel for the respondent asserts, that this rule was not previously applicable.

[36]          Although he observes that there are no decisions dealing directly with the point at issue here, counsel for the appellant nevertheless refers to certain decisions relating in particular to the question of whether a given transaction was on account of capital or of income. One such decision is Tip Top Tailors Ltd. v. M.N.R., 57 DTC 1232 (S.C.C.).

[37]          In counsel for the appellant's view, that decision states the principle applicable in the case of the repayment of a debt contracted a number of years earlier, since the Minister considered the devaluation of the foreign currency at the time of the repayment of the debt in establishing the gain. It remained to be determined in that case whether the gain was to be treated as being on account of capital or of income.

[38]          Counsel for the appellant argues that some support for his position may also be found in the decisions in Oxford Motors Ltd. v. M.N.R., 59 DTC 1119 (S.C.C.) and The Bank of Nova Scotia v. The Queen, 80 DTC 6009 (Federal Court, Trial Division), confirmed by the Federal Court of Appeal, 81 DTC 5115, to the extent that the situation is one in which a debt was effectively extinguished.

Analysis

[39]          While subsection 45(2) of the Interpretation Act provides that the amendment of an enactment does not in itself imply that the previous law has been amended, this does not mean however that it cannot be inferred from the context of an amendment that the previous law has in fact been amended. In The Interpretation of Legislation in Canada, 3rd ed., Montréal, Éditions Thémis, 1999, P.A. Côté comments on subsections 45(2) and (3) of the Interpretation Act, emphasizing at p. 532:

                It should be pointed out that these provisions do not exclude use of repeal or amendment of an enactment as an indication of Parliament's opinion, where the circumstances warrant. Their sole effect is to eliminate any automatic presumption of legislative intent in this respect. (Footnotes omitted.)

[40]          I do not find the authorities submitted by the appellant of much assistance in deciding the question at issue. The appellant relies first of all on the Supreme Court judgment in Tip Top Tailors Ltd. v. M.N.R., supra, which concerns the characterization of the profit realized by the appellant on the repayment of a debt denominated in a foreign currency as a consequence of the devaluation of that currency at the time of the said repayment. Second, the appellant refers to the Supreme Court's reasons in Oxford Motors Ltd. v. M.N.R., supra, in which the point at issue was the characterization of rebates made to the appellant by a foreign supplier and applied against a prior debt of the appellant to that supplier. Lastly, the appellant refers to the decision by the Federal Court, Trial Division in The Bank of Nova Scotia v. The Queen, supra, which was confirmed by the Federal Court of Appeal, supra, and which concerned the determination, for the purposes of computing the foreign tax credit, of the exchange rate applicable to a foreign tax debt actually paid more than a year after it arose.

[41]          None of these situations is actually similar to the situation contemplated by paragraph 79(c) of the Act, which places the emphasis on the disposition of an asset, real property in the instant case, rather than on the extinction of a debt. The purpose of paragraph 79(c) is above all to determine the proceeds of disposition for the debtor of property repossessed by a creditor. Consequently, it is impossible to establish any parallel between the factual situation herein and the factual situations giving rise to the decisions cited above.

[42]          Section 79, as applicable to 1991, established a series of rules for determining the treatment applicable to both the debtor and the creditor on a mortgage foreclosure. More specifically, paragraph 79(c) provided that a debtor forced to hand over mortgaged property to a creditor after defaulting on the mortgage was deemed to have disposed of the property for an amount equal to the principal amount of the debt and the principal amount of any other debt extinguished by virtue of the acquisition of the property by the creditor. In addition, under paragraph 79(d), any additional payment to the creditor who has repossessed the property made by the debtor as, on account of or in satisfaction of the creditor's claim was deemed to be a loss of the debtor from the disposition of the property for the taxation year in which the payment was made. The application of section 79 was triggered by the repossession of the property by the creditor. Repossession of the property obviously resulted in a disposition of that same property for the debtor. The purpose of paragraph 79(c) was to fix the proceeds of disposition of the property at the amount of the debt owed to the creditor at that time plus the amounts of any other debts extinguished by virtue of the repossession of the property by the creditor. While it seems normal to use the principal of the debt at the time of repossession in determining the proceeds of disposition of the property, it also seems normal and logical, where a debt is denominated in a foreign currency, to determine its equivalent in Canadian dollars at the same time. If the property was voluntarily disposed of in satisfaction of a debt denominated in U.S. dollars, the proceeds of disposition would have been established in Canadian dollars by applying the exchange rate at the time of that disposition. In the instant case, the disposition was involuntary and the proceeds of disposition were determined to be the amount of the principal of the claim of the creditor who repossessed the property. It appears to me to be equally reasonable to use the exchange rate in effect at the time of the disposition in determining the proceeds of disposition in Canadian dollars. In my view, in the absence of a statutory provision dealing with the matter, paragraph 79(c) must be applied in the instant case by reference to the value of the foreign currency relative to the Canadian dollar at the time of disposition.

[43]          I believe that the intent to genuinely amend the previous law can be detected—should one wish to refer thereto—in the explanatory notes accompanying Bill C-70 introduced in February 1995 and dealing with the amendments made by the new subsection 79(7) and the new paragraph 80(2)(k). The explanatory notes read as follows with respect to the two new provisions proposed at that time:

                79(7)

                New subsection 79(7) of the Act provides that, where a debt is denominated in a foreign currency, the proceeds of disposition for property surrendered by a debtor are determined with reference to the historical foreign exchange rate at the time the debt was issued. This is consistent with the rule provided for debt forgiveness under paragraph 80(2)(k)

                80(2)(k)

                Paragraph 80(2)(k) of the Act clarifies the treatment under section 80 of an obligation that is settled in the event that the obligation is denominated in a foreign currency. It provides that foreign currency fluctuations after the time an obligation is issued are ignored for the purposes of section 80 and that forgiven amounts are determined with reference to the exchange rate at the time that a debt was issued.

                EXAMPLE

                A debtor borrowed U.S. $10,000 on a long-term basis, at a time when the Canadian dollar and the U.S. dollar are trading at par. Subsequently, the creditor forgives the obligation on payment of U.S. $3,000. At the subsequent time, the exchange rate is Cdn. $1 = U.S. $.80. The foreign currency gains and losses for the debtor and creditor are assumed to be on account of capital.

                Results :

                1.              At the subsequent time, the capital loss sustained by the debtor because of the depreciation of the Canadian dollar is Cdn. $750 ($3,000/.8 - $3,000). (The lender has a corresponding gain.)

                2.              Under new paragraph 80(2)(k), the forgiven amount is determined with reference to the exchange rate at the time the debt was issued. As a consequence, the forgiven amount is equal to Cdn. $7,000 (10,000 – 3,000).

                Further rules dealing with fluctuations in foreign currency are provided under new subsection 79(7) and 80.01(11).

[44]          Thus, according to the explanatory notes, gains and losses which may result from foreign exchange fluctuations will not be considered for the purposes of the new sections 79 and 80 of the Act as enacted by S.C. 1995, c. 21, sections 26 and 27 (Bill C-70). The example given with respect to the application of the new paragraph 80(2)(k) clearly shows that the losses that could previously result from foreign exchange fluctuations will no longer be possible under the new paragraph 80(2)(k). However, this conclusion is valid solely for the application of section 80. In my opinion, the same is true of the new section 79, since the explanatory notes concerning the new subsection 79(7) state that the rule applicable under this new provision is consistent with that applicable to the forgiveness of debt under paragraph 80(2)(k).

[45]          However, this conclusion does not mean that foreign exchange fluctuations are currently disregarded for the purposes of the Act. As stated in a comment on section 79 in the Canada Tax Service, Carswell, volume 6, at pages 80-161 and 80-162:

. . . As with section 80, foreign exchange gains are excluded from section 79 and are therefore subject to the provisions of subsection 39(2).

[46]          In my view, this comment suggests, as do moreover the explanatory notes on the amendments made to sections 79 and 80 in 1995, that foreign exchange fluctuations were previously considered for the purposes of sections 79 and 80, as they applied prior to those amendments.

[47]          From the above, I find that the appellant was entitled to compute his losses—that is, a terminal loss and a capital loss—under paragraph 79(c) on the foreclosure of the mortgages in 1991 using the U.S. currency exchange rate applicable at that time, namely 1.15 percent.

[48]          Revenue Canada's use of an exchange rate of 1.32 percent, that is, the rate applicable at the time the debts were taken over by Cantex in 1987 when it acquired the Bennington Building, seems to me entirely inappropriate in the circumstances. Apart from the reasons stated above, accepting the respondent's argument that the addition of subsection 79(7) in 1995 did not have the effect of amending the previous law would mean that the "time the debt was issued" can also mean the "time the debt was assumed" by another person. The exchange rate used by Revenue Canada for the purposes of paragraph 79(c) in the instant case was the rate in effect at the time the mortgage debts were assumed by Cantex in 1987, not the rate in effect in 1978 and 1979 when the debts were issued. In my view, the issuing of a debt at the time a loan is taken out by a person and its subsequent assumption by a new debtor are not interchangeable concepts. Although the use of the term "issue" is not common in relation to a debt, it appears that the issue of a debt must be understood to mean its creation. However, unless a novation is thereby effected, a change of debtor does not create a new debt. As article 1171 of the Civil Code of Lower Canada (article 1660 of the Civil Code of Québec) states, the long established rule is that novation is not presumed. On this point, in Les Obligations, 5th ed., Cowansville, Yvon Blais, 1998, J.-L. Baudoin and P.G. Jobin write as follows at page 750:

                [TRANSLATION]

                Novation by change of debtor . . . occurs where the creditor agrees, on the one hand, to have another debtor enter into an obligation toward him and, on the other hand, to discharge the original debtor. . . . However, the creditor must clearly express his intention to release the first debtor by extinguishing the obligation. If this intention is not evident, there is no novation but rather mere delegation of payment resulting in the addition (not substitution) of a new debtor to the old one. (Footnotes omitted.)

[49]          Novation was not alleged in the instant case. However, absent novation, the assumption by a new debtor of an existing debt does not have the effect of extinguishing the existing debt or creating a new debt. It follows that the assumption by Cantex of the mortgage debts on August 17, 1987 does not create a new debt and, consequently, that this date may not be considered as the time the debt was issued.

[50]          Based on the foregoing, the appeal from the determination of a loss for 1991 shall be allowed with respect to the applicable exchange rate.

[51]          To sum up, the appeal from the assessment made under the Income Tax Act for the 1990 taxation year is dismissed. The appeal from the determination of a loss for the 1991 taxation year is allowed and the determination of the terminal loss and of the capital loss is referred back to the Minister of National Revenue for reconsideration and redetermination on the basis that the U.S. currency exchange rate that shall be used for the purposes of paragraph 79(c) of the Act is 1.15 percent.

[52]          In view of the divided outcome, there will be no award of costs.

Signed at Ottawa, Canada, this 2nd day of April 2001.

"P. R. Dussault"

J.T.C.C.

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