CIBC – Federal Court of Appeal finds that s. 40(3.6) applied to deny an FX loss arising on shares
CIBC realized an FX loss of C$126.4 million in 2007 when shares of a US subsidiary for which it had subscribed US$1 billion approximately 11 months’ earlier were redeemed for US$1 billion. The Tax Court had rejected the CIBC position that such loss was deemed by the previous version of s. 39(2) to be a capital loss from foreign currency and, therefore, was excluded from the application of the s. 40(3.6) stop-loss rule (which applied only if the loss were viewed as having arisen from the disposition of the subsidiary’s shares.)
In dismissing CIBC’s appeal, Webb JA stated:
There is nothing in subsection 40(3.6) of the ITA that would require the application of subsection 39(2) of the ITA before the loss realized on the redemption of shares is deemed to be nil by subsection 40(3.6) of the ITA. … As a result, the loss realized by CIBC on the redemption of shares is deemed to be nil and, therefore, there is no loss that could have been deemed to be a capital loss under subsection 39(2) of the ITA.
This result contrasted with BMO, which found that s. 39(2) deemed the loss from a disposition of shares arising from a foreign exchange fluctuation to be a capital loss from a disposition of foreign currency and not from the disposition of shares, so that there was no capital loss from shares to which the stop-loss rule in s. 112(3.1) could apply. Webb JA distinguished BMO on the basis that s. 112(3.1), by its terms, only applied to “that share of the loss determined without reference to this subsection,” i.e., there effectively was a statutory direction to apply s. 39(2) first (to deem the loss to be an FX loss rather than a share loss), before applying s. 112(3.1), whereas there was no similar ordering rule in s. 40(3.6).