In The Queen v. Agnico-Eagle Mines, 2016 FCA 130, the CRA said that a foreign exchange (FX) gain was realized by a corporation under s. 39(2) when it issued shares for debt under US dollar convertible debentures.  This view was based on the simple fact that the Canadian dollar value of the US dollar principal amount (of the debt) at the time of the conversion (to shares) was less than the Canadian dollar value of that principal amount when the debentures were first issued.  The Tax Court of Canada sided with the taxpayer, saying that no FX gain arose because the relevant time of comparing the Canadian dollar values was solely at the time the debentures were first issued (viewing the debentures as merely an advance subscription agreement for shares to be issued on any subsequent conversion).  The Federal Court of Appeal (FCA) rejectedboth of these views of the matter. 

  • The question under s. 39(2) was “…essentially whether, in C$ terms, the Taxpayer paid less on the repayment of its indebtedness evidenced by the Convertible Debentures, on their Conversions in 2005 and 2006, than it received on the issuance of those Convertible Debentures in 2002” (see paragraph 78). 
  • Following this proposition, the FCA determined that the amount “paid” by the corporation to discharge the debt on conversion was the “sale price” (as defined in the debentures) of the shares issued.  This sale price was determined by reference to the trading price of the shares on the NYSE at the time of conversion, and this was essentially the same as “…the amount of money that the Taxpayer would have received if it had issued such shares for money” (see paragraph 102; Teleglobe Canada Inc. v. The Queen, 2002 FCA 408; MNR v. MacMillan Bloedel Ltd., [1999] 3 C.T.C. 652). 
  • The matter was thus remitted back to the CRA for reassessment on this conceptual basis, which will surely result in a FX capitalloss to the corporation under s. 39(2).  That is, the Canadian dollar value of the shares at the time they were issued (on the conversion and resulting discharge of the debt under the debentures) was in fact higher than the Canadian dollar value of the principal amount of the debt at the time the debentures were first issued.