Edward Rowe

The appellant appealed a reassessment of its 2007 taxation year regarding the available-for-use rules for depreciable capital property.

The appellant argued that subsection 13(31) of the Income Tax Act created a notional taxation year for a partnership that acquired property from a non-arm's-length party before the partnership existed.

The Tax Court of Canada dismissed the appeal, holding that subsection 13(31) only deems the date of acquisition and does not create a notional taxation year, thereby preserving the two-year rolling start rule.

The taxpayers, Imperial Oil and Inco, issued debentures in U.S. dollars and later redeemed them.

Due to the appreciation of the U.S. dollar against the Canadian dollar, they suffered foreign exchange losses.

They sought to deduct these losses under s. 20(1)(f) of the Income Tax Act.

The Minister of National Revenue disallowed the deductions, treating them as capital losses under s. 39(2).

The Supreme Court of Canada held that s. 20(1)(f) is limited to original issue discounts and does not permit the deduction of foreign exchange losses, which must be claimed as capital losses under s. 39.

The appellant taxpayer entered into debenture agreements to borrow New Zealand dollars at a high interest rate, and simultaneously entered into a forward exchange contract to convert the funds to US dollars for use in its business, while hedging the exchange rate risk.

The taxpayer deducted the high interest payments under s. 20(1)(c)(i) of the Income Tax Act and reported the resulting foreign exchange gain on capital account.

The Minister reassessed the taxpayer, arguing the interest deduction should be limited to the lower rate applicable to US dollars based on the economic realities of the transaction.

The Supreme Court of Canada held that the taxpayer's legal relationships must be respected and that the borrowed New Zealand dollars were directly used to earn income.

The Court allowed the appeal, permitting the full interest deduction, and dismissed the Minister's cross-appeal, holding the foreign exchange gain was on capital account.