Canadian Imperial Bank of Commerce v. R., [1997] 3 C.T.C. 2819, 97 D.T.C. 1362

Sarchuk T.C.J.:

1 This is an appeal by Canadian Imperial Bank of Commerce (the Appellant from an assessment for income tax with respect to its 1977 taxation year, wherein the Minister of National Revenue (the Minister) disallowed certain deductions claimed by it pursuant to former paragraph 20(1)(gg) of the Income Tax Act (the Act).

2 The Appellant is a chartered bank incorporated under the laws of Canada. Paragraph 20(1)(gg) of the Act, as in force at the relevant time, allowed a taxpayer in computing its business income for a fiscal period ending after March 31, 1977 and before February 26, 1986 to deduct an amount equal to 3% of the cost amount of the opening inventory of tangible property described in its inventory and held by it for sale in the ordinary course of business. Pursuant to this provision, in its return of income for the 1977 fiscal year (November 1, 1976 - October 31, 1977), the Appellant claimed a deduction in computing income of $278,810 with respect to its holdings of gold and silver bullion and gold coins at the commencement of that year. The Appellant subsequently revised its inventory allowance claimed to include an additional claim with respect to its holdings of foreign currency notes. The Minister disallowed the Appellant's inventory allowance with respect to its gold and silver bullion and foreign currency notes but allowed the claim with respect to its holdings of gold coin.

3 In its Notice of appeal the Appellant also appealed the Minister's disallowance of a deduction with respect to the amortization for its 1977 taxation year of a $500,000 discount incurred on a series of debentures issued on December 15, 1972 and claimed a further deduction under former paragraph 20(1)(gg) of the Act with respect to items of seized collateral that the Appellant held for resale as part of its normal lending business. The Appellant has advised the Minister and the Court that it no longer intends to pursue these claims. Accordingly, the only deductions that remain at issue are those with respect to the Appellant's inventory allowance claims for gold and silver bullion and foreign currency notes.

4 Finally, it should be noted that the Appellant revised the quantum of its inventory allowance claims on several occasions during the objection stage. The parties are now agreed that as at November 1, 1976, the Appellant held gold and silver bullion in the amount of $11,982,123 and that the inventory allowance claimed with respect to that bullion was $210,754. The Appellant also held foreign currency to the value of $11,488,896 and that the inventory allowance deduction claimed amounted to $256,633.

Background:

I Gold and Silver Bullion

5 In the early 1970s, it was agreed amongst various Governments to allow the price of gold to be determined by the market rather than being set at a fixed level. The Appellant became active in this market and by the taxation year in issue, its gold and silver operations involved the following basic activities: sale of bullion and coin; sale of bullion certificates; deposit accounts (Vostro/Nostro); futures/forwards and gold purchases from mines.

6 Sales of bullion were made to both retail and wholesale customers. The latter consisted principally of jewellers but also manufacturers of various products who employed gold in their processes. Retail customers were individuals who bought bullion and coins over the counter. Sales of bullion could also be made to other dealers or institutions seeking to acquire inventory. A purchaser of gold bullion or coin would either take delivery of it after having paid the purchase price for it or, might decide to keep it with the Appellant for safe-keeping. In such a case, the customer entered into a safe-keeping agreement with the Appellant and the latter acted as custodian of the bullion on the customer's behalf for an annual fee. Such bullion was segregated and not treated as part of the Appellant's inventory.

7 The Appellant also sold bullion and coin certificates which entitled the customer to delivery of the amount of bullion or coin shown on the face of the certificate within five days upon redemption and surrender of the certificate. Alternatively, the customer could claim the cash equivalent. In practice most customers claimed cash. These certificates did not give holders title to any specific bullion in the Appellant's inventory nor was any specific bullion segregated by it for this purpose.Rather, a certificate holder was entitled only to delivery of a quantity of bullion equivalent to the amount set out on the face of the certificate. In the event the certificate holder redeemed for physical bullion, that bullion could come from the Appellant's existing inventory but did not necessarily have to. It was the Appellant's practice that if the required bullion was available in its inventory and could be delivered sooner than the five-day notice, then it would be so delivered.

8 The Appellant also had customers that maintained bullion deposit accounts with it (Vostro accounts). These accounts were somewhat analogous to the bullion certificates in that the customer had no specific bullion allocated or held in custody for him but merely had the right to call upon a specified quantity of bullion. The mirror image of the Vostro deposit account was the Nostro account. These were bullion deposit accounts which the Appellant maintained at various refiners such as Johnson, Mathey in London, dealers, central banks and other financial institutions. Both the Vostro and Nostro accounts were referred to in the testimony as “unallocated accounts”.

9 The Appellant also dealt in futures and forwards. A future is a commitment to acquire or sell a specific quantity of bullion at a specific time in the future at a specific price. Futures were traded in commodity exchanges. Forwards involved basically the same type of contractual arrangement as futures, the distinction being that futures were traded in commodity exchanges while forward agreements were entered into between private parties and were not traded in any formal market. Futures and forwards were used by the Appellant's traders as position managing tools or hedges. When the Appellant sold a customer a certificate for 1,000 ounces of gold, that created a short position which the Appellant may have wished to hedge “within trading limits” in order to avoid the risk of adverse price fluctuations.

10 The evidence of David Armstrong (Armstrong)and that of Elsie Raczkowski (Raczkowski)was that rather restrictive trading limits were set by the Appellant with respect to both gold and silver.According to Armstrong these trading limits were comparatively narrow when viewed in the light of the total of the Appellant's gold assets and liabilities. Trading limits provided the Appellant with flexibility with the purpose of maintaining an essentially flat positionso as not to expose the Appellant to fluctuations in the market. It also allowed the trader some flexibility in managing the Appellant's position in order to give it the opportunity to make money. Armstrong conceded that the purpose of maintaining the essentially flat position, subject to the trading limits, was to ensure that the Appellant was not speculating in bullion. As he noted “obviously we didn't want them to bet the Bank, but we didn't want to constrain them to the extent that they ended up being order takers and for every buy, they had to do the opposite, they had to sell, so they were given a range to trade in”.

11 In the taxation year in issue the Appellant utilized a manual bookkeeping system to process trades and to track changes in the net position of the precious metals in which it dealt. The system was designed to produce a running daily balance of the assets and liabilities and the overall net position.A general ledger control account was maintained to track the net position. There was a general ledger control account for each of gold and silver called the “trading position” account. An entry in this account reflected the value (in US dollars) of the Appellant's net position in each commodity including gold (silver) certificates, adjusted daily, but excluding futures and forwards. This system resulted in a daily profit and loss entry recorded in another general ledger account.

12 In addition to the general ledger net account the Appellant also maintained a sub-ledger to track activity in each individual balance sheet item. This sub-ledger contained a category for each of the balance sheet items referred to. These categories were adjusted daily to account for all trading activity in the respective category that day. A sub-ledger reflected both the ounces and the US dollar value for each category. At the end of each month, for financial statement purposes, the Appellant reconciled the sub-ledger categories with the general ledger control account. A further reconciliation was performed with respect to the futures/forwards in order to determine the true net position. For reporting purposes, the Appellant reallocated from the control account to the appropriate balance sheet reporting lines on a monthly basis. Ultimately, profits from gold and silver operations were recorded at year end in the earnings column of the Appellant's income statement. The value of the Appellant's bullion assets, including physical inventory, was recorded as one of the components of the “cash and due from Banks” column on the assets side of the balance sheet. The value of outstanding liabilities, including certificates, would be recorded in the “other liabilities” column on the liabilities side of the balance sheet.

II Foreign Currency —Bank Notes

13 The Appellant kept foreign currency notes on hand for its customers as a regular part of its business. In general, these customers included corporate customers such as other financial institutions and trading houses who dealt in foreign currency, persons going on vacation or on cross-border shopping excursions who required foreign currency for this purpose, commercial customers who held deposits in US currency operating accounts and individuals who held US savings accounts. It is not disputed that some of the Appellant's foreign currency (primarily US) was held against these deposit liabilities. Transactions in foreign currency at the customer level were carried out by the branches, each of which maintained a level of foreign currency inventory to suit its own needs. The level of the Appellant's foreign currency transactions varied according to demand which was largely seasonal. The majority of its foreign currency holdings were US dollars, reflecting customer demand.

14 In the taxation year in issue, the acquisition and distribution of US currency through the branches or to corporate customers was handled by the main branch of each province or region. The acquisition and distribution of other foreign currencies was handled by the Appellant's international banking services department.The Appellant acquired its foreign currency inventory from foreign banks or various trading houses. Notes which branches received from customers, generally foreign notes exchanged by tourists, etc. coming to Canada and deposits by commercial customers were a further source of supply. The Appellant attempted to regulate its inventory levels based on past experience so as not to have a supply on hand in excess of anticipated demand. To the extent that a branch received more foreign notes than it could use, they were “cleared” by shipping them back to the main branch. These were then distributed to other branches to the extent possible. Any excess supply over the Appellant's requirements was returned to US financial institutions or trading banks.

15 Generally speaking, branches were supplied with foreign currency notes on a weekly basis, depending on their needs. Branches ordered foreign currency notes by way of a special requisition form which was forwarded to the main branch. The branches acquired foreign currency from the main branch at the “settling rate”. This rate was set by the Appellant's foreign exchange traders on a daily basis at a level above the market rate for each currency. The branch “sold”foreign currency notes to customers at the “counter rate”. The “counter rate” was set at a rate higher than the “settling rate” and represented an additional “mark-up” on the currency that was “sold”. The operating principle was the same when the Appellant acquired foreign currency at the branch level. The suggested “counter rate” was lower than the rate at which the branch could “sell” that currency on the market. At the relevant time the Appellant's off-shore branches also held foreign, that is non-Canadian, notes for “sale” to individuals wishing to acquire these currencies. Basically the system kept domestically was replicated at foreign branches.

Appellant's Position — Gold and Silver Bullion

16 The Appellant contends that it is qualified to claim an inventory allowance pursuant to paragraph 20(1)(gg) of the Act with respect to both its holdings of gold and silver bullion and foreign currency notes because it has met the four required preconditions to wit: the allowance must have been claimed on the cost amount of the property in question at the beginning of the taxation year in question; the property against which the allowance was claimed must have been “tangible property”, other than real estate or an interest therein; the property must have been “described in the taxpayer's inventory in respect of the business”; and the property must have been held for sale or to be processed, manufactured, incorporated into, attached to, or otherwise converted into the property for sale in the ordinary course of that business.

17 With respect to the first two, the Appellant contends that its inventory allowance claim with respect to its gold and silver bullion was in fact based on the cost amount of the bullion to which it held title at the commencement of the 1977 taxation year and that such gold and silver bullion constitutes tangible property.

18 With respect to the third precondition, Counsel for the Appellant refers to Friesen v. R.,and submits that:

Major J, writing for the majority, held that “inventory” under the Act should be construed in accordance with its “normal” meaning, which he defined broadly as follows (at p. 5555):

...In the normal sense, inventory is property which a business holds for sale and this term applies to that property both in the year of sale and in the years where the property remains as yet unsold by a business.

Major J added that this is also consistent with the definition of “inventory” accepted under ordinary principles of commercial accounting and of business (at pp. 5557-5558):

...In the ordinary sense of the term, an item of property which a business keeps for the purpose of offering it for sale constitutes inventory at any time prior to the sale of that item. The ordinary sense of the word also reflects the definition of inventory which is accepted according to ordinary principles of commercial accounting and of business. The Canadian Institute of Chartered Accountants has defined “inventory” as including, inter alia, “[î]tems of tangible property which are held for sale in the ordinary course of business”: Terminology for Accountants, (3rd ed. 1983), at p. 81.

Thus, under well accepted principles of commercial and accounting practice the value of unsold inventory is relevant to the computation of business income. This is based on the accounting presumption that holding onto unsold inventory represents a cost to a business.

Applying Friesen, therefore, an item of property is described as “inventory” under the Act if it is kept by a business for the purpose of offering it for sale. That is because, as a general rule, items of property sold by a business will always be relevant to the computation of income.

The evidence in this case is that CIBC holds its physical gold and silver bullion for sale to customers. The evidence is also that the value of this bullion, and the income generated from sales, is directly relevant to and accounted for in computing CIBC's income.

It is submitted, therefore, that CIBC's gold and silver bullion holdings come within the meaning of the term “inventory”, as that term is normally understood, and thus constitute items of property “described in the taxpayer's inventory” for the purpose of the Act and specifically paragraph 20(1)(gg).

19 With respect to the fourth requirement, the Appellant contends that its sales of the gold and silver bullion constituted part of the undistinguished common flow of business done, and formed part of its ordinary business carried on, calling for no remark and arising out of no special or particular situation.

20 Counsel for the Appellant argues that the Minister erred in basing his disallowance of the claimed deduction on the assumption that the gold and silver bullion was not held for sale in the regular course of the Appellant's business but rather was held in “custody” for holders of certificates. The evidence, he said, disproves this assumption. More specifically, it established that the Appellant did not safe-keep any specific bullion on behalf of certificate holders nor did it segregate any of its bullion as a reserve against these liabilities or withhold them from sale for that purpose. All of the gold and silver bullion in the Appellant's inventory was available for sale at any time, was sold in response to customer demand and was replenished as necessary, consistent with that demand.

21 It submits that there was no relationship between bullion certificates and the gold bullion in its inventory and no attempt was ever made to keep such a balance. More specifically, it did not endeavour to maintain a balance between its “physical” bullion inventory and certificates for hedging purposes. Counsel submits that it is incorrect to posit that it tried to maintain a “flat position” and that at all relevant times, the Bank did speculate in gold and silver albeit within prescribed trading limits. It does not dispute that in order to minimize risk it engaged in risk management by hedging but it did not do so by buying physical gold. It hedged by being active in the futures and forwards markets and by increasing or decreasing its Vostro accounts.

22 It is also the position of the Appellant that the sale of certificates constituted a separate and independent part of its business. Furthermore, these certificates did not give their holders title to any specific bullion but only entitled them to the delivery of a quantity of bullion equivalent to the amounts set out on the face of the certificate. Counsel contrasts this with the situation where the Appellant performed a safe-keeping function on behalf of an owner of bullion. In that case, it charged the customer a safe-keeping fee to store an item of physical bullion in its vaults. In the event that a certificate holder redeemed for physical bullion, it could come from a number of sources, including outside sources such as another institution or refiner. Since virtually all certificate holders redeemed their certificates for cash, there was little practical risk of a “run” on the Appellant creating a situation in which it might be short of sufficient bullion inventory to redeem its certificates. Accordingly, it would have made little economic sense for the Appellant to maintain a static physical reserve of bullion against certificate liabilities.

Respondent's Position — Gold and Silver Bullion

23 The Respondent concedes that the first two requirements set out in paragraph 20(1)(gg) of the Act are not in issue. However, the Respondent contends that the Appellant's gold and silver holdings were neither “held by it for sale” nor “described in the Appellant's inventory in respect of its business” within the meaning of paragraph 20(1)(gg) of the Act.

Not held for Sale:

24 In the view of the Respondent, the issue with respect to the Appellant's gold bullion holdings turns on the relationship between those holdings and its outstanding gold bullion certificates. It is common ground that most customers wishing to purchase gold from the Appellant chose not to take delivery of the bullion but rather chose to accept gold certificates which the Appellant issued to them for the specified quantity of bullion for which they paid the full price. This certificate entitled the customer to the delivery to him of the stated quantity of gold bullion at any time, subject to a five-day notice. While not disputing that title to the quantity of gold bullion to which a certificate holder was entitled remained, prior to such delivery, in the Appellant, the Respondent contends that by entering into a certificate transaction with the Appellant, a contract for the sale of goods (within the meaning of The Sale of Goods Act)came into existence between the Appellant and the certificate holder. The Respondent further contends that such transactions were not merely sales of certificates as suggested by the Appellant and that while they were not contracts for the sale of specifically identified bars of gold, they were nevertheless contracts for the sale of specified quantities of gold. The Respondent agrees it is a requirement of subparagraph 20(1)(gg)(ii) of the Act that in order for property to be held for sale the claimant must have title to it and the ability to transfer title to it.The Respondent, however, disputes the converse proposition, namely that as long as title to property does not pass to a buyer, the seller necessarily “holds the property for sale” within the meaning of that subparagraph simply on the basis that he can sell it to someone else. The Respondent contends that where a taxpayer has committed himself to sell property, he cannot be viewed as holding it for sale. Even though in this case the goods are unascertained, the principle is the same.

25 Second, it is the Respondent's position that since it was the Appellant's policy to keep an essentially “flat position” with respect to its bullion liabilities and assets, the Appellant's “physical” holdings, being part of its bullion assets, were necessarily utilized in achieving that “flat position” and were therefore part of the hedge against its bullion liabilities which include the gold certificates. Counsel contends that the evidence supports a conclusion that the Appellant's physical bullion holdings were in fact operating as part of its hedge against its bullion liabilities in 1976 and 1977, and that the testimony of Raczkowski, Lawrence Scott and Anthony Power to the contrary was unsubstantiated and, indeed, was contradicted by other evidence adduced on behalf of the Respondent.

26 Third, it is the Respondent's position that there is no evidence that the Appellant carried on separate operations with respect to the sale of physical bullion and bullion certificates. Counsel submits that it was idle argumentatively to separate these transactions from one another and to compartmentalize them for reasons that had no basis in fact in an effort to demonstrate that the Appellant's bullion was “held for sale”.

Not Described in Inventory

27 It is the Respondent's position that the words “Described in Inventory” in paragraph 20(1)(gg) of the Act must be given a meaning in keeping with the provision of subsection 248(1) which defines inventory as follows:

“Inventory” means a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year;

Relevance in this context is not synonymous with “being related to” or with “pertaining to” the computation of income; the cost or value of an item of property must appear as an expense in the computation of income. Thus when the income of a vending business is calculated in accordance with the well recognized formula used in inventory account:

Gross Profit = Proceeds of Sale - Value of Inventory at the beginning of the year + Cost of Inventory acquisitions - Value of Inventory at the end of the year, or:

Gross Profit = (Proceeds of Sale - Value of Inventory Sold) + Change in Value of Unsold Inventory.

the value of unsold inventory appears as a cost item.

...the Appellant valued its closing bullion holdings, as well as its bullion liabilities, at market and because of its policy of endeavouring to maintain a “flat” or non speculative position, set off the value of its bullion liabilities by the value of its bullion assets. At the end of the Appellant's 1976 taxation year this resulted in the value of bullion liabilities exceeding the value of the bullion assets (a “short position”). Since the value of the bullion assets was more than offset by the bullion liabilities, there was no value of bullion assets that could be considered to be a cost to the Appellant's business. It therefore follows that on the Appellant's method of calculating profits there could be no “cost of unsold inventory” which normally is encountered in standard inventory accounting for costs of goods sold.

28 Counsel for the Respondent submits that while it is not disputed that the Appellant's practice in determining its profits was in accordance with GAAP, which in this instance included marking to market its physical holdings of gold and silver, the Respondent does dispute that the Appellant calculated its profits by applying the standard inventory method of accounting. Counsel argues:

...Thus in that method liabilities play no part, so that the method employed by the Appellant accordingly does not conform to the standard inventory method of accounting for profits, and Mr. Power acknowledged this.

It is this standard inventory valuation method of accounting for profits which paragraph 20(1)(gg) of the Income Tax Act contemplates.

It is that standard inventory valuation method of accounting for profits which makes the value of holdings relevant in computing income for income tax purposes. As already submitted, in the Appellant's method of accounting for profits the value of the appellant's gold and silver bullion holdings was not relevant. These bullion holdings were therefore not “described in [its] inventory”, within the meaning of subparagraph 20(1)(gg)(i) of the Income Tax Act.

It is therefore submitted that even though the Appellant's method of accounting for profits from its bullion operations may have employed a method sanctioned by GAAP, it is contrary to the requirements of subparagraph 20(1)(gg)(i) of the Income Tax Act and must therefore be disregarded.

Appellant's Position — Foreign Currency

29 There is no dispute between the parties with respect to the first precondition under paragraph 20(1)(gg) of the Act, the Respondent having conceded that the inventory allowance claim was based on the cost amount of the Appellant's total foreign currency holdings as at the commencement of its 1977 taxation year.

30 The Appellant's position is that foreign currency notes are “tangible property” within the meaning of the relevant legislation. As money, foreign currency notes are included in the definition of “property” under subsection 248(1) of the Act as then in force.As well, foreign currency notes are tangible within the plain meaning of that word in that they have physical existence and are perceptible to touch. The Appellant contends that Parliament expressly acknowledged that currency is tangible property by amending the provisions of paragraph 20(1)(gg) to add the words “(other than real property or an interest therein and currency that is held for other than its numismatic value)”.Furthermore, ther is nothing on the face of the provision as amended, to indicate that it was intended to have retroactive effect.

31 Money is also considered to be a tangible item for the purpose of the law of sale of goods.Money is also included among items that are generally considered to be tangible assets from an accounting perspective.The “tangibility” of currency is particularly evident in the case of foreign currency which, the Appellant says, is dealt with as a commodity with an intrinsic worth which can be measured in terms of the indigenous currency with which it is bought. Furthermore, the value of foreign currency can vary from day-to-day in relation to local currency. In that sense, it is no different from any other tangible item of intrinsic value.Counsel argues that money is not merely a representation of value akin to, by way of example, a share certificate since it has intrinsic value that is not linked to or representative of any underlying commodity such as an interest in a corporation. The inherent value of money is the purchasing power which it embodies by virtue of the fact that it has been established by government fiat to be legal tender and has earned general acceptance as a receptacle of value.

32 The Appellant's position is that foreign currency can constitute an object of commercial intercourse and can be bought and sold as a commodity.Its foreign currency holdings were both described in its inventory and held as a commodity for sale to its customers in the ordinary course of its business. The revenues generated by these sales and the value of the foreign currency notes held were relevant to and accounted for in computing its income. Accordingly, its foreign currency holdings meet the third and forth conditions in paragraph 20(i)(gg).

33 Counsel for the Appellant argues that it is incorrect for the Respondent to characterize its foreign currency transactions as the provision of a service for a fee rather than a sale. The appropriate test to be applied is that summarized by Fridman in Sale of Goods in Canada as follows:

If the primary object of the contract is the transference of property which was not originally the property of the “buyer”, the contract will be one of sale of goods, but if the primary purpose of the parties is the performance of certain work, or the provision of services, incidentally to which property and goods is passed from one party to another, the contract will not be one of sale of goods.

34 Last, the Appellant contends that the sale of foreign currency by it to customers does not involve an exchange within the legal meaning of that term. Exchange refers to a mutual transfer of commodities rather than for money consideration. That is distinct from a sale, which involves a transfer of property in a thing from one person to another for a price which is what occurs in the Appellant's transactions with its customers relating to foreign currency.As such, the nature of its foreign currency business differs in essential respects from that of the taxpayer in Blue Water Currency Exchange Ltd. v. Minister of National Revenue

Respondent's Position — Foreign Currency

35 It is the Respondent's position that “tangible property” and “intangible property” are not mutually exclusive concepts. Thus, tangible property is property that has physical form or substance and is not intangible property. Given the non-exclusive meaning of tangible property, an element of ambiguity in its meaning is introduced and thus, where words in a statute are not plain on their face, the purpose of the legislation in the context of economic reality may be resorted to.The purpose of the enactment of paragraph 20(1)(gg) of the Act was to mitigate against an understatement of closing inventory due to inflationary pressure, i.e. an understatement of the cost of goods sold and thereby an overstatement of income.Currencies, while they change in value against one another due to internal factors of commerce and politics, may be susceptible to inflationary pressures, but their value is self-adjusting by way of changing values relative to one another on a day-to-day basis. They are therefore not subject to the inflationary pressures as are vendors of merchandise who must stock it frequently for lengthy periods of time. The Respondent submits that enacting paragraph 20(1)(gg) of the Act to provide relief from inflationary pressures, Parliament could not have intended its application to everything one can touch, such as bank notes.

36 Counsel further argues that as used chiefly in the law of taxation, intangible property means such property as has no intrinsic or marketable value, but is merely the representative of value, such as share certificates, bonds, promissory notes, copyrights and franchises.Bank notes (that is foreign currency and Canadian currency) are generally issued by a bank authorized to do so and are intended to circulate as money. Money is defined as anything serving as a medium of exchangeand represents so much purchasing power in terms of commodities.Thus, foreign currency being a medium of exchange, represents purchasing power. It therefore has no intrinsic value but only representative value and is therefore intangible property. As such, it is excluded from the definition of tangible property even though it has physical form or a substance.

37 The Respondent also takes the position that the amendment of paragraph 20(1)(gg) in 1985 and 1986 which had the effect of expressly excluding currency held for other than numismatic value, does not entitle the Appellant to argue that this constituted a change in the law and permitted one to infer as a result that prior to the amendment the relevant provision must have contemplated the inclusion of currency. On the contrary, the amendment was enacted by Parliament for greater certainty rather than with an intent to alter the law.

38 The Respondent further contends that the foreign currency in issue was not held by the Appellant for sale. A sale in its ordinary meaning signifies the exchange of goods and services for money or other valuable consideration. In the Sale of Goods Act the definition of “goods” excludes money.While one may speak of buying and selling currencies, the transaction in essence is the trading of one form of currency for another or more precisely, the exchanging of one form of currency for another. The Respondent submits that a proper characterization of a transaction where one form of currency is traded for another is that it is an exchange for a fee or a price.

39 Last, the Respondent takes the position that the Appellant's holdings of foreign currency bank notes were not described in its inventory within the meaning of subparagraph 20(1)(gg)(i) of the Act. Counsel for the Respondent argues that on the evidence of Cheong S. Lee and Michael L. Oakes, the Appellant applied a conservative non-speculation policy to its foreign currency assets and liabilities. It aggregated all of its foreign currency bank notes, foreign currency deposit accounts and all other foreign currency assets world-wide, and also aggregated all of its foreign currency deposit liabilities and all other foreign liabilities world-wide. It then valued these aggregates at the same rates in Canadian dollars and netted them against each other in an effort to create a flat position. The Respondent submits that since there is a flat position, the value of the Appellant's foreign currency assets is not relevant to the computation of the Appellant's income so that these assets were not described in the Appellant's inventory within the meaning of the relevant provisions of the Act.

Conclusion

40 The issue before this Court is whether the Appellant is entitled to claim as a deduction in computing its income for the 1977 taxation year inventory allowances in respect of its holdings of gold and silver bullion and of foreign currency notes at the beginning of its 1977 taxation year.

Gold and Silver Bullion

41 In order to be eligible to claim a paragraph 20(1)(gg) inventory allowance four preconditions must be met. Failure to establish the existence of any one of these elements results in a disentitlement to a reserve under that paragraph.Two elements remain in issue in this appeal: was the bullion inventory held for sale in the ordinary course of the Appellant's business and was it “described in the taxpayer's inventory” for the purposes of paragraph 20(1)(gg).

42 The Appellant's position that the bullion inventory in issue was held for sale in the ordinary course of its business is based on a number of interrelated propositions, the primary one being that none of its “physical bullion holdings”was held as a reserve or hedge against its bullion certificate liabilities. This argument depends in great measure on the evidence of Raczkowski, the thrust of which was that all gold and silver bullion was purchased and held in inventory solely and exclusively to satisfy its customers' demand for “physical product” and that if certificate holders redeemed for actual gold, it would not come from “physical inventory” since the Appellant did not keep bullion for redemption purposes.

43 Raczkowski's testimony to that effect and her testimony that the inventory level was determined solely by the level of market demand for “physical product” (i.e. actual gold and silver, but not certificates) is somewhat at odds with other evidence before the Court. I make particular reference to certain documents prepared for the purpose of providing a response to an information request by Revenue Canada Taxation (RCT). On November 22, 1979, J.S. Early, Supervisor of the Appellant's Taxation Department, solicited the comments and suggestions of W.J. Lovering, Manager, Gold Operations International,with respect to a draft of the proposed response.A discussion between the two that day was recorded by Early in a memo to file.Raczkowski reviewed the draft response and in her comments to Early stated, in part:

We would concur with the answers as given in your draft reply to revenue Canada except (3) that the spread between buy and sell price is not really intended to be a profit but a cushion to protect us against fluctuations in price. We do of course take short term conservative positions, the moment someone buys or sells bullion, we at that time in effect take a position and are at risk until we cover. It should be also pointed out that although we do hedge our position at all times and we do buy gold to cover our certificates, it is a matter of judgment on our part and we are under no obligation to do so. Actually, we could have a liability for certificates outstanding without a corresponding asset in the form of bullion and in fact that, on occasion, does happen. (Emphasis added)

44 On December 19, 1979, Early provided the required information to RCT including the following:

Question

• 1 Is the bullion acquired to be held against gold and silver certificates as the latter are issued and thus not put itself (the bank) in the position of speculating on future prices when the certificates are redeemed?

Answer

The Bank does take short term conservative positions in bullion and, indeed, a position exists on the occasion of each purchase and sale transaction since the Bank is at risk until that position is covered. It is not, however, the policy of this Bank to speculate heavily in gold and silver. As a result, we do purchase gold and silver bullion or coin to match substantially the value of issued certificates. In essence, the acquisition of bullion to cover certificates is a matter of judgment on our part since we are under no obligation to do so.

(Emphasis added)

The fees charged to customers who purchase gold and silver certificates are described as “safekeeping fees”. This is perhaps misleading in that a certificate does not give the certificate holder title to gold or silver. It simply provides the certificate holder with a legal right or “chose in action” (to use legal parlance) to call on the Bank to deliver the number of ounces of bullion recorded on the certificate, subject to the conditions recorded on the reverse side of the certificate. Title to bullion held by the Bank rests with the Bank. The Bank in practice adopts a policy of non-speculation. That is to say, it maintains a flat position which in essence means that, within prescribed limits, it maintains a physical back-up in bullion for every ounce of certificate gold and silver issued. The cost to the Bank to safekeep its bullion is passed on to the certificate holder in the form of what I referred to in the trade as “safekeeping fees”.

(Emphasis added)

45 The foregoing comments put in question the Appellant's assertion that there was no correlation or relationship between its bullion inventory and certificates for hedging purposes. Indeed, Raczkowski in cross-examination, conceded that the inventory in issue did form part of the hedge. Nonetheless, Counsel for the Appellant argues that since bullion was not “purchased for hedging” the fact that it was used in the computation of the hedge because it “existed in the vault” was irrelevant. Given the comments of Lovering and Early previously referred to, this submission is not factually sound.

46 Counsel for the Appellant also argues that since the purchase and sale of “physical bullion” was a separate business from the sale of bullion certificates and since the two had nothing to do with each other, it must be concluded that all of the “physical bullion” was held for sale. In light of the manner in which the Appellant carried out its bullion transactions in the taxation year in issue, this assertion is difficult to accept. The evidence establishes that all transactions were recorded in a general ledger control account for each of gold bullion and silver bullion. This account was referred to as the Appellant's “trading position” account. All profits and losses from the Appellant's gold and silver operations including the issuance and redemption of bullion certificates were recorded in the trading account. The entry in this account reflected the value of the Appellant's net position in each commodity adjusted daily, but excluding futures and forwards. This exercise resulted in a daily profit and loss entry recorded in another general ledger account.As Counsel for the Respondent noted, had the Appellant operated its bullion transactions separate and apart from its certificate transactions, one might expect separate accounting for the profits and losses therefrom. The evidence, however, is that the Appellant commingled the accounting of the profits or losses from all of these transactions. This is not irrelevant as suggested by Counsel for the Appellant. Indeed, by following its “non-speculative - essentially flat position” policy with respect to its bullion assets and liabilities the Appellant of necessity had to combine the accounting for all physical bullion and bullion certificate transactions.

47 Reference was also made by Counsel for the Appellant to the Gold Clauses Act in support of his submission that a certificate transaction was not a “sale of gold” because title did not pass and because there was no obligation at law on the part of the Appellant to deliver the gold pursuant to the certificate. This submission does not stand up to close scrutiny. “Gold clause obligation” is defined in section 2 of that Act and means “any obligation incurred ... that purports to give the creditor a right to require payment in gold or in gold coin or in an amount of money measured thereby...”. Section 7 of this Act provides that any obligation that “purports to give to the creditor a right to require payment in gold ... is contrary to public policy and every obligation containing such a provision has effect as if such provision were not contained therein, and as if it contained a covenant to pay its nominal face amount in currency that is legal tender...”. In my view, the Gold Clauses Act has nothing whatsoever to do with a contract for the purchase and sale of gold. The relationship in the certificate transaction is that of vendor and purchaser and not debtor and creditor. The delivery of gold pursuant to a demand by a certificate holder is not the payment of an obligation, i.e. the discharge of a debt, but rather is the delivery of a commodity bought and paid for. This is consistent, I might add, with the Appellant's practice which was to redeem a certificate following a claim for redemption with gold bullion from its inventory.

48 The Appellant's position that a certificate transaction was not a completed sale of bullion is correct since title did not pass. However, it is also evident that by entering into a bullion certificate transaction, the Appellant, having received payment in full from its customer for a specified quantity of bullion, has contractually committed itself to deliver, upon demand, that specific quantity of bullion. Such delivery could only be made to the certificate holders (or pursuant to Powers of Attorney issued by them) since the certificates were not assignable and could not be traded in the manner of share certificates or negotiable instruments. An examination of the manner in which the certificate transactions were carried out by the Appellant suggests that it treated them as the sale of a specific quantity of bullion. Whether a customer wished to purchase bullion for immediate delivery or for future delivery (certificate), the procedure was the same. The customer entered an order to buy gold or silver at the branch at the “offer price”, and the Appellant and the customer executed a “Bullion Contract”.The Buy Order was forwarded to the “back office” where a trading ticket was prepared recording the “sale”. If the purchase of bullion was for immediate delivery, the bullion was shipped to the appropriate branch and delivered to the customer. In the case of gold purchased by way of certificate, the bullion certificate was delivered to the customer. When the certificate holder redeemed for cash, the branch completed a “Sell Order” and the backroom trader completed a buy ticket. If that customer wished to redeem a certificate for bullion instead of cash, the certificate would be sent to the “back office” for cancellation and bullion was sent to the branch for delivery. The trading department made no distinction between the transactions and each day “batched” the buy and sell tickets for bullion and certificates to ensure they were roughly in balance and subject only to trading limits. The Appellant's accounting department also treated all such tickets as purchases and sales of bullion in calculating the Appellant's profits from its bullion operations.

49 Paragraph 20(1)(gg) of the Act requires that inventory be held for sale. That does not mean that inventory can be held for sale and for other purposes.While it is not disputed that the Appellant sold bullion “across the counter” and that some of its bullion assets were acquired for that purpose, there is no documentary evidence to support the Appellant's assertion that there was a real correlation between sales of “physical gold bullion” and the amounts of gold bullion actually held in inventory. The evidence as a whole fails to establish on a balance of probabilities that all of the inventory in issue was held solely for that purpose. Furthermore, the fact that no specific bullion was segregated for each certificate does not, in my view, permit the conclusion that the bullion in inventory was held for sale for the purposes of paragraph 20(1)(gg), as contended by the Appellant.

50 It is evident that the purchaser of the certificate and the Appellant contemplated that the contractual relationship between them was that of buyer and seller of bullion with delivery to be taken at a time of the buyer's choosing. The obligation to deliver a specific quantity of bullion in accordance with the certificate is the reason why, as Lovering noted, the Appellant “maintains a flat position which in essence means that, within prescribed limits, it maintains a physical backup in bullion for every ounce of certificate gold and silver issued”. The fact is that the gold trading limit for the Appellant was 10,000 ozs. in the taxation year in issue. Trading was carefully monitored and the short or long position never exceeded this amount. The Appellant did not speculate in gold and it could only avoid speculative gains and losses by maintaining a flat position so that all assets and liabilities were effectively hedged. What this means in actual practice is that the gold bullion inventory was held as a reserve against the gold liabilities, the bulk of which reflected certificate liabilities.

51 I am satisfied, on the evidence as a whole, that in the taxation year in issue the Appellant held its gold and silver bullion in its inventory as a reserve against its certificate and Vostro account liabilities and thus is not entitled to the deduction claimed.In view of my conclusion, it is not necessary to determine whether the inventory in issue was “property, the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year”.

Conclusion — Foreign Currency

52 The Appellant has said that its transactions involving foreign currency notes were in the nature of the sale of a good and not the provision of a service, i.e. the exchange of foreign currency for Canadian currency. In my view, the evidence as a whole leads to a contrary conclusion. The Appellant's objective was to realize a profit over and above the international market rate for the conversion of foreign currencies into Canadian currencies and vice versa. To that effect, the Appellant's foreign exchange traders, based on market activity, daily established a rate that became the basis for the Appellant's exchange rates, both internal and external. The Appellant's formula in the case of US currency was to add 90 basis points (0.9%) to the spot rate established by the traders. This formed the “settling rate” which is the rate at which the Appellant settled internally between the branches and Currency Operations. The Appellant further added an additional 35 basis points to the settling rate to create the counter rate used by each branch in currency transactions with its customers. As well, the foreign exchange traders prepared, also on a daily basis, an “exchange bulletin” which provided each branch with the “branch exchange rate details”,which included the “counter rates” to be used by the branches in their foreign exchange transactions. Although the international market rates for foreign currency may fluctuate on a daily basis, the Appellant's formula effectively produced a consistent 125 basis point margin over the international exchange rate.

53 In Bluewater Currency Exchange Limited v. Minister of National Revenue the Appellant claimed an inventory allowance pursuant to the provisions of paragraph 20(1)(gg) of the Act with respect to American currency held by it at the commencement of each taxation year. Although that Appellant sought deductions only in respect of its US funds, it dealt in a number of other foreign currencies including those of Great Britain, France, Germany, Italy and Japan. It was noted by the Court that it accommodated individuals arriving in Canada who wished to obtain Canadian currency with foreign funds and this also applied to persons leaving Canada who wanted foreign currency in exchange for Canadian funds. In that case, Christie A.C.J.T.C.C. observed:

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 purpose 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 king 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% above the international exchange rate in the process of and 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 at1/2of 1% and using the remainder of that money to purchase Canadian currency.

54 Although it is not of great significance, the Appellant itself appears to have treated these transactions as the conversion or exchange of Canadian currencies into foreign currencies and vice versa. By way of example, a daily “exchange bulletin” provides the branches with “exchange rate” details. Furthermore, its foreign branches were required to report the value of their foreign currency holdings and the calculation of their monthly profit and loss for foreign currency “sales”. The form provided records the transactions in issue under the heading “Foreign Exchange and Miscellaneous Commissions”.The term rate of exchange can only mean the price at which the currency of one country may be converted into the currency of another country. Calling the transactions “sales and purchases” or characterizing the application of an exchange rate established from international market rates as a “mark-up of a sale price” does not change the true nature of the Appellant's foreign currency business.

55 I have concluded that the foreign currency in issue was not held by the Appellant for sale within the meaning of paragraph 20(1)(gg) of the Act. Accordingly, it is not necessary to decide the two remaining issues raised by the Respondent, i.e. that the currency in issue was not tangible property and that it was not held in inventory by the Appellant.

56 One further issue must be addressed. As part of the Respondent's case, portions of the examination of Andrew G. Kenyon (Kenyon)on discovery, were read into the evidence. His testimony was that a number of customers of the Appellant held deposit accounts in foreign currencies such as US dollars in Canada and that one of the purposes for which the Appellant kept such currencies on hand was to satisfy possible calls upon these accounts. Kenyon agreed that it was a fair assumption that the Appellant, on any particular day, endeavours not to keep more foreign currency bank notes on hand than would be necessary to satisfy the demand for it on a particular day. As well, in response to certain undertakings, Kenyon testified that the records of the Appellant are no longer available to advise the Respondent of the Appellant's total US dollar deposit liabilities as at October 31, 1976.

57 Prior to trial, the parties agreed that if the Court should find that the Appellant held its foreign currency bank notes in Canada partly for sale and partly to satisfy the foreign deposit liabilities then the allocation would be on a50/50basis. That is, of the amount of $12,271,983 in foreign currency holdings, only 50% would form the base on which the inventory allowance is to be calculated.In the course of his argument Counsel for the Appellant added a rider to the agreement to the effect that it “would not come into play” if “the need to have cash on hand to satisfy potential withdrawals from deposit liabilities was insignificant or immaterial or at least not substantial”. Counsel argued that only if the Court determined “that at least a substantial or major purpose behind holding these foreign currency notes was to have them as against the foreign currency liabilities that the50/50allocation comes into play”, failing which the Appellant would be entitled to the inventory allowance on the entire amount claimed.

58 Counsel for the Respondent submitted that the agreement in issue was precipitated by the fact that no records were available. He contends that the agreement was quite simply that if the amount:

is not quantifiable and if you (the Court) should find that indeed there was an unquantifiable amount of foreign currency, US dollars in particular held against the US dollar deposit liabilities, then the agreement was50/50. There was no mention of insignificance or otherwise. The answer that was given on discovery was that it was not quantifiable.

59 The position advanced by Counsel for the Respondent as to the genesis of the agreement was not seriously disputed. However, it is unnecessary to resolve this impasse since in my view, the evidence relied on by the Appellant does not meet the standard of proof required. First, Kenyon's testimony was that no records exist which could assist this Court to quantify the foreign currency deposit liabilities. The testimony of two other witnesses, Dennis Cook (Cook) and Desmond Ward (Ward),relied upon by the Appellant also provides little assistance. Cook stated that the Appellant does not hold foreign currency notes for any “reserve” purpose against deposits. That flies completely in the face of the testimony given by Kenyon. Cook also testified in cross-examination that the amount of US cash kept on hand by the Appellant Canada-wide is based on “strictly the anticipated needs. The needs may include customers withdrawing from their US dollars accounts.” When asked whether the branches keep a certain amount of cash on hand in order to pay withdrawals in US dollars, Cook responded “I would say no more so than the amount of Canadian cash that we keep available to meet our Canadian needs”. He also agreed that a portion of the US dollar currency that is held by the branches must be held to satisfy deposit liability in US dollars should the need arise. Although he did say in re-examination that the significance of such need was very minor, in my view, his evidence falls far short of establishing the position advanced by the Appellant.

60 Ward testified that in Barbados foreign currency deposit accounts were offered in both US and Canadian dollars. However, since that country's Central Bank did not allow banks to pay interest on foreign currency accounts their value and numbers were limited. Since the foreign currency deposit liabilities were of marginal import in Barbados and perhaps the rest of the Caribbean, Ward's testimony provides absolutely no assistance in determining the overall ratio between foreign currency deposit account liabilities and foreign currencies held for exchange.

61 In result, had I ruled that the Appellant did hold foreign currency for sale, I would have, pursuant to the agreement reached between the parties, directed that the allocation be made on the50/50basis set out therein.

62 The appeal is dismissed, costs to the Respondent to be taxed.