[2016] 4 F.C.R. D-2
Income Tax
Income Calculation
Capital Gains and Losses
Appeal from Tax Court of Canada (T.C.C.) decision (2014 TCC 324) allowing respondent’s appeal from reassessments in which Minister of National Revenue determining that respondent having foreign exchange gains as result of conversions of certain United States dollar (US$) denominated debentures (convertible debentures) into common shares (common shares) occurring in each of respondent’s 2005, 2006 taxation years — Reassessments issued pursuant to Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 in force when respondent assessed — T.C.C. concluding that no foreign exchange gains realized by respondent on conversions occurring during years at issue — Conclusion premised on T.C.C.’s interpretation of terms, conditions stipulated in February 2005 indenture at issue applying to convertible debentures — T.C.C. finding that holders of convertible debentures exercising rights to acquire common shares on conversions essentially completing subscriptions for common shares that they made when subscribing for, acquiring convertible debentures — Respondent, public corporation, subject to Ontario Business Corporations Act (OBCA), R.S.O. 1990, c. B.16, listing for trading common shares on New York Stock Exchange, Toronto Stock Exchange from 2002 to 2006 — Respondent authorized by resolutions to enter into indenture with trust corporation as trustee on behalf of each holder acquiring convertible debenture — Under principal terms of indenture, respondent promising to pay holder US$1000 at maturity date — Also authorized to issue common shares upon conversion, redemption or maturity of convertible debentures — Both in 2005, 2006, holders of convertible debentures giving conversion, redemption notices, receiving common shares upon surrender of convertible debentures — Conversions occurring on different dates whereby foreign exchange rates fluctuating — In 2005 income tax return, respondent not reporting any capital gains regarding conversions occurring in 2005 taxation year while in 2006 income tax return, reporting capital gain resulting from conversions, redemptions in 2006 — Minister reassessing respondent for 2005, 2006 taxation years on basis that pursuant to Act, s. 39(2), respondent deemed to have realized capital gains as result of 2005 conversions, 2006 conversions, redemptions — T.C.C. allowing respondent’s appeal regarding deemed capital gains assessed respecting 2005, 2006 conversions but upholding assessment of deemed capital gains regarding redemptions — Whether T.C.C. committing reviewable error in interpretation of indenture; whether committing reviewable error in concluding that amount paid by respondent to extinguish indebtedness evidenced by convertible debentures arising (“arose”) within meaning of Act, s. 261(2)(b) at time when indebtedness coming into existence, not at time when indebtedness extinguished; whether T.C.C. committing reviewable error in concluding that amount paid by respondent to extinguish indebtedness evidenced by each convertible debenture subject to conversion US$1000, that respondent not making gain for purposes of Act, s. 39(2) resulting from 2005, 2006 conversions — T.C.C. simultaneously adopting two different, mutually irreconcilable characterizations of indenture, legal rights, obligations created thereunder — Inconsistency constituting legal error requiring Court’s intervention — While correctly characterizing convertible debentures, indenture under which issued, T.C.C. concluding that subscription price tendered by holders on issuance date having to be characterized not as subscription for respondent’s indebtedness but as subscription price of common shares that might, at some future time, be issued if and to extent such holders deciding to convert convertible debentures pursuant to conversion provisions of indenture — T.C.C. finding that indenture constituting subscription for shares for holders whose convertible debentures converted into common shares while constituting subscription for debt security in respect of which indebtedness repayable in shares for persons whose convertible debentures redeemed — Thus, T.C.C. characterizing indenture, rights, obligations thereunder on ex post facto basis thereby making inconsistent interpretations — Characterization of rights, obligations of holders, respondent under indenture having to be determined at time indenture entered into, becoming operative — Impossible to know whether at time indenture entered into convertible debentures would be redeemed, converted or repaid on maturity date — Ex post facto characterization constituting legal error — Based on interpretation of relevant indenture provisions, holders issuing conversion notices having indebtedness of respondent thereto evidenced by convertible debentures repaid by issuance of common shares in accordance with terms of indenture — Having to determine whether in 2005, 2006 respondent making foreign currency gain for purposes of Act, s. 39(2) by virtue of foreign currency fluctuations resulting from conversions of convertible debentures occurring then –– Amount respondent paying upon repayment of indebtedness constituting repayment amount — Each repayment amount arising on date of such repayment — Terms, conditions of indenture providing answer as to how quantum of repayment amount intended to be determined — When respondent’s directors passing value of consideration for share issuance resolution, complying with OBCA, s. 23(4) since adopting, at least in part, language of provision — Based on conversion provisions of indenture, each holder giving up such holder’s right to receive US$1000 per convertible debenture in cash at maturity with all of holder’s other rights under indenture when respondent’s indebtedness to such holder repaid upon each conversion — Thus, relinquishment of such rights constituting consideration given by each holder to respondent for issuance of set number of common shares per convertible debenture plus US$ cash payment in lieu of fractional common share — Repayment amount regarding each convertible debenture being amount consisting of US$ amount determined when sale price of common share, on each conversion date, multiplied by 71.429 (conversion rate, i.e. amount of common shares per convertible debenture) — Resulting US$ amount would then be converted to C$ in accordance with Act, s. 261(2) on each conversion date — Determination of whether respondent making gain for purposes of Act, s. 39(2) would be made by comparing C$ amount with C$ amount received by respondent on issuance date — If repayment amount in respect of any particular conversion less than related issuance amount, respondent having gain for purposes of Act, s. 39(2) in respect of conversion — Appeal allowed.
Canada v. Agnico-Eagle Mines Limited (A-532-14, 2016 FCA 130, Ryer J.A., judgment dated April 26, 2016, 41 pp.)