T-1401-78
Tahsis Company Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Vancouver, May 17 and
August 23, 1979.
Income tax — Income calculation — Capital gain and
capital loss — Foreign currency transactions — Amount bor
rowed in U.S. dollars in 1965 to be repaid biannually in
instalments in U.S. dollars ending December 1975 — Fluctua
tions in exchange rates resulting in capital gains and capital
losses in various years — Whether currency differences be
tween 1965 and 1971 are to be disregarded according to s.
39(2) of the Income Tax Act or whether the differences in
value of the currencies between 1965, 1971 and the dates of
repayment are to be taken into account in determining whether
there was a true loss — Income Tax Act, S.C. 1970-71-72, c.
63, s. 39(2).
INCOME tax appeal.
COUNSEL:
I. Pitfield for plaintiff.
P. Barnard for defendant.
SOLICITORS:
Thorsteinsson, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
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 Depart
ment of National Revenue 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 interpreta
tion of subsection 39(2) of the "new" Income Tax
Act':
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 Canadi-
an 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 this 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.
' R.S.C. 1952,c. 148, as amended by S.C. 1970-71-72, c. 63.
On January 22, 1965 the plaintiff borrowed
$21,400,000 (U.S.). One of the terms of repay
ment called for $1,400,000 (U.S.) to be paid bian
nually, commencing in 1970, ending on December
15, 1975. The total annual repayment for the years
1970 through 1975 was, therefore, $2,800,000
(U.S.).
At the time this particular loan was made the
Canadian dollar was at a discount: $2,800,000 in
U.S. funds converted into $3,022,189 Canadian
dollars.
At December 31, 1971 the U.S. and Canadian
dollar were at par. $2,800,000 U.S. dollars
brought $2,800,000 Canadian dollars, and vice
versa.
But in the years in dispute there were fluctua
tions in the exchange rates. To repay $2,800,000
(U.S.) in the years under appeal, the following
amounts of Canadian dollars were laid out by the
plaintiff:
1972 $2,763,687.50
1973 $2,801,120.00
1974 $2,735,180.00
1975 $2,854,320.00
As can be seen, the Canadian dollar was more
valuable in 1972 and 1974, compared to December
31, 1971, than its U.S. 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
U.S. dollar, than it was at December 31, 1971, but
more valuable than it was, relative to the U.S.
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 Decem-
ber 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 (paragraph 10 of the statement of
agreed facts):
(b) 1973
Canadian funds required,
1973, to repay $2,800,000.
(U.S.) $2,801,120.00
Canadian funds required,
December 31, 1971, to repay
$2,800,000. (U.S.) $2,800,000.00
Loss $ 1,120.00
The defendant, on the other hand, made the
calculation this way (paragraph 11 of the state
ment of agreed facts):
(i) 1973
Reduction in loan $3,022,189.00
Required to obtain
reduction at December
31, 1971 $2,800,000.00
Unrealized "Gain"
as of December 31, 1971 $222,189.00
Reduction in loan $3,022,189.00
Required to obtain
reduction, 1973 $2,801,120.00
Gain realized on
December 15, 1973 $221,069.00
Reduction of gain
arising from post
1971 fluctuations $ 1,120.00
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 subsec
tion 39(2).
I set out, once more, the opening words:
Notwithstanding subsection (1), where, by virtue of any fluc
tuation after 1971 in the value of the currency ... a taxpayer
has made a gain or sustained a loss in the taxation year ...:
[My underlining.]
The fluctuations, or differences in value, to be
taken into account are, in my view, only those
occurring after 1971. Fluctuations before Decem-
ber 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 sub
section, 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.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.