Tahsis Co. Ltd. v. The Queen, 79 DTC 5328, [1979] CTC 410 (FCTD)

Collier, J:—The plaintiff has appealed its income tax assessments for the taxation years 1972 through 1975 inclusive. This particular appeal is for 1972. All four appeals were set for trial for the same day. The other three actions were, on the hearing, adjourned sine die. The outcome of the 1972 action will, as I understand it, resolve the issues in the other cases.

The real dispute here is whether the taxpayer incurred a foreign exchange capital loss in 1973 and 1975. The taxpayer says “yes”. The Revenue Department says ‘‘no’’. It is common ground the taxpayer had, in 1972, a taxable capital gain. If the taxpayer is correct for 1973, then “carry-back” provisions apply.

A similar situation exists in respect of 1974 and 1975. It is agreed the taxpayer again had, in 1974, a capital gain. There is a dispute as to whether there was a capital loss in 1975. The “carry-back” provisions again come into play.

Resolution of the key issue involves interpretation of ss 39(2) of the “new” Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72, c 63:

39.(2) Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year, the following rules apply:

(a) the amount, if any, by which

(i) the aggregate of all such gains made by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be included in computing his income for the year or any other taxation year)

exceeds

(ii) the aggregate of all such losses sustained by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of the section, be deductible in computing his income for the year or any other taxation year), and

(iii) if the taxpayer is an individual, $200,

shall be deemed to be a capital gain of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital gain is the amount determined under this paragraph; and

(b) the amount, if any, by which

(i) the aggregate determined under subparagraph (a)(ii),

exceeds

(ii) the aggregate determined under subparagraph (a)(i), and

(iii) if the taxpayer is an individual, $200,

shall be deemed to be a capital loss of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital loss is the amount determined under this paragraph.

An agreed statement of facts was filed.

On January 22, 1965 the plaintiff borrowed $21,400,000 (US). One of the terms of repayment called for $1,400,000 (US) to be paid biannually, commencing in 1970, ending on December 15,1975. The total annual repayment for the years 1970 through 1975 was, therefore, $2,800,000 (US).

At the time this particular loan was made the Canadian dollar was at a discount. $2,800,000 in US funds converted into $3,022,189 Canadian dollars.

At December 31, 1971 the US and Canadian dollar were at par. $2,800,000 US dollars brought $2,800,000 Canadian dollars, and vice versa.

But in the years in dispute there were fluctuations in the exchange rates. To repay $2,800,000 (US) in the years under appeal, the following amount of Canadian dollars were laid out by the plaintiff:

As can be seen, the Canadian dollar was more valuable in 1972 and 1974, compared to December 31, 1971, than its US counterpart. The parties agree the capital gain in 1972 was $36,312.50, and in 1974 was $64,820. The plaintiff included in income for those years one-half of each amount.

In respect of the years 1973 and 1975, the Canadian dollar was less valuable, relative to the US dollar, than it was at December 31, 1971, but more valuable than it was, relative to the US dollar in 1965, when the debt was incurred. In those facts lie the seeds of the dispute, and the difference in method of calculation used by the respective parties.

The plaintiff contends any currency differences or fluctuations between 1965 and 1971, are, according to subsection 39(2), to be disregarded. The Revenue Department, in its interpretation of the subsection, contends the difference in value of the currencies between 1965, 1971, and the dates of repayment, are all to be taken into account in determining whether there was a true loss.

The plaintiff put the issue as follows:

The sole question for determination is whether the capital losses resulting from fluctuations in the relative values of the Canadian and United States currencies when computed by reference to subsection 39(2) of the Income Tax Act, are to be determined by reference only to the currency values at December 31, 1971 and the subsequent transaction or payment date, as contended by the Plaintiff, or whether the calculation is also to take into account, or be affected by, the relative values of the currency in 1965 when the debt to the Series “A” lenders was incurred.

The plaintiff calculated a capital loss for 1973 as follows (para 10 of the statement of agreed facts):

(b) 1973

Canadian funds required,
1973, to repay $2,800,000 (US)	$2,801,120
Canadian funds required,
December 31, 1971, to repay
$2,800,000 (US)	$2,800,000
Loss	$	1,120

The defendants, on the other hand, made the calculation this way (para 11 of the statement of agreed facts):

(i) 1973

Reduction in loan	$3,022,189
Required to obtain reduction
at December 31, 1971	$2,800,000
Unrealized “Gain”
as of December 31, 1971	$222,189
Reduction in loan	$3,022,189
Required to obtain
reduction, 1973	$2,801,120
Gain realized on
December 15, 1973	$221,069
Reduction of gain arising from
post 1971 fluctuations	$ 1,120

In the defendant’s method one first calculates the gain or loss between the date of the loan and December 31, 1971. There was, here, a gain. Then, the argument runs, any losses after December 31,1971 and the applicable date of repayment must exceed the “unrealized gain’’ before there can be a true capital loss. If the loss after December 31, 1971 does not exceed the earlier gain, there is merely an abatement; there is no true loss.

The method put forward on behalf of the defendant is ingenious. But it does not find, in my opinion, any support in the plain words of subsection 39(2).

I set out, once more, the opening words:

Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency . . . a taxpayer has made a gain or sustained a loss in the taxation year . . .: My italics

The fluctuations, or differences in value, to be taken into account are, in my view, only those occurring after 1971. Fluctuations before December 31, 1971, whether resulting in gains or losses, are not to be taken into consideration. If the legislators had intended the earlier fluctuations to be brought into the tax brew, it seems to me it would have been a simple matter to say so. The words, as they are written and placed in the subsection, are clear. I agree with counsel for the plaintiff that the defendant’s assessment is, in effect, a recasting of subsection 39(2), as if it read as follows:

Notwithstanding subsection (1), where, after 1971, by virtue of any fluctuations in the value of the currency . . . a taxpayer has made a gain or sustained a loss in the taxation year . . .

That is not the way the draftsman wrote it. Nor is that the way it is to be interpreted.

The appeal is allowed. The assessment is referred back to the Minister of National Revenue with a direction that the plaintiff is entitled to carry-back into its 1972 income a deduction for the capital loss in 1973.

It may be a formal judgment, in the 1973 appeal, should be pronounced now. This, rather, than the adjournment agreed to by the parties. I shall wait to hear from counsel.

The plaintiff is entitled to its costs.