S. Patricia Lee

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.

The appellant, a bank subsidiary, transferred its leasing assets to a partnership to utilize a tax rollover provision under s. 97(2) of the Income Tax Act.

The Minister reassessed the appellant, arguing the partnership was invalid because the Bank Act prohibits banks from participating in partnerships, and the Partnerships Act dissolves partnerships engaged in unlawful business.

The Supreme Court of Canada held that the partnership was valid.

The Bank Act prohibition applied to the parent bank, not the subsidiary, and did not render the partnership's business unlawful.

Furthermore, the Bank Act's saving provision prevents transactions from being invalidated solely due to a contravention of the Act.

The appeal was allowed.

The Continental Bank of Canada disposed of a partnership interest acquired from its subsidiary during a winding-up process.

The Minister of National Revenue reassessed the Bank, arguing the gain was income rather than a capital gain.

The Tax Court and Federal Court of Appeal held it was a capital gain.

The Supreme Court of Canada dismissed the Crown's appeal, finding the transaction was capital in nature and not an adventure in the nature of trade.

The Court also refused to entertain the Crown's new alternative argument regarding recapture of capital cost allowance, as it was raised after the limitation period for reassessment had expired.