Canadian Imperial Bank of Commerce v. The Queen

Canadian Imperial Bank of Commerce v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-11-02
Neutral citation
2021 TCC 71
File numbers
2020-175(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Docket: 2020-175(IT)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard by videoconference
on July 5, 2021 at Ottawa, Ontario
Before: The Honourable Justice John R. Owen
Participants:
Counsel for the Appellant:
Monica Biringer
Al Meghji
Chris Sheridan
Counsel for the Respondent:
Natalie Goulard
Christopher M. Bartlett
ORDER
UPON the Appellant and the Respondent bringing a motion for determination, before hearing, of the following question (the “Question”) pursuant to section 58 of the Tax Court of Canada Rules (General Procedure) (the “Rules”):
“Whether paragraph 40(3.6)(a) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, applies to deem CIBC’s loss from the disposition of Class B Shares of CIBC Delaware Holdings Inc. to be nil.”
AND UPON having read the materials filed and having heard the submissions of counsel;
IN ACCORDANCE with the attached Reasons for Order, it is ordered that:
1. the Question is answered in the affirmative; and
2. each party shall bear its own costs of this motion under section 58 of the Rules.
Signed at Ottawa, Canada, this 2nd day November 2021.
“J.R. Owen”
Owen J.
Citation: 2021 TCC 71
Date: 20211102
Docket: 2020-175(IT)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Owen J.
I. Background
[1] By letter dated May 11, 2021, the parties to this appeal made a joint application to the Court for the determination of the following question (the “Question”) under section 58 of the Tax Court of Canada Rules (General Procedure) (the “Rules”):
Whether paragraph 40(3.6)(a) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, applies to deem CIBC’s loss from the disposition of Class B Shares of CIBC Delaware Holdings Inc. to be nil.
[2] By order dated May 14, 2021 (the “Order”), a Tax Court judge ordered that the Question be determined before the hearing of the appeal pursuant to section 58 of the Rules (the “Rule 58 Hearing”). The Order further provided for the submission of an agreed statement of facts and written argument in advance of the Rule 58 Hearing.
II. The Facts
[3] Paragraphs 1 through 15 [1] of the Agreed Statement of Facts for the Rule 58 Hearing state:
1. The Appellant (“CIBC”) is a corporation governed by the Bank Act and is a taxable Canadian corporation and a public corporation for purposes of the Income Tax Act (the “Act”).
2. CIBC uses the Canadian dollar to determine its “Canadian tax results” (as defined in subsection 261(1) of the Act).
3. CIBC had a taxation year beginning on November 1, 2006 and ending on October 31, 2007 (the “2007 Taxation Year”).
4. CIBC Delaware Holdings Inc. (“DHI”) is a corporation governed by the laws of Delaware. At all relevant times DHI was a wholly-owned direct or indirect subsidiary of CIBC.
5. At all relevant times, DHI was a non-resident of Canada for purposes of the Act.
6. On November 8, 2006, CIBC subscribed for 1,000 shares of Class B Common Stock of DHI (the “DHI Class B Shares”) for an aggregate subscription price of US$1 billion.
7. The spot exchange rate on November 8, 2006 was US$1 = C$1.1300.
8. The Canadian dollar equivalent of the US$1 billion subscription price of the DHI Class B Shares was C$1,130,000,000.
9. CIBC’s adjusted cost base for the DHI Class B Shares was C$1,130,000,000.
10. On September 25, 2007, DHI redeemed the DHI Class B Shares and paid CIBC US$1 billion.
11. The spot exchange rate on September 25, 2007 was US$1 = C$1.0036.
12. The Canadian dollar equivalent of the US$1 billion redemption proceeds for the DHI Class B Shares was C$1,003,600,000.
13. The Appellant realized a foreign exchange loss of C$126,400,000 on the redemption of the DHI Class B Shares as a result of the US dollar weakening relative to the Canadian dollar.
14. Immediately after the redemption of the DHI Class B Shares, CIBC owned, directly or indirectly, the remaining shares of DHI.
15. In its tax return for the 2007 Taxation Year, CIBC reported an allowable capital loss of C$63,200,000 (the “Loss”).
[Boldface, footnotes and headings omitted.]
[4] No evidence was presented at the Rule 58 Hearing and therefore the determination of the Question is based solely on the law, and the facts contained in the Agreed Statement of Facts. I will refer to the facts described in the Agreed Statement of Facts as the “Circumstances”.
III. The Statutory Provisions
[5] The positions of the parties primarily address the interpretation and interaction of four statutory provisions in the Income Tax Act (the “Act”) [2] as they existed during the Appellant’s 2007 taxation year: subsections 39(1), 39(2), 40(1) and 40(3.6). [3] The version of those provisions in existence at that time is set out in Appendix A.
IV. The Positions of the Parties
[6] Both parties rely on the decision of the Federal Court of Appeal in R. v. Bank of Montreal. [4] However, each party has a different interpretation of paragraph 41 of BMO (the “Paragraph”), which states:
Subsection 39(2) of the Act, in 2010, did not address how a gain or loss was to be calculated, but rather only addressed the source of that gain or loss. The gain or loss arising as a result of a disposition of a particular property was (and still is) determined under subsection 40(1) of the Act. There was no conflict between subsections 40(1) and 39(2) of the Act with respect to the computation of the amount of a gain. Subsection 39(2) of the Act was premised on the assumption that the gain or loss had already been determined. The question for subsection 39(2) of the Act was: why did the taxpayer realize the particular gain or sustain the particular loss? If it was because of a change in the value of Canadian currency relative to a foreign currency, then the condition for the application of the subsection was satisfied.
A. The Position of the Appellant
[7] The Appellant relies on BMO for the position that the loss realized by the Appellant in the Circumstances is deemed by subsection 39(2) to be a capital loss of the Appellant from a disposition of currency of a country other than Canada [5] and therefore is excluded from the application of subsection 40(3.6), which applies only to a loss from the disposition of a share.
[8] The Appellant submits, however, that the statement of the Federal Court of Appeal in the Paragraph to the effect that for the purposes of subsection 39(2) a gain or loss on a disposition of property is and has always been determined under subsection 40(1) (the “Statement”) is obiter dictum and, if not obiter dictum, with respect is wrong.
[9] Citing paragraph 29 of Bernier v. R., [6] the Appellant submits that subsection 39(2) is a self-contained rule that is an exception to the rules normally applicable to the calculation of capital gains and capital losses. [7] Consequently, the loss identified in the opening words of the subsection should be determined using the general approach adopted by the Federal Court of Canada - Appeal Division in MacMillan Bloedel Ltd. v. R: [8]
According to the plain wording of subsection 39(2) the taxpayer is only required to have sustained a loss by virtue of a currency fluctuation in order to claim a capital loss, if the amount is not otherwise included in computing income. In this case, there is no dispute with respect to the effect of the currency fluctuation; the only question is whether the share redemption payment here falls within the meaning of “loss”. According to the common understanding of “loss”, the respondent’s payment to the shareholders clearly qualifies. That is, in Canadian dollar terms the respondent paid more to redeem the shares than it had initially received. The circumstances here are not unlike those in Tahsis Co. v. R., wherein the Federal Court Trial Division interpreted subsection 39(2) as providing relief to a debtor with respect to payments owed on a loan. There, currency fluctuations forced the taxpayer to pay more Canadian dollars in order to meet his U.S. dollar loan payments. Both that taxpayer and the respondent here sustained what would ordinarily be understood to be a loss. There is nothing in subsection 39(2) to limit the meaning of “loss” such that it would not cover this otherwise straightforward result. [9]
[10] The Appellant submits that even if the Statement is accepted as part of the ratio decidendi of the decision in BMO and as correct, the Statement references only subsection 40(1) and does not reference the remaining rules in Part I, Division B, Subdivision c of the Act (“Subdivision c”). Consequently, for purposes of subsection 39(2), subsection 40(3.6) is not incorporated into the calculation of the loss under subsection 40(1).
[11] Finally, the Appellant submits that even if subsection 40(3.6) applied to the determination of the loss under subsection 39(2), it would have no effect.
[12] If subsection 40(3.6) is applied before subsection 39(2) then it deems a loss from a disposition of shares to be nil but does not deem a loss sustained by virtue of the fluctuation of a currency other than Canadian currency to be nil. Consequently, subsection 40(3.6) would have no impact on the determination of the loss under subsection 39(2).
[13] If subsection 40(3.6) is applied after subsection 39(2) then the latter would already have deemed the loss to be a capital loss from the disposition of foreign currency and the condition for the application of subsection 40(3.6) that the loss result from a disposition of a share in an affiliated corporation would not be met.
[14] The Appellant submits that the Respondent is in effect applying the current version of subsection 39(2), applicable to taxation years that begin after August 19, 2011, to the Circumstances, which occurred in the Appellant’s 2007 taxation year.
B. The Position of the Respondent
[15] The Respondent submits that the starting point for determining a gain or loss on a disposition of property is subsection 40(1). The Respondent submits that where there is a disposition of property for the purposes of determining a gain or loss identified in the introductory words of subsection 39(2), the Paragraph requires the application of subsection 40(1).
[16] The Respondent submits that in the Circumstances the calculation under subsection 40(1) proceeds as follows:
A. Determine in Canadian dollars [10] the adjusted cost base to the Appellant of the redeemed shares using the foreign exchange rate at the time the shares were acquired by the Appellant, which is Cdn$1,130,000,000.
B. Determine in Canadian dollars the outlays and expenses made or incurred by the Appellant for the purposes of making the disposition of the redeemed shares, which is nil.
C. Determine in Canadian dollars the proceeds of disposition to the Appellant of the redeemed shares using the foreign exchange rate at the time the shares were redeemed, which is Cdn$1,003,600,000.
D. Calculate the gain or loss on the disposition of the redeemed shares by subtracting from the proceeds of disposition the sum of the adjusted cost base and the outlays and expenses, which yields a loss of Cdn$126,400,000.
E. Determine if another provision in Part I of the Act provides for a different result.
[17] With respect to letter E., above at paragraph 16, the Respondent submits that subsection 40(3.6) provides for a different result by reducing the loss of the Appellant otherwise determined under subsection 40(1) to nil and adding that loss to the adjusted cost base of the Appellant’s remaining shares in Delaware Holdings Inc.
[18] The Respondent submits that the cases cited by the Appellant [11] in support of a more general interpretation of “gain” or “loss” in the opening words of subsection 39(2) do not address a disposition of property but rather the repayment of debt denominated in a foreign currency. Consequently, these cases do not justify ignoring the extensive statutory structure in Subdivision c of the Act for determining the gain or loss on a disposition of property.
[19] The Respondent submits that the approach taken to subsection 112(3.1) in BMO is not applicable to subsection 40(3.6). Subsection 112(3.1) is a loss denial rule in Division C of Part I, which addresses the computation of taxable income after income has been determined under Division B, whereas subsection 40(3.6) is a loss deferral rule in Division B of Part I, which addresses the computation of income. The Respondent submits that the placement of subsection 40(3.6) in the Act supports the Respondent’s position regarding the role of subsection 40(3.6) in determining gain or loss under subsection 39(2).
V. Analysis
A. Is the Statement Obiter Dictum?
[20] The Canadian Law Dictionary [12] defines obiter dictum as:
A statement made or a decision reached in a court opinion that is not essential for disposition of the case.
[21] The Supreme Court of Canada states in Henry v. R. [13] in discussing its own decisions:
All obiter do not have, and are not intended to have, the same weight. The weight decreases as one moves from the dispositive ratio decidendi to a wider circle of analysis which is obviously intended for guidance and which should be accepted as authoritative. [14]
[22] The position of the Appellant that the Statement is obiter dictum is not supported by the content of the Paragraph as a whole, nor by its place in the reasons of the Federal Court of Appeal as part of the analysis of the context and purpose of subsection 39(2).
[23] In my view, the Paragraph is an essential part of the ratio decidendi of the Federal Court of Appeal because it is the only paragraph in BMO that addresses—albeit in summary fashion—the potential conflict between subsection 39(2) and subsection 40(1), which is an important aspect of the contextual analysis of the subsection. Since the Statement is in turn an essential part of the Court’s conclusion that there is no conflict between subsections 39(2) and 40(1), it is also not obiter dictum.
B. Is the Statement Wrong?
[24] The position of the Appellant that the Statement is wrong is not a matter this Court can act upon because I am bound by the decision of the Federal Court of Appeal in BMO, which necessarily includes the reasoning by which that decision is reached. However, I can express my agreement or disagreement with the position of the Appellant and explain my reasons for that position. I believe that is consistent with the approach suggested by Rothstein J. in R. v. Craig: [15]
But regardless of the explanation, what the court in this case ought to have done was to have written reasons as to why Moldowan was problematic, in the way that the reasons in Gunn did, rather than purporting to overrule it. [16]
[25] The issue raised by the Appellant is whether for the purposes of the introductory text of subsection 39(2), subsection 40(1) applies to the computation of the gain or loss realized on a disposition of property. In the Paragraph, the Federal Court of Appeal states that it does and further states that there is no conflict between the two subsections because subsection 39(2) is only concerned with why the taxpayer realized the particular gain or sustained the particular loss.
[26] As with all questions of statutory interpretation, the interpretive approach mandated by the Supreme Court of Canada must be followed. Recently, the Supreme Court succinctly summarized the correct approach in Bell Canada v. Canada (Attorney General): [17]
The scope of the CRTC’s authority under s. 9(1)(h) is to be determined by interpreting that provision in accordance with the modern approach to statutory interpretation. As this Court has reiterated on numerous occasions, this approach requires that the words of the statute be read “in their entire context and in their grammatical and ordinary sense harmonious with the scheme of the Act, the object of the Act, and the intention of Parliament” . . . [18]
[27] In Canada Trustco Mortgage Co. v. R., [19] the Supreme Court addressed statutory interpretation in the context of the Act:
It has been long established as a matter of statutory interpretation that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: . . . . The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole. [20]
. . .
The provisions of the Income Tax Act must be interpreted in order to achieve consistency, predictability and fairness so that taxpayers may manage their affairs intelligently. . . . [21]
[Emphasis added.]
[28] In Lipson v. R., [22] the Supreme Court of Canada emphasized that the text, context and purpose of a provision is used to determine the intention of the legislator:
In determining the purpose of the relevant provision(s) of the Act, a court must take a unified textual, contextual and purposive approach to statutory interpretation (Canada Trustco, at para. 47). This approach is, of course, not unique to the GAAR. As this Court confirmed in Kaulius, the approach to statutory interpretation is the same for provisions of the ITA as for those of any other statute: it is necessary “to determine the intention of the legislator by considering the text, context and purpose of the provisions at issue” (para. 42; see also Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715, at paras. 21-23). [23]
[Emphasis added.]
[29] Finally, in Attorney General of Canada and Darryl Zelisko v. Stevan Utah, [24] the Federal Court of Appeal emphasized that provisions must be considered in their proper context:
The key provision in this case is paragraph 3(1)(a) of Alberta’s Limitations Act. It tells us when the two-year limitation period started. Our task is to determine the authentic meaning of paragraph 3(1)(a) and apply it to the facts before us.
We determine the authentic meaning of paragraph 3(1)(a) by taking the plain meaning of its words, seeing them in their proper context, and keeping front of mind the purposes the provision is to serve . . . We do this neutrally, dispassionately and objectively . . . . [25]
[Emphasis added.]
[30] To address the correctness of the Statement, I must consider the text of subsections 39(1), (2) and (3) [26] and 40(1) and their interaction with other provisions in Subdivision c and elsewhere in the Act at the time Subdivision c was introduced into the Act in 1972. This represents the original context of subsection 39(2) and is therefore the proper starting point for determining the intent of Parliament in enacting subsection 39(2).
[31] The text of subsections 39(1), (2) and (3) and 40(1) immediately following their enactment in 1972 is reproduced in Appendix B.
[32] The Respondent observes that Subdivision c was added to the Act in 1972 to address the Report of the Royal Commission on Taxation. [27] The Carter Commission Report was followed in 1969 by a government paper titled “Proposals for Tax Reform”, [28] which outlined the government’s proposed course of action in response to the Carter Commission Report. Neither document assists in the interpretation of subsection 39(2).
[33] Prior to the enactment of Subdivision c, the Act did not tax gains and did not recognize losses arising from dispositions of property held on capital account. Subdivision c therefore introduced an entirely new scheme into the Act that addressed the taxation of such gains and losses. [29] As had been the case prior to the enactment of Subdivision c, such gains and losses were referred to as capital gains and capital losses. The taxable or deductible portion of such gains and losses were called taxable capital gains and allowable capital losses, respectively.
[34] Subject to the exclusion of dispositions of specified properties, [30] paragraph 39(1)(a) stated that “a taxpayer’s capital gain for a taxation year from the disposition of any property is his gain for the year determined under [Subdivision c]” to the extent not otherwise included in income. Similarly, paragraph 39(1)(b) stated that “a taxpayer’s capital loss for a taxation year from the disposition of any property is his loss for the year determined under [Subdivision c]” to the extent not otherwise deductible in computing income.
[35] Consistent with the text of subsection 39(1), most of the new computational rules in Subdivision c were focussed on a disposition of property by a taxpayer and ultimately the determination of the gain or loss resulting from that disposition. However, subsections 39(2) and 39(3) were different in that each of these subsections had its own rules for determining a taxpayer’s capital gain or capital loss in specified circumstances.
[36] Subsection 39(3) applied “[w]here a taxpayer has issued any bond, debenture or similar obligation and has at any subsequent time in a taxation year and after 1971 purchased the obligation in the open market, in the manner in which any such obligation would normally be purchased in the open market by any member of the public”.
[37] When it applied, subsection 39(3) deemed the taxpayer to realize a capital gain or a capital loss from the disposition of capital property to the extent that the amount paid by the taxpayer for the obligation was less than or more than the amount for which the obligation was issued. The deeming rule in subsection 39(3) applied on an obligation-by-obligation basis.
[38] Subsection 39(2) commenced with the words “Notwithstanding subsection [39](1)” and applied “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 Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year”.
[39] When it applied, subsection 39(2) aggregated all such gains and losses in a taxation year that were on capital account and, subject to the reduction of the net amount by $200 if the taxpayer was an individual, deemed the net amount to be a capital gain or a capital loss for the year from the disposition of currency of a country other than Canada (i.e., from the disposition of foreign currency).
[40] Unlike subsection 39(3), subsection 39(2) applied its deeming rule to a net amount computed by the formula in the subsection and not to an amount resulting from a particular event. The net amount could be comprised of the foreign exchange result from a single event during the taxation year or from multiple events during the taxation year each having different foreign exchange consequences (i.e., different amounts of gain or loss).
[41] The aggregation of gains and losses mandated by subsection 39(2) was necessary to apply the $200 reduction when determining the net gain or loss of an individual. This approach was a material departure from the property-by-property approach and the obligation-by-obligation approach in subsections 39(1) and 39(3), respectively, highlighting the uniqueness of subsection 39(2).
[42] In lieu of requiring a disposition of any property, subsection 39(2) asks whether the taxpayer has “made a gain” or “sustained a loss” because of a fluctuation in the value of a foreign currency vis-à-vis the Canadian dollar. This requires both a determination that a gain or loss has been made/sustained and identification of the reason [31] for that gain or loss.
[43] Unlike subsection 39(1), subsection 39(2) did not require that the gain or loss to which the subsection applied be determined under Subdivision c. Rather, as with subsection 39(3), subsection 39(2) had its own terminology for determining the gain or loss implying that Parliament intended a different approach than taken in subsection 39(1):
It is presumed that every feature of a legislative text has been deliberately chosen and has a particular role to play in the legislative design. The legislature does not include unnecessary or meaningless language in its statutes; it does not use words solely for rhetorical or aesthetic effect; it does not make the same point twice. This is what is meant when it is said that the legislature does not speak in vain. [32]
[44] The phrases chosen by Parliament were not unique in the history of the pre‑1972 Act. In MNR v. Consolidated Glass Limited, [33] the Supreme Court of Canada had interpreted the phrases “capital profits or gains made” and “capital losses sustained” used in paragraph 73A(1)(a) of the 1950 version of the Income Tax Act, which stated in subparagraph 73A(1)(a)(iii):
the amount by which all capital losses sustained by the corporation in those years before the 1950 taxation year exceeds all capital profits or gains made by the corporation in those years before the 1950 taxation year,
[45] Rand J. (writing for two other judges and with whom two further judges concurred on this point) stated:
“Losses sustained” and “profits and gains made” are clearly correlatives and of the same character, but how can profits and gains be considered to have been made in any proper sense of the words otherwise than by actual realization? This is no inventory valuation feature in relation to capital assets. That the words do not include mere appreciation in capital values is, in my opinion, beyond controversy.
[46] Eleven years later in D.W.S. Corp. v. MNR, [34] Thurlow J. used the repayment of a debt to identify the point in time that a foreign exchange loss was “sustained” by the taxpayer on a trade debt owed by the taxpayer. [35] The Supreme Court of Canada affirmed the decision in 1969 without reasons. [36]
[47] Hence, prior to the enactment of Subdivision c, the Supreme Court of Canada had interpreted language very similar to that used in subsection 39(2) as capturing gains and losses on capital account realized by a taxpayer but not necessarily because of a disposition of property.
[48] Parliament is presumed to have been aware of the law when it enacted subsection 39(2) and it is therefore reasonable to infer that, in using in subsection 39(2) terminology very similar to that that had been accorded a meaning in the jurisprudence, Parliament intended to adopt the approach to the determination of a taxpayer’s gain or loss taken in that jurisprudence. [37]
[49] The prominent tax commentators of the day were quick to recognize the unique implication of the words “made a gain” and “sustained a loss” used in subsection 39(2). For example, in a 1972 National Tax Conference article, the (to be) Honourable Murray Mogan observed:
. . . where amounts are borrowed on a long-term basis to provide fixed capital, fluctuations in foreign exchange can produce capital gains or losses to the borrower.
. . .
Assuming that a foreign exchange profit is, in fact, a capital profit and not income, section 39(2) of the new Act deems the amount to be a capital gain from the disposition of foreign currency; and individuals are given a $200 free zone for both gains and losses. [38]
[50] In paragraph 9 of Interpretation Bulletin IT-95 dated March 15, 1973 (“IT‑95”), the revenue authorities recognized that there may be “a capital gain or capital loss on the discharge of” a capital debt obligation and in Tahsis, the Federal Court - Trial Division accepted without question the application of subsection 39(2) to the repayment of foreign currency denominated debt on capital account owed by the taxpayer.
[51] In MacMillan Bloedel, the Federal Court of Canada - Appeal Division applied subsection 39(2) to a redemption of shares by the issuing corporation. In doing so, the Court recognized the unique implication of the words “sustained a loss”. The Court also held that the word “loss” in subsection 39(2) should be given its commonly understood meaning:
According to the plain wording of subsection 39(2) the taxpayer is only required to have sustained a loss by virtue of a currency fluctuation in order to claim a capital loss, if the amount is not otherwise included in computing income. . . . According to the common understanding of “loss”, the respondent’s payment to the shareholders clearly qualifies. . . . [39]
[52] Although Tahsis and MacMillan Bloedel did not address a disposition of property, nothing in the text of subsection 39(2) read in context suggests that the meaning of the phrases “made a gain” and “sustained a loss” differs depending on whether there is a disposition of property. It runs counter to the presumption of linguistic competence [40] and to the interpretive principle adopted by the Supreme Court of Canada in Canada Trustco [41] that emphasizes consistency, predictability and fairness to afford different meanings to the words of a provision depending on the circumstances to which they apply.
[53] Parliament recognized that with respect to a disposition of property that fell within the intended scope of subsection 39(2) there was a potential conflict between subsections 39(1) and 39(2) and expressly addressed that conflict with the words “Notwithstanding subsection (1)”. These words gave paramountcy to subsection 39(2):
In the complete statute book of a jurisdiction, whether federal, provincial, or municipal, there is inevitably a significant potential for conflict between provisions. Part of the job of legislative drafters is to search out such conflicts and seek instruction on how to deal with them — by repeal perhaps, or by designating one of the provisions to be paramount. The latter is conventionally rendered by introducing the paramount provision with words like “notwithstanding (or despite) section xx” or introducing the subordinate provision with words like “subject to section yy.” Sometimes general notwithstanding clauses are included that make certain provisions or an entire Act paramount over anything else that might conflict with it. [42]
[Emphasis added.]
[54] The paramountcy afforded subsection 39(2) ensured that subsection 39(2) would apply instead of subsection 39(1) to a disposition of property by a taxpayer if the gain made or loss sustained by the taxpayer because of that disposition was “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 Canadian currency”. Since subsection 39(1) did not apply to such a disposition of property because of the notwithstanding clause in subsection 39(2), the requirement in subsection 39(1) to determine the gain or loss under subdivision c also did not apply.
[55] I therefore agree with the Appellant’s position that subsection 39(2) is a stand-alone provision that when it applies to a disposition of property replaces subsection 39(1) and the rules in Subdivision c adopted by that subsection. Consistent with the approach adopted by the Federal Court of Canada - Appeal Division in MacMillan Bloedel, whether a gain is made, or a loss is sustained, for the purposes of subsection 39(2) is determined by reference to the commonly understood meaning of the words “gain” and “loss” and not by reference to the computational rules elsewhere in Subdivision c.
[56] With respect, the conclusion in the Paragraph that if there is a disposition of property the gain or loss referred to in subsection 39(2) must be determined under subsection 40(1) is tantamount to reading into subsection 39(2) the rule in subsection 39(1) that the gain or loss is to be “determined under this subdivision”.
C. How Does Subsection 39(2) Function as a Stand-Alone Provision?
(1) Did Parliament Intend Subsection 39(2) to Apply to Dispositions of Any Property?
[57] It is apparent that subsection 39(2) applies to transactions that do not involve a disposition of property such as the transactions addressed in Tahsis and in MacMillan Bloedel as well as to transactions that do involve a disposition of property. The latter transactions gave rise to the need for the notwithstanding clause at the beginning of subsection 39(1).
[58] As others have recognized, however, the text of subsection 39(2) does not explicitly define the scope of the provision when it comes to dispositions of property. [43] Moreover, the notwithstanding clause in and of itself provides no insight into the intended scope of subsection 39(2) when Parliament enacted the provision in 1972. However, when the text of subsection 39(2) is considered within the broader context in which it was placed in 1972, only one interpretation is harmonious with that broader context and with the Act read as a whole.
[59] I start my analysis with the point that for the purposes of the Act, income, gains and losses must be measured in Canadian dollars because that is the only currency known to Canadian law. [44] I will refer to this requirement as the “Currency Principle”.
[60] By 1972, there were several Supreme Court of Canada cases that reflected the Currency Principle even if not stated in such terms. [45] For example, in Eli Lilly, the majority of the Supreme Court of Canada stated:
The cost of exchange arising out of fluctuations in foreign currency is an ordinary expense in relation to foreign trade and has been so recognized and treated in the computation of income tax. … The language of Jenkins J. is appropriate:
. . . where a British company in the course of its trade engages in a trading transaction such as the purchase of goods abroad, which involves, as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then any profit resulting from an appreciation or loss resulting from a depreciation of the foreign currency embarked in the transaction as compared with sterling will prima facie be a trading profit or a trading loss for Income Tax purposes as an integral part of the trading transaction. [46]
[Emphasis added.]
[61] As well, paragraphs 6 through 11 of IT-95 indicate that the Currency Principle was well recognized by the revenue authorities around the time Subdivision c was enacted. With respect to transactions on capital account, paragraph 9 of IT-95 states, in part:
Whichever of the above methods is used in respect of transactions of an income nature, the purchase or sale of a capital asset is expressed in Canadian dollars at the rate prevailing at the time of the transaction.
[62] This understanding of the effect of the earlier case law on transactions on income account is confirmed by the majority of the Supreme Court of Canada in Imperial Oil Ltd. v. Canada; Inco Ltd. v. Canada. [47] In that case, the majority reviewed several of the earlier decisions addressing foreign exchange and trading transactions and stated:
In my view, the above cases stand for the proposition that foreign exchange gains and losses incurred in relation to foreign trade cannot be separated from the underlying transaction such that the foreign exchange gain or loss would be on capital account while the underlying transaction would be on income account. In such a case, the foreign exchange gain or loss is an intrinsic element of the price received or paid for a company’s goods and must be included in the computation of income. [48]
[Emphasis and double emphasis added.]
[63] The majority also affirmed the Federal Court of Appeal’s decision in Gaynor to apply the Currency Principle to the determination of a gain or loss under subsection 40(1) but held that Gaynor did not establish a general principle that all elements of a statutory formula in the Act had to be converted into Canadian dollars. [49] The minority of the Court disagreed on this latter point.
[64] In 2007 and again in 2009, the Currency Principle was codified for all taxation years [50] by the enactment of subsection 261(2) and the definition of “Canadian tax results” in subsection 261(1). Subject to minor exceptions, these rules require the use of Canadian dollars when determining amounts under the Act unless the taxpayer makes a functional currency election. Paragraph 2 of the Agreed Statement of Facts states that the Appellant determined its Canadian tax results in Canadian dollars.
[65] With this background in mind, there is no doubt that subsection 39(2) was intended to apply to dispositions of foreign currency on capital account. This application is the only obvious explanation for the aggregation of all gains and losses for a taxation year and the reduction of the net gain or loss of individuals by $200 as explained in Paragraph 5 of IT-95. The same approach is seen in current subsection 39(1.1).
[66] Gains and losses realized on a disposition of foreign currency are unique in the sense that the only possible reason for a gain or loss for Canadian income tax purposes is the fluctuation in the value of the foreign currency vis-à-vis the Canadian dollar. Consequently, such gains and losses are always solely “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 Canadian currency”. This distinguishes dispositions of foreign currency from dispositions of other property.
[67] For property other than foreign currency, foreign currency fluctuations are an aspect of determining the change in value of the property in Canadian dollars, which is required to determine a taxpayer’s gain or loss for purposes of the Act. This change in value may result from any number of factors.
[68] In a 1993 article, David Broadhurst observed:
Subsection 39(2) provides rules that apply when a taxpayer makes a gain or sustains a less “by virtue of any fluctuation” of a foreign currency relative to Canadian currency. There is some uncertainty about how subsection 39(2) should be interpreted relative to the other provisions of the Act. From its position in subdivision c, one might infer that subsection 39(2) was intended to deal only with gains and losses “made” on foreign currency liabilities. Subsection 39(1) deals with capital gains on the disposition of property. Any foreign currency fluctuation inherent in the difference between proceeds (translated into Canadian dollars at current exchange rates) and cost (translated at historic rates) would be included in the computation of gain or loss under subsection 39(1) without reliance on subsection 39(2). However, subsection 39(1) is limited to dispositions of “property.” Therefore, a rule is needed to deal with foreign currency gains and losses on liabilities. Subsection 39(2) fulfils this purpose. It deems a foreign currency gain or loss that is made on a liability to be a gain or loss from the disposition of foreign currency. The fact that the next subsection, subsection 39(3), deals with other gains and losses realized on liabilities may support that approach.
Whatever the intent, subsection 39(2) is not expressly limited to the gains and losses made on liabilities. However, it is difficult to apply when dealing with the disposition of assets. . . .
. . .
[69] Parliament is assumed to have had knowledge of the law and of the implication of its application to the computational rules in Subdivision c when it enacted Subdivision c. [51] Considering this and the ensuing widely recognized application of the Currency Principle to amounts determined under subsection 40(1), one might reasonably ask why in 1972 Parliament would choos