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FEDERAL INCOME TAX - Capital gains and losses - General anti-avoidance rule

Friday, June 12, 2020 @ 5:41 AM  


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Appeal by the Crown from a Tax Court decision finding there was no tax benefit for the purposes of s. 245 of the Income Tax Act because of the transactions undertaken by the respondent Bank in relation to certain financing arrangements made for its U.S. subsidiaries, the Harris Group. The Bank undertook certain transactions to reduce its foreign exchange risk in financing the Harris Group. As part of these transactions, the Bank was a limited partner in a Nevada limited partnership that acquired the shares of a Nova Scotia unlimited liability company, BMO (NS) Investment Company (NSULC). The Bank was concerned that if the Canadian dollar increased in value relative to the American dollar between the time when it borrowed the necessary funds from third parties in American currency and the time when it unwound the transactions and repaid the debt, it would incur a capital loss on the disposition of the shares of this company. Since this company paid dividends, to avoid the possible application of s. 112(3.1) of the Act which would reduce its capital loss by the amount of such dividends, the limited partnership acquired a separate class of shares on which the dividends were paid. The Canadian dollar increased in value relative to the American dollar and, in unwinding the transactions, the Bank incurred a loss because of the disposition of the shares of NSULC. The Minister reassessed the Bank on the basis that the general anti-avoidance rule applied to the transactions undertaken to avoid the reduction in the capital loss. The Tax Court judge found that s. 39(2) applied to any capital property. Because the loss realized by the Bank on the disposition of the shares in issue was entirely attributable to the change in the exchange rate between the Canadian dollar and the American dollar, this loss was deemed to be a loss from the disposition of a foreign currency and was thus not a loss from the disposition of shares. The Tax Court judge held s. 112(3.1) of the Act, which only applied if there was a loss from the disposition of shares, would not have applied to reduce this loss for the dividends paid, even if only one class of shares was issued and no tax benefit was realized by the Bank in completing the transactions to avoid the possible application of this section.

HELD: Appeal dismissed. Section 39(2) of the Act had a broader application than what was proposed by the Crown. The Technical Notes indicated that the 2010 version of s. 39(2) of the Act applied to any disposition of capital property, and not just a disposition of foreign currency. The textual, contextual and purposive analysis confirmed that the Tax Court judge was correct in his interpretation of s. 39(2) of the Act as it read in 2010. Therefore, the loss realized by the Bank because of the disposition of the shares of NSULC was deemed to be a loss from the disposition of a foreign currency. There was nothing in the language of s. 39(2) of the Act that restricted its application to only s. 39 of the Act. Parliament deemed the net gain or loss as determined under this section to be a gain or loss from the disposition of a foreign currency. This deeming rule would have been applicable for the purposes of the Act. Since s. 112(3.1) of the Act only applied to dispositions of shares, this section did not apply to reduce the capital loss of the Bank that was deemed to be a capital loss from the disposition of a foreign currency.

Bank of Montreal v. Canada, [2020] F.C.J. No. 566, Federal Court of Appeal, W.W. Webb, D.G. Near and A.L. Mactavish JJ.A., May 4, 2020. Digest No. TLD-June82020010