Income Tax
Income Calculation
Appeal from Tax Court of Canada decision (2007 TCC 462) dismissing appeal from income tax assessments for taxation years 1995, 1996, 1998, 1999—Appellant financing construction of plant by issuing notes totalling US$231 million, repayable in instalments—Applying hedge accounting principles by booking US dollar sales revenues, repayments of loan denominated in US dollars at rate of exchange prevailing when loan made—Whether “debt principle” as basis for characterizing foreign currency loss or gain displaced when important reason for borrowing in foreign currency to “hedge” or neutralize impact of currency fluctuations on income earned by borrower in that currency from otherwise unrelated transactions—Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 39(2), which deems foreign exchange losses to be on capital account, only applying if underlying transaction in connection with which losses incurred capital in nature—Foreign exchange losses, gains on repayment of loan denominated in foreign currency taking character as income or capital from nature of loan—If loan finances construction of capital asset, foreign exchange losses on repayments on borrower’s capital account, cannot be used to reduce income tax liability—Foreign exchange risks hedged as intended, although, since value of Canadian dollar declined during taxation years in question, foreign exchange gains on appellant’s sales revenues offset losses on loan repayments, not vice versa—Appeal dismissed.
Saskferco Products ULC v. Canada (A-433-07, 2008 FCA 297, Evans J.A., judgment dated October 6, 2008, 13 pp.)