Blue Water Currency Exchange Limited v. Minister of National Revenue, [1987] 1 CTC 2401, 87 DTC 306

Christie, A.C.J.T.C.:—This appeal relates to the appellant’s 1980 to 1983 taxation years inclusive. The issue is whether in computing its income for those years the appellant is entitled to deduct in each year a three per cent inventory allowance under paragraph 20(1)(gg) of the Income Tax Act*. [1] It provided:

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:

(gg) an amount in respect of any business carried on by the taxpayer in the year, equal to that portion of 3% of the cost amount to the taxpayer, at the commencement of the year, of the tangible property (other than real property or an interest therein) that was

(i) described in the taxpayer's inventory in respect of the business, and

(ii) held by him for sale or for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business

that the number of days in the year is of 365;

The amounts sought to be deducted in relation to taxation years 1980, 1981, 1982 and 1983 are $1,044, $2,919, $6,320 and $8,908 respectively. These figures relate to the American currency held by the appellant at the commencement of each taxation year. By reassessments made on September 8, 1983 and January 21, 1985 the respondent disallowed the deductions.

In addition to U.S. currency the appellant deals in a number of other foreign currencies including those of Great Britain, France, Germany, Italy and Japan. The appellant accommodates individuals arriving in Canada who wish to obtain Canadian currency with foreign funds. This also applies to persons leaving Canada who want foreign currency in exchange for Canadian funds. The appellant has 15 offices that are strategically located in Ontario, New Brunswick and Manitoba. Additional offices are planned for Nova Scotia and Saskatchewan.

On the advice of its accountant, based on considerations of related expense, the appellant sought deductions only in respect of its U.S. funds, so these reasons will deal with that aspect of the appellant’s business.

As elucidated by Mr. Robert O. Richardson, the sole shareholder and president of the appellant, the basic approach in determining what someone would receive on a given day in Canadian funds for American funds

was this: January 2, 1986 and $1,000 U.S. were chosen at random for the purpose of the illustration. The appellant’s records, based on information received from the financial section of the Globe and Mail, show that the rate of exchange established by the market in foreign currencies was 1.4030 on January 2, 1986. The gross profit sought by the appellant on these transactions was 1.65 per cent (0.165). On Januray 2, 1986 a person offering $1,000 U.S. would have received $1,386.50 Cdn.

On the other hand, using the same date, an offer of $1,000 Cdn. for U.S. funds would have yielded $710.23 U.S. The appellant sought a much reduced gross profit of one-half of 1 per cent (.005) on these transactions.

Overall, during the course of a taxation year the bulk of the appellant’s transactions was exchanging Canadian funds for U.S. funds. The primary source of revenue for the appellant was the 1.65 per cent realized on these exchanges. Especially in the summer months they produced a large volume of excess American dollars. The most economical way to dispose of this money was to exchange it at the various offices of the appellant with persons wanting U.S. dollars, hence, the one-half of 1 per cent rate on this flow. As Richardson explained:

We have a different rate policy (where a person seeks U.S. currency in exchange for Canadian money) because of competition. All summer long I have a huge inventory, a huge supply of these U.S dollars, I can't get rid of them. There are not enough people going the other way to take them off my hands, so the best way to get rid of them is to charge a lower rate. What happens is all the banks compete, as well as we compete, to try and get rid of those U.S. dollars because there is no place to send them unless you go to the major expense of counting it, bundling it according to the rules, having it picked up by people like Brinks, taken to a cash collection centre. At that cash collection centre it is recounted and subsequently you are given credit either directly or electronically through your bank account, or by a cheque which is mailed to you.

In the winter months the exchanges were less imbalanced because of the Canadian tourist traffic to warmer climates, although of course there continued to be a substantial traffic from the U.S. to Canada of persons on skiing and other winter vacations. The surplus American cash not disposed of at the branch offices was used by the appellant to purchase Canadian currency.

There is no doubt that foreign exchange is something that is capable of being bought and sold. For example, futures contracts on a currency, i.e., a contract to buy or sell a foreign currency at a fixed price within a specified time, are well recognized in the commercial world. Bank of India v. Trans Continental Commodity Merchants Ltd. and others, [1982] 1 Lloyd's Rep. 506, on appeal, [1983] 2 Lloyd's Rep. 298, is an example of litigation in respect of such contracts. Swiss Bank Corporation v. Lloyds Bank Ltd., [1979] 2 All E.R. 853 involved an English corporation, Triumph Investment Trust Ltd., that in 1971 wished to participate in the formation of a new bank in Israel, First International Bank of Israel Ltd. It was agreed that Triumph would be allocated a 13.7 per cent stake in FIBI in the form of shares and loan notes. Browne-Wilkinson, J. said at page 858:

In order to acquire the FIBI securities Triumph had to put up money in a foreign currency, Israeli pounds. In the ordinary way the only means by which a United Kingdom resident can acquire such currency for investment is by purchasing it in a limited market, the investment currency market.

While it may have been possible in some circumstances during the period under review for foreign currency to be looked upon as being in a taxpayer's inventory for the purposes of paragraph 20(1)(gg), the appellant’s method of doing business did not lend itself to the U.S. currency held by it being so regarded. One of the kinds of property described in a taxpayer’s inventory that was within paragraph 20(1 )(gg), and the only kind that could have any relevance to this appeal, is tangible property held by him for sale. This was not, however, the true nature of the appellant’s business in relation to U.S. currency. It did not acquire that currency for the purpose of holding it for sale. Rather, it acquired it in the execution of the principal focus of its business which was realizing 1.65 per cent above the international exchange rate in the process of in consideration for converting U.S. money into Canadian currency. This was followed by the necessarily incidental sequel of conversion of these American funds back into Canadian currency in order to perpetuate the process. This was accomplished by exchanging the American money for Canadian funds at the appellant’s places of business at one- half of 1 per cent and using the remainder of that money to purchase Canadian currency.

Other matters were debated, e.g., whether U.S. currency is “tangible property" within the meaning of paragraph 20(1)(gg), but in the light of what I have said they need not be pursued.

The appeal is dimissed.

Appeal dismissed.