Rip, J.T.C.C.:—Avis Immobilien G.M.B.H. ("Avis"), a non-resident of Canada, was assessed tax for 1986 pursuant to subsection 115(1) of the Income Tax Act,
R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Avis has appealed the assessment on the basis that the Minister of National Revenue ("Minister") ought to allow it to deduct a foreign exchange loss in calculating its capital gain from dispositions of property in accordance with paragraph 40(1 )(a) of the Act.
Avis was formed under the laws of the Republic of Germany in November 1982 and at all relevant times was resident of Germany. The owners of the interests in Avis were Mr. Robert Vogel ("Vogel"), a citizen and resident of Germany, and Mrs. Karen Fischer ("Fischer"), Vogel's sister, a citizen of the Netherlands and a resident of Switzerland.
Prior to 1982 Vogel and Fischer had invested in Canada. They had purchased three immovable rental properties situated at 1625 Blvd. de Maisonneuve West, 2000—2100 Guy Street ("de Maisonneuve"), 3333 Queen Mary Road ("Queen Mary") and 1350 Sherbrooke Street West ("Sherbrooke") in the city of Montreal. On December 21, 1982 he and Fischer sold to Avis each of the properties for the following purchase prices:
de Maisonneuve | $10,000,000 |
Queen Mary | $3,300,000 |
Sherbrooke | $3,200,000 |
The purchase price of $16,500,000 was payable and paid as follows:
(a) a cash payment in the amount of $10,060,268.86; and
(b) the balance of $6,439,731.14 payable as follows:
(i) the assumption of a debt in the amount of $1,039,731.14 secured by a first-ranking hypothec on the Sherbrooke property, payable to the Prudential Insurance Company of America; and
(ii) an amount of $5,400,000 payable to the vendors with interest at rates ranging from 9.1 per cent to 11.4 per cent per annum, payable monthly from January 1983 until December 1997.
Interest rates in Canada were high in 1982. To finance the purchase of the properties, Avis obtained three loans aggregating DM 21,000,000 from the Ham- ourgische Landesbank Girozentrale ("Bank") of Hamburg, Germany. At time of the loans DM 21,000,000 converted into $10,875,194.
The three loan agreements, dated December 21, 1982, provided, amongst other things, that:
(a) each loan was secured by hypothec registered on the particular property in the following amount:
de Maisonneuve | $7,250,000 |
Queen Mary | $2,250,000 |
Sherbrooke | $1,000,000 |
(b) the principal amount of each loan was payable on 31 December 1997 with ongoing capital repayments of 1 per cent per annum;
(c) the loans bore interest at the rate of 9.5 per cent per annum;
(d) the appellant had no right to prepay the loans prior to March 30,1988; and (e) the loans were to be repaid in German currency.
The loan agreements also stated that:
... the borrower shall not sell further hypothecate or otherwise alienate the whole or any part of the property without the prior written consent of the lender. . . .
The three properties were the only assets of Avis.
By 1986, Avis was having difficulty with the management of the properties and the properties were in need of repair. The value of the Canadian dollar had depreciated relative to the German mark. Vogel also found Quebec taxes high compared to other jurisdictions. For these reasons Vogel decided it was best to sell the properties. Vogel had a long standing relationship with the bank which he did not want jeopardize and advised the bank.
In October 1986, the appellant agreed, subject to the bank's approval, to sell the properties to a Canadian company, MCLR Equities Inc. ("MCLR"), with whom the appellant was dealing at arm's length. The bank consented to the sales on certain conditions. First, it required Avis to repay its loans prior to the sale. The bank was prepared to finance the purchase but desired to deal only with Vogel and Fischer, according to Vogel. Arrangements were thus made for Avis first to sell the properties to Vogel and Fischer who would finance the purchase by borrowing personally from the bank DM 20,000,000. The loans were to be made on closing and were to be secured by hypothecs on each of the properties in favour of the Bank. Vogel and Fischer would then, in turn, sell the properties to MCLR subject to the hypothecs. The Bank also demanded a penalty payment from the appellant for its consent to the sale.
The properties were sold for $25,000,000 by Avis to Vogel and Fischer and by them to MCLR on December 15, 1986, as arranged. As of that date Avis had made capital repayments of DM 105,000 on the loan. The appellant also on that day paid to the bank:
(a) the full amount of the principal of the loan then outstanding of DM 20,895,000 which converted into $14,306,807; and
(b) a penalty of 5'/2 per cent of unpaid capital, equal to the amount of $786,866, in order to secure the right to prepay the loans.
The bank loaned Vogel and Fischer DM 20,000,000, to purchase the de Maisonneuve, Queen Mary and Sherbrooke properties; the loans were secured by hypothecs in different amounts on each of the properties. The deeds of loan and hypothec are dated December 15,1986 and were registered December 16, 1986. The bank granted an "acquittance" to Avis, which was dated December 18, 1986, and registered on January 12, 1987.
An income tax return (T 2 form) was filed on behalf of the appellant with respect to the 1986 taxation year within the time prescribed by the Act. The appellant declared a capital gain on dispositions of the properties of $3,866,996, calculated as follows:
Total Proceeds of Disposition | $25,4%,022 |
Adjusted Cost Base | (16,669,258) |
Outlays and Expenses | (4,959,766) |
| $ 3,866,998 |
The “outlay or expenses" included an amount of $3,485,996 representing the difference between:
(i) | the number of Canadian dollars corresponding in 1986 | |
| to the outstanding capital amount of the loans repaid | |
| in German currency (DM 20,895,000): | $14,306,807 |
| and | |
(ii) | the number of Canadian dollars corresponding to the | |
| proceeds of German currency of the original loans re | |
| ceived in 1982: | $10,820,811 |
plus, amongst other amounts, the amount of the prepayment penalty of $788,666.2
Mr. Ronald Gallay, the appellant’s chartered accountant, testified that when the return was being prepared it was his view that the $3,485,996 was an expense incurred "strictly" as a result of selling the properties and "therefore related to the sale"; this expense would not have been incurred had the properties not been sold.
By notice of assessment dated 28 September 1990, the Minister disallowed the deduction of the $3,485,996 foreign exchange loss and added back an amount of $1,742,998 representing the taxable portion of the additional capital gain. The Minister agreed the prepayment penalty of $788,666 was a cost of disposition. In the Minister’s view the foreign exchange loss was neither an outlay nor an expense to the extent that it was made or incurred by Avis for the purpose of making the dispositions of the three properties contemplated by subparagraph 40(1)(a)(i) of the Act. The loss was incurred for the purpose of extinguishing the debt of the appellant to the bank: subsection 39(2).
The appellant submits that the amount of $3,485,996 it paid to the bank was an outlay or expense "made or incurred . . . for the purpose of making the disposition" within the meaning of subparagraph 40(1)(a)(i) and therefore was deductible in computing its capital gain from the dispositions of the properties.
The appellant had to repay the loan in order to sell the properties, it says, and in so doing it incurred an expense. The appellant argues that in principle and in accordance with the spirit of the Act, the calculation of the appellant's gain arising from the dispositions of the properties necessitates the deduction of all outlays and expenses incurred by the appellant for the purpose of making the dispositions, including the expenses incurred to repay the bank loans. Any other construction or interpretation of the capital gains provision of the Act would result in taking into account as a gain an amount that is more than the appellant's actual gain and such an interpretation would not comply with section 12 of the Interpretation Act, R.S.C. 1985, c. I-21.
In the alternative, the appellant argues that the amount of $3,485,996 was part of the adjusted cost base to it of the properties immediately before their dispositions.
Subparagraph 40(1)(a)(i) provides:
40 (1) Except as otherwise expressly provided in this Part
(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which
(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition. . . .
The main issue to be decided, then, is whether the foreign exchange loss was an outlay or expense and, if so, whether it was made or incurred for the purpose of selling the three properties.
Onus of proof
In the course of making his submissions, counsel for Avis raised a procedural argument that the respondent had the onus to prove the foreign exchange loss was not “for the purpose of making the disposition”. Counsel first declared the respondent's denial that the outlay or expense was made for the purpose of making the disposition is not clear from documentation sent to the appellant. He also argued that since the respondent's reply stated that in assessing Avis, the Minister proceeded, amongst other things, on the basis that:
[T]he said "foreign exchange loss" was not an outlay nor an expense but even if it were considered to be an outlay or an expense it would not have been made for the purpose of making the disposition of the properties but for the purpose of extinguishing the debt of the appellant the respondent pleaded in the alternative.
This issue, then, is whether the Minister properly and sufficiently disclosed the basic foundation of the assessment so that the appellant knew the case it had to meet: Johnston v. M.N.R., [1948] S.C.R. 452, [1948] C.T.C. 195, D.T.C. 1182, Conway Estate v. M.N.R., [1965] C.T.C. 283, 65 D.T.C. 5169 (Ex. Ct.), at page 287 (D.T.C. 5172) and M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184 (Ex. Ct.), at page 302 (D.T.C. 5188).
Avis was not prejudiced by the pleadings of the respondent. The Minister had advised Avis in his notice of confirmation of the assessment that:
. . . the loss on foreign exchange . . . was not incurred within the meaning of subparagraph 40(1)(a)(i) . . . accordingly the allowable capital loss ... has not been deducted from your income in accordance with the provisions of subsection 115(1). . . .
On receipt of the notice of confirmation Avis was advised it would have to meet a case under subparagraph 40(1)(a)(i). The provision states capital gain is equal to the proceeds of the property less any outlay or expense if such outlay or expense was made for the purpose of the disposition.
Hence, the taxpayer must come within subparagraph (i) to reduce the capital gain. The Minister is not limited to only one ground in assessing. If the amount is an outlay or expense it must then meet the "purpose" test. This is not pleading in the alternative as discussed in the cases cited by counsel: Fradet et al. v. The Queen, [1986] 2 C.T.C. 321, 86 D.T.C. 6411, (F.C.A.); The Queen v. Stirling, [1985] 1 C.T.C. 275, 85 D.T.C. 5199 (F.C.A.) and Gaynor v. The Queen, [1991] 1 C.T.C. 470, 91 D.T.C. 5288 (F.C.A.).
The taxpayer's notice of appeal does not lack anything which indicates, even remotely, that the taxpayer is unaware of the case it has to meet. Indeed, in its notice of appeal, the appellant's first reason for the appeal is that the foreign exchange loss was "made or incurred ... for the purpose of making the disposition”. The vast majority of evidence led by both counsel in examination in chief and cross-examination of witnesses related to whether the foreign exchange loss was made for the purpose of making the dispositions of the properties. Indeed the facts alleged in the pleadings of the parties are not really dissimilar. It is the interpretation one is to give to those facts that is in issue. There is no shift in onus on proving any fact.
Outlay and expense
Counsel for the respondent submitted the foreign exchange loss was not an Outlay or expense. He argued that loss was not an expending of money referred to by Hugessen, J., in Demers, supra. In counsel's view the loss was notional in that Avis borrowed German marks and repaid its lender in German marks. Avis did not disburse any Canadian currency.
The Act itself does not define the terms "outlay" and "expense". An outlay or an expense may be on account of income or capital. Most of the cases considering the words “outlay” and "expense" related to the calculation of income from a business and the courts have relied in the meaning of the words their meanings in determining profits of a business: Associated Investors of Canada Ltd. v. M.N.R., [1967] C.T.C. 138, 67 D.T.C. 5096, per Jackett, P., and Canadian General Electric Co. v. M.N.R., [1962] S.C.R. 3, [1961] C.T.C. 512, 61 D.T.C. 1300.
An outlay is "the expending of a sum of money": Fradet et al., supra, at page 325 (D.T.C. 6413), per Hugessen, J. In MacMillan Bloedel Ltd. v. Canada, [1990] 1 C.T.C. 468, 90 D.T.C. 6219 the Federal Court, per Collier, J., considered, amongst other things, whether a foreign exchange loss was deductible in computing income from a business in accordance with subparagraph 20(1)(e)(ii). At page 476 (D.T.C. 6225) Collier, J., stated:
Mr. Culver [a chartered accountant called as an expert witness by the defendant], in his evidence in chief, described the foreign exchange loss as a "cost", but seemed unwilling to characterize that cost as an expense. I so characterize it; and deductible under... the statute.
See also, for example, Eli Lilly and Co. v. M.N.R., [1955] S.C.R. 745; [1955] C.T.C. 198, 55 D.T.C. 1139; Gaynor v. The Queen, supra, D.W.S. Corp. v. M.N.R., [1968] C.T.C. 65, 68 D.T.C. 5045, at pages 75-76 (D.T.C. 5052) per Thurlow, J., (as he then was) and Texas Co.(Australia) Ltd. v. Federal Commissioner of Taxation (1939), 63 C.L.R. 382 (Aust H.C.), at pages 426-30, 465-67, 469.
A foreign exchange loss, then, may be an outlay or expense for the purpose of determining income from a taxpayer's business. However, whether a foreign exchange loss may be an outlay or expense contemplated by subparagraph 40(1)(a)(i) has not been previously considered. It has been argued that a capital gain or loss on foreign exchange is determined only by subsection 39(2). It does not follow that a capital gain necessarily should be computed according to the same rules as income from a business or property: The Queen v. Stirling, supra, at page 276 (D.T.C 5200), per Pratte, J.I, however, shall assume that there may be circumstances when a foreign exchange loss may be an outlay or expense which may be applied to reduce a capital gain.
"For the purpose"
Appellant's counsel, Me. Du Pont, says the foreign exchange loss was incurred for the purpose of selling the properties in Montreal. Counsel argues that to deny a deduction of the loss on converting the Canadian currency to German currency on the dispositions of the properties would artificially inflate the gain. He suggested that the transactions are to be appreciated in the light of the practical and essential business purposes which they were calculated to achieve. He referred the Court to Bo water Power Co. v. M.N.R., [1971] C.T.C. 818, 71 D.T.C. 5469, at page 837 (D.T.C. 5480), per Noël, J., Fradet v. The Queen, supra, at 428 (D.T.C. 5448), per Walsh, J., and Firestone v. The Queen, [1987] 2 C.T.C. 1, 87 D.T.C. 5237 at page 12 (D.T.C. 5245), per MacGuigan J.
Counsel declared that on the face of the deeds Avis could not sell the property without the bank's consent and the bank would only consent if its loans were repaid. The appellant considered the price it was to receive for the properties and the costs of the penalty and the foreign exchange loss prior to making the dispositions and concluded the dispositions were "good deals”. In accordance with Bowater, supra, the essential business purpose to be achieved by the transactions and what the repayment of the loans was "calculated to effect from a practical business point of view" was the sale of the properties. More particularly, the foreign exchange loss was calculated to effect the sale of the properties; without agreeing to suffer that loss, the properties could not have been sold.
Appellant's counsel stated that the fact the foreign exchange loss was incurred in the course of repaying the loans does not in any way preclude a finding that the outlay was indeed made for the purpose of disposing of the properties. An outlay may oe made for more that one purpose: Fradet et al., supra, at page 324-25 (D.T.C. 6413-14) per Hugessen, J.
Me. Du Pont referred to a number of cases which considered whether particular expenses were incurred for the purpose of earning income. He concluded from these cases that absent a specific statutory provision to the contrary, costs which are part of the process of disposing of a capital asset are deductible from the proceeds of disposition of the asset in computing the gain on the disposition for the year of the dispositions, provided the costs are not otherwise deductible in computing income for the year.
In counsel’s view the foreign exchange cost was no different in principle from the prepayment penalty paid to the Bank which the Minister allowed to be deducted in computing the capital gain. The phrase "for the purpose of making the disposition" has been given a broad meaning by the courts, counsel said. He referred to the following cases: Campbellton Enterprises Ltd. v. M.N.R., [1990] 2 C.T.C. 2413, 90 D.T.C. 1869 (T.C.C.), Pollard v. M.N.R., [1988] 1 C.T.C. 2138, 88 D.T.C. 1110 (T.C.C.), Collin v. M.N.R., [1990] 2 C.T.C. 92, 90 D.T.C. 6369 (F.C.T.D.), Samson Estate v. M.N.R., [1990] 1 C.T.C. 2223, 90 D.T.C. 1144 (T.C.C.), and Fradet, supra. In the last case the taxpayers sold their shares in a corporation for $7,800,000. However pursuant to the agreement of purchase or sale, on closing they were to pay to the corporation $1,402,225, the face value of a debt owed to the corporation by another company. The market value of the debt was $600,000. The taxpayers deducted the difference between the face and market values in determining their proceeds of dispositions of the shares. Pratte and MacGuigan, JJ. of the F.C.A. held the agreement, properly construed, provided the taxpayers would use part of the sale price to pay the debt owing to the corporation and they were correct in reducing the proceeds, relying on subparagraph 54(h)(i). Hugessen, J., found the difference between the market and face values of the debt was an expense or outlay incurred to dispose of the shares within the meaning of subparagraph 40(1 )(a)(i).
Counsel also submitted that if the Minister's assessment is upheld, the appellant would be taxed on an amount that is $3,485,996 more than its economic gain. Section 12 of the Interpretation Act, he said, requires that subparagraph 40(1)(a)(i):
. . . be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.
He suggested that to interpret subparagraph 40(1 )(a)(i) in a manner that would result in taking into account as a gain an amount that is more than the appellant’s actual economic gain contravenes section 12 of the Interpretation Act. He relied on the following comments of Lord Wilberforce in Aberdeen Construction Group Ltd. v. C.I.R., [1978] 2 W.L.R. 648, [1978] 52 T.C. 281 (H.L.), at page 651 (W.L.R.):
The capital gains tax is of comparatively recent origin. The legislation imposing it, mainly the Finance Act 1965, is necessarily complicated, and the detailed provisions, as they affect this or any other case, must of course be looked at with care. But a guiding principle must underlie any interpretation of the Act, namely, that its purpose is to tax capital gains and to make allowance for capital losses, each of which ought to be arrived at upon normal business principles. No doubt anomalies may occur, but in straight-forward situations, such as this, the courts should hesitate before accepting results which are paradoxical and contrary to business sense. To paraphrase a famous cliche, the capital gains tax is a tax upon gains: it is not a tax upon arithmetical differences.
In the view of counsel for the appellant, subsection 39(2) of the Act is not relevant to the calculation of a capital gain and the rule in subsection 39(2), if it applies, does not preclude the application of subsection 40(1) on the facts of this appeal. Nothing in subsection 39(2) expressly overrides the rules laid down in section 40. Subsection 39(2), he stated, does not determine proceeds of dispositions or costs of property. What subsection 39(2) does, he added, is to deem for certain purposes and in certain circumstances the existence of capital gains or losses resulting from a fluctuation of currency of a country other than Canada.
In support of the Minister’s claim that the foreign exchange cost was not laid out or incurred for the purpose of selling the properties, Me. Roy, respondent's counsel, directed me to Pattison H.M. Inspection of Taxes v. Marine Midland Ltd., [1984] A.C. 362, 57 T.C. 219, a decision of the House of Lords. In that case Lord Templeman found that the taxpayer, a resident of the United Kingdom who carried on the business of a commercial banker, did not make any capital or other loss when it repaid with $15,000,000 in U.S. funds a loan of $15,000,000 in U.S. funds, although the U.S. dollar appreciated over sterling during the time the loan was unpaid, from £6,000,000 to nearly £8,500,000. Lord Templeman explained at page 372 (A.C.):
A profit or loss may be earned or suffered if a borrower changes the currency he borrows but that profit or loss arises from the exchange transaction and not from the borrowing.
Me. Roy submitted that by virtue of paragraph 2(3)(c) of the Act that Avis is liable to pay tax in Canada: Avis is a non-resident who disposed of taxable Canadian property. Paragraph 115(1 )(b) defines taxable Canadian property which does not include foreign currency. The provisions of subsection 39(2) are not available to non-residents of Canada.
Increase to cost base
The appellant’s counsel also submitted that in the event I hold the foreign exchange cost was not incurred for the purposes of making the dispositions the foreign exchange cost is to be included in the appellant’s adjusted cost base of each of the properties immediately prior to their dispositions. He stated the foreign exchange loss was a cost of holding and maintaining the property and is to be added to the property's original acquisition cost. He relied on the reasons of Stone, J., of the Federal Court of Appeal in Bodrug Estate v. Canada, [1991] 2 C.T.C. 347, 91 D.T.C. 5621, as authority for the proposition that the terms and scheme of the Act relating to the computation of capital gains do not limit the "cost" of a capital asset to the price of acquiring such asset. He adds that there is no support in the Act for excluding from the computation of capital gains costs incurred by a taxpayer in order to put itself in a position to acquire and dispose of an asset.
Analysis
The words "for the purpose of” are found not only in subparagraph 40(1)(a)(i) but in other provisions of the Act as well. The words are used, for example, in paragraph 18(1)(a) and counsel for the appellant has cited several cases where various expenses or outlays were deductible in computing income from a business (R. v. Lavigueur, [1973] C.T.C. 773, 73 D.T.C. 5538 (F.C.T.D); R. v. FH. Jones Tobacco Sales Co., [1973] C.T.C. 784, 73 D.T.C. 5577 (F.C.T.D.); Mosport Park Ltd. v. M.N.R., [1977] C.T.C. 2397, 77 D.T.C. 264 (T.R.B.); Frappier v. M.N.R., [1976] C.T.C. 85, 76 D.T.C. 6066 (T.D.); Eli Lilly, supra; and D.W.S. Corp., Supra.) However, one ought not to lose sight that what may be a valid proposition to determine whether an expense or outlay is deductible in computing income may have no influence in computing a capital gain. In Bodrug Estate, supra, Stone, J., stated, at page 352 (D.T.C. 5625):
In my view, the principles which apply to the determination of ordinary income for income tax purposes are not in play. We are concerned with the computation of a capital gain within a particular statutory regime.
and he rejected the argument of the Bodrug Estate that tax consequences of a damage award are dependent upon an analysis of the underlying liability. The comments of Thorson, P., in Imperial Oil Ltd. supra, at pages 370-74 (D.T.C. 1098-100), apply to disbursements or expenses laid out or incurred in the course of various operations and transactions carried on by a business and not to one particular transaction of a capital nature. See also Stirling, supra.
In 1983, Avis borrowed German marks from the Bank, changed the marks to Canadian dollars and then purchased the properties. In 1986, Avis entered into at least three transactions: it sold the properties, it converted at least a portion of the Canadian funds it received from the sales of the properties to German marks and it repaid the bank with the marks. The number of Canadian dollars Avis required to repay the bank with marks was greater than the number of dollars it received in 1983 when it converted the marks it borrowed to dollars. l accept Lord Templeman's description of the foreign exchange loss, that it arises from the exchange transaction and not from the borrowing.
If I accept the appellant's basic premise in the appeal, that the loan was repaid for the purpose of disposing of the properties—and I infer from the evidence that the loan would not nave been repaid had the sale not taken place—then its appeal must fall since no outlay or expense was incurred by him in the transaction of repaying the loan. In other words a transaction consisting of marks being repaid with marks took place and there was no foreign exchange loss flowing from that transaction.
Any outlay or expense was incurred as a result of another transaction, marks being exchanged for dollars in 1983 and then, in 1986, more dollars being reconverted into the number of marks borrowed in 1986 (ignoring the modest portion of the loan repaid over the three years). Therefore the question becomes: was the foreign exchange loss itself, independent of the repayment of the loan, made or incurred for the purpose of making the dispositions? Notwithstanding Me. Du Font's submission that the Federal Court of Appeal in Neonex Int'l Ltd. v. The Queen, supra, (see also Riviera Hotel Co. v. M.N.R., [1972] C.T.C. 157, 72 D.T.C. 157 (F.C.T.D.)) took a restrictive approach which is inconsistent with more recent court decisions, this decision is still binding on me. The Court of Appeal held that a payment made by Neonex to return existing debt obligations in order to make a new loan could not be considered to have been incurred "in the course of borrowing of money used by the taxpayer for the purpose of earning income from a business .. . .” (subparagraph 20(1)(e)(ii)).
In his reasons for judgment in Neonex, Urie, J., stated, on page 495 (D.T.C. 6345):
In my view, the payment . . . while in a sense necessary for the fulfillment of a condition imposed in respect of a second borrowing, is more properly characterized as a bonus paid to induce the first lender. . . to forego its right to hold its first mortgage to maturity by permitting the mortgagor, . . . , to prepay it.
Appellant's counsel argued that a major difference in the facts at bar and those in Neonex, was that in the latter case the taxpayer had no obligation to repay the first loan in order to enter into the second but chose to do so as a matter of preference. However, he said, Avis had no choice but to repay the loans in order to sell the properties. I cannot agree with counsel that his client had no choice but to repay the loan. Firstly, it was the appellant's choice to sell the properties in the same way Neonex decided to make a second loan. There is no evidence anybody held a gun to the heads of Vogel and Fischer to force them to cause Avis to sell. Once Avis decided to sell it entered into negotiations with its Bank and freely accepted the bank’s conditions, as did Neonex with its first lender.
The words "for the purpose of" are susceptible of different meanings depending on whether the purpose is immediate or ultimate, direct or indirect or initial or final. Subparagraph 40(1)(a)(i) provides a rule for determining what outlays and expenses may be deducted in calculating a taxpayer's capital gain. The words "for the purpose of" in subparagraph 40(1)(a)(i) are directed to the action of making a particular disposition. The outlays and expenses in that provision are directed to a particular disposition and no other.
In the facts at bar Avis entered into two transactions prior to selling the properties; it repaid the loan and exchanged currencies. While the repayment of the loan may have been transacted in order to dispose of the properties, the exchange of currencies was transacted for the purpose of repaying the loan in German marks. In other words, it may be said that the transaction of converting the currency was made for the purpose of repaying the loan in a certain foreign currency and the repayment of the loan was made to dispose of the properties.
The words “for the purpose of" in subparagraph 40(1)(a)(i) mean "for the immediate or initial purpose of” and not the eventual or final goal which the taxpayer may have in mind. To give the words the latter meaning would permit the most indirect or most distantly related outlay or expense to reduce the amount of a gain. This could not have been Parliament's intent. We are not dealing in subparagraph 40(1)(a)(i) with the computation of income from a business, which is of a ongoing nature, but, rather, expenses or outlays made or incurred to dispose solely of capital properties. The statutory provision under consideration sets out a rule to determine a taxpayer's capital gain from the disposition of property and only expenses or outlays to be applied in reducing the gain are those incurred or made directly for the purposes of making the disposition. Subparagraph 40(1)(a)(i) does not contemplate expenses or outlays which may have merely facilitated the making of the disposition or which were entered into on the occasion of the disposition.
Foreign exchange losses are specifically dealt with in subsection 39(2) of the Act, as submitted by respondent's counsel. What the appellant appears to be trying to do is incorporate subsection 39(2) into subsection 115(1) and turn a deemed disposition of the type contemplated by subsection 39(2) into a disposition of taxable Canadian property within subsection 115(1). This attempt to rationalize the appellant’s position cannot succeed.
I also do not find merit in counsel for the appellant’s alternate argument that the foreign exchange loss is to be added to the cost base of each of the properties prior to their dispositions. I cannot find any support for Me Du Font's submission in the reasons of Stone, J., in Bodrug Estate, supra. Indeed, Stone J., added to his comments at page 352 (D.T.C.) 5625, cited above, that:
As I see it, the appellant can succeed only if it is able to bring itself within the relevant language [of the statute].
Subsection 53(1) of the Act sets out the amounts that may be added to the cost base of a taxpayer's property. I am unable to find in subsection 53(1) or elsewhere in the Act any amount of foreign exchange loss in the circumstances at bar that may reduce the capital gain.
The appeal is dismissed with costs.
Appeal dismissed.