Date:
20021104
Docket:
2002-2104-IT-I
BETWEEN:
JALAL
REZVANKHAH,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Bowman,
A.C.J.
[1]
At the conclusion of argument I informed Mr. Chalabiani, who
appeared as agent on behalf of the appellant that I would be
dismissing the appeal subject to a minor concession that the
respondent was prepared to make but that since the issue was a
somewhat technical one and the appellant was not at the time of
trial in Canada I would give brief written reasons.
[2]
The issue is the correct method of calculation of capital gains
or losses realized on the disposition of securities which were
purchased and sold on margin using U.S. currency. The fact the
purchases were on margin was stressed by Mr. Chalabiani as a
basis for distinguishing Gaynor v. M.N.R.,
87 DTC 279 (T.C.C.) aff'd 88 DTC 6394
(F.C.T.D.) aff'd 91 DTC 5288 (F.C.A.).
[3]
In 1998 the appellant disposed of a substantial number of
corporate shares that had been purchased in 1996, 1997 and 1998.
In calculating his capital gains or losses he determined what the
gain or loss was in U.S. dollars and then translated that amount
into Canadian dollars.
[4]
The Minister in computing the appellant's capital gain or
loss went through a two step calculation. The adjusted cost base
was determined by applying the average exchange rate in the year
of acquisition to arrive at the Canadian dollar equivalent of the
U.S. dollar cost in the year of acquisition, and the proceeds of
disposition were computed by applying the average exchange rate
in the year of disposition to arrive at the Canadian dollar
equivalent of the U.S. dollar proceeds.
[5]
I believe this approach is the correct one. Transactions that
take place in foreign currency that are relevant to the
computation of capital gains or income must for Canadian income
tax purposes be expressed in Canadian dollars. This means
translating the foreign currency cost and the foreign currency
proceeds into their Canadian dollar equivalent at the time of
purchase and the time of sale. This view is confirmed by the
Gaynor decision in the Federal Court of Appeal where the
court stated at page 5289:
The appellant's contention is that, in order to calculate the
amount of her capital gains, the respondent should have first
determined the profit in American currency that she had realized
on the sale of her securities and, after that, should have
converted the amount of that profit into Canadian currency at the
rate of exchange prevailing at the time she had sold the
securities.
This contention was, in our view, correctly rejected by the Trial
judge. Paragraph 40(1)(a) of the Income Tax Act
makes it clear that the capital gain realized by the appellant in
each case was the "amount" by which the proceeds of the
disposition of her securities exceeded the adjusted cost base of
those securities. When that provision speaks of the
"amount" of the capital gain, it obviously refers to an
amount expressed in Canadian currency. As that amount is the
result of a comparison between two other amounts, namely, the
amount representing the cost of the securities and the amount
representing the value of the proceeds of disposition, it
necessarily follows that both the cost of the securities and the
value of the proceeds of disposition must be valued in Canadian
currency which is the only monetary standard of value known to
Canadian law. Once this is realized, it becomes clear that the
cost of the securities to the appellant must be expressed in
Canadian currency at the exchange rate prevailing at the time of
their acquisition while the valuation of the proceeds of
disposition of the same securities must be made in Canadian
currency at the rate of exchange prevailing at the time of the
disposition.
That method of assessing the amount of capital gains may, as
counsel for the appellant said, produce undesirable results in
certain cases. It is nevertheless the only method that is in
harmony with the provisions of the Act.
[6]
I am aware that a taxpayer may believe, as a matter of common
sense, that if he or she buys something for $1,000 U.S. and
subsequently sells it for $1,000 U.S. no gain or loss has been
realized and that the fact that the Canadian dollar has fallen as
against the U.S. dollar should not result in a gain for the
purposes of Canadian income tax. Nonetheless that in my view is
the effect of Gaynor. That conclusion is not in my view
affected by the House of Lords judgment in Pattison (Inspector
of Taxes) v. Marine Midland Ltd. [1984] 1 A.C. 362,
referred to by Rip J. in Avis Immobilien G.M.B.H. v. Her
Majesty The Queen, [1994] 1 C.T.C. 2204.
[7]
Three further observations should be made.
[8]
The first has to do with the average annual exchange rate. This
rate is published by the CCRA and is used for all U.S. currency
transactions in the particular year. It is a sensible
administrative practice although the appropriate rate should
technically be that which prevails at the moment the transaction
occurs. If the use of that rate works out favourably for a
taxpayer there is no reason why it cannot be used if the taxpayer
insists. The use of the average annual exchange rate is simply an
administrative convenience, not an inflexible rule.
[9]
The second point has to do with the fact that the appellant was
buying on margin. The contention, if I understand it correctly,
is that the portion of the proceeds representing the amount owing
in the margin account simply went to the broker and were never
converted to Canadian funds. With respect I think this confuses
two separate concepts. An actual conversion of foreign currency
to Canadian dollars may give rise to a gain or loss. It is
questionable in my view whether subsection 39(2) of the
Income Tax Act is necessary for this result to obtain.
That is not however what we are talking about here. This case
involves the requirement that transactions in foreign currency be
translated into the Canadian dollar equivalent to determine the
result for Canadian tax purposes. No actual conversion is
necessary and the gain or loss is the same whether the shares are
purchased on margin or entirely out of the taxpayer's own
funds.
[10] The third
point is that counsel for the Crown stated that the respondent
was prepared to concede that the appellant was entitled to the
$200 exemption contemplated by subsection 39(2) of the
Income Tax Act. I informed him that I had some doubt
whether subsection 39(2) had any application. However I make
no final determination on the point. Far be it from me to deprive
a taxpayer of the benefit of a concession that the Crown is
prepared to make.
[11] The appeal
will be allowed and the assessment referred back to the Minister
of National Revenue solely for the purpose of allowing the
appellant the $200 capital gains exemption provided by
subsection 39(2) of the Income Tax Act.
Signed at
Ottawa, Canada, this 4th day of November 2002.
A.C.J.COURT
FILE
NO.:
2002-2104(IT)I
STYLE OF
CAUSE:
Between Jalal Rezvankhah and
Her Majesty The Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
October 24, 2002
REASONS FOR
JUDGMENT BY: The Honourable D.G.H.
Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
November 4, 2002
APPEARANCES:
Agent for
the
Appellant:
Najafgholi Chalabiani
Counsel
for the
Respondent:
Michael Taylor, Esq.
COUNSEL OF
RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-2104(IT)I
BETWEEN:
JALAL
REZVANKHAH,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on October 24, 2002 at Vancouver, British Columbia,
by
The
Honourable D.G.H. Bowman
Associate
Chief Judge
Appearances
Agent for
the
Appellant:
Najafgholi Chalabiani
Counsel
for the
Respondent:
Michael Taylor, Esq.
JUDGMENT
It is ordered that the appeal from the assessment made under the
Income Tax Act for the 1998 taxation year be allowed and
the assessment be referred back to the Minister of National
Revenue for reconsideration and reassessment solely for the purpose of allowing the
appellant the $200 capital gains exemption provided by
subsection 39(2) of the Income Tax Act.
Signed at
Ottawa, Canada, this 4th day of November 2002.
A.C.J.
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