Digests

Imperial Oil Ltd. v. Canada

A-142-04

2004 FCA 361, Sharlow J.A.

26/10/04

31 pp.

Appeal, cross-appeal from Tax Court's answers to questions on reference ([2004] 2 C.T.C. 3030)--On October 16, 1989, Imperial Oil issuing 30-year debentures with face amount of US$300,000,000, using proceeds in business--Costs incurred by Imperial relating to transaction only deductible as permitted by Income Tax Act, s. 20(1)--Debentures issued at discount of 1.99% and bearing interest at 8.75% per year--Redeemable at option of Imperial on October 15 of each year from 1999 to end of term, subject to payment of premium upon any repayments in 1999 to 2008 inclusive--On October 15, 1999, Imperial redeeming some debentures-- Conversion rate of U.S. dollars to Canadian dollars higher when debentures redeemed in 1999 than when issued in 1989 --Difference (total redemption cost) totalling C$27,831,712 --In 1999 tax return, Imperial claiming deduction under Act, 20(1)(f)(i) for original issue discount, reporting deemed capital loss under s. 39(2)--But deemed capital loss not deductible since Imperial having no capital gains in 1999--Imperial appealing tax assessment to Tax Court of Canada--Three questions regarding Imperial's deductions referred to Tax Court--Whether foreign currency loss incurred upon repayment of debt denominated in foreign currency deductible under Income Tax Act, s. 20(1)(f)--S. 20(1)(f) permitting deduction of financing costs incurred for purpose of earning income from business or property if threshold test and two conditions met--If only one condition met, deduction calculated according to statutory formula permitted under s. 20(1)(f)(ii)--Threshold test in s. 20(1)(f) met if amount paid in year to discharge principal amount of debt, obligation issued by taxpayer after June 18, 1971, on which interest stipulated payable--Under s. 20(1)(f), percentage of deduction on loss in 1999 limited to 75%-- Decision by Federal Court of Appeal in Gaynor v. Canada, [1991] 1 C.T.C. 470 applicable and binding notwithstanding that dealing with computation of capital gain, not business income--Establishing that if foreign currency transaction is element of any computation required by statutory formula, amount of foreign currency must be converted to Canadian dollars at conversion rate prevailing at time of transaction-- Applying s. 20(1)(f) to debt denominated in foreign currency, each element of computation of s. 20(1)(f) deduction must be converted to Canadian dollars at conversion rate in effect on relevant date--Imperial meeting threshold test--S. 20(1)(f)(i), (ii) including statutory formula for determining amount of permissible deduction--"Principal amount" of debt obliga-tion, as defined by s. 248(1) (maximum amount payable on account of debentures immediately before they were redeemed on Oct. 15, 1999) and "amount for which debt obligation issued" common elements in two formulas--According to Gaynor, date of redemption, date debentures issued relevant dates to calculate formulas--Therefore, principal amount of debentures immediately before redemption totalling C$129,119,689--Amount for which debentures issued C$101,287,977 (difference between principal amount and original issue discount)--Applying Gaynor to determination of "principal amount" of debentures on date issued and on date redeemed resulting in increase in "principal amount" of debentures from C$102,517,158 to C$129,119,689--Increase in "principal amount" of debt during term of debentures only occurring if increase mandated by contractual term governing debt--Implicit in terms of repayment of foreign currency loan "principal amount" of debt fluctuating with Canadian dollar conversion rate--Thus, fluctuation in "principal amount" of debt mandated by contractual terms--First condition under s. 20(1)(f)(i) obligation issued for amount not less than 97% of principal amount--For purposes of first condition, "principal amount" to be determined using date debentures redeemed-- Imperial not meeting first condition, therefore only amount calculated under s. 20(1)(f)(ii) deductible--According to statutory formula, Imperial Oil entitled to deduct C$20,873,784 (75% of total redemption cost)--Difference between total redemption cost ($27,831,712) and amount of s. 20(1)(f)(ii) deduction ($20,873,784) not deemed capital loss under s. 39(2)--Total redemption cost incurred by Imperial loss on capital account deductible only according to certain formula--Amount of deduction under s. 20(1)(f)(ii) designed to be equivalent to tax relief for capital loss (75% of actual loss sustained on disposition of capital property)--Wording in s. 39(2) ensuring amounts relating to foreign exchange losses not treated as capital gain, capital loss if part of computation of income or loss from source--Allowing further deduction under s. 39(2) regarding non-deductible 25% of total redemption cost tantamount to allowing more tax relief for capital loss than Parliament intended--Appeal allowed-- Income Tax Act, R.S.C., 1985 (5th Supp.) c. 1, ss. 20(1)(f) (as am. by S.C. 2001, c. 17, ss. 13, 203), 39(2), 248(1) "principal amount".