BMO – Federal Court of Appeal finds that former s. 39(2) extended to FX gains on s. 39(1) dispositions
On unwinding a tower structure, a Nevada subsidiary LP of BMO realized FX gains on repaying U.S.-dollar borrowings, but completely offset that loss through realizing a capital loss on winding up an NSULC subsidiary. As a technical matter, s. 112(3.1) did not apply to deny any portion of this capital loss because the NSULC paid all its dividends on a separate class of preferred shares that it had issued as a stock dividend – rather than on the common shares on which the LP had realized the loss.
CRA considered this structuring to be abusive and applied GAAR. Webb JA found that s. 112(3.1) would not have applied to grind the loss even if the NSULC had instead paid all the dividends on its common shares. Thus, the structuring was unnecessary, and there was no “tax benefit” which could engage GAAR.
In particular, he found that the pre-2013 version of s. 39(2) applied to FX gains or losses on the dispositions of property generally, rather than being restricted, as contended by the Crown, to dispositions of foreign currency and FX gains or losses arising on settlement of obligations. As s. 39(2) applied to the FX loss sustained on the disposition of the NSULC shares, s. 39(2) thus deemed that loss to be a loss from the disposition of foreign currency rather than of shares, so that s. 112(3.1) could not apply.
In this regard, he stated:
By providing that subsection 39(2) of the Act will be applicable “[n]otwithstanding subsection (1)”, Parliament acknowledged that both subsections 39(1) and (2) of the Act could apply to dispositions of property. If foreign currency was the only property to which subsection 39(2) of the Act was to have applied, the text of the provision could have so provided.
After referring to the Finance Technical Notes on ss. 39(2), 95(2)(f.15) and 95(2)(g.02), he further stated:
All of the Technical Notes released by the Department of Finance appear to be drafted on the premise that subsection 39(2) of the Act (as it read in 2010 and in earlier years) had a broader application than what is proposed by the Crown. The Technical Notes indicate that this version of subsection 39(2) of the Act applied to any disposition of capital property, and not just a disposition of foreign currency.