Federal Court of Appeal Decisions

Date: 20041026

Docket: A-142-04

Citation: 2004 FCA 361

CORAM:        LÉTOURNEAU J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

                                                       IMPERIAL OIL LIMITED

                                                                                                                                            Appellant

                                                                           and

                                                    HER MAJESTY THE QUEEN

                                                                                                                                        Respondent

                                                                           and

                                                                INCO LIMITED

                                                                                                                                          Intervener

                                         Heard at Ottawa, Ontario on September 7, 2004.

                                Judgment delivered at Ottawa, Ontario on October 26, 2004.

REASONS FOR JUDGMENT BY:                                                                           SHARLOW J.A.

CONCURRED IN BY:                                                                                        LÉTOURNEAU J.A.

                                                                                                                                    MALONE J.A.

Date: 20041026

Docket: A-142-04

Citation: 2004 FCA 361

CORAM:        LÉTOURNEAU J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

                                                       IMPERIAL OIL LIMITED

                                                                                                                                            Appellant

                                                                           and

                                                    HER MAJESTY THE QUEEN

                                                                                                                                        Respondent

                                                                           and

                                                                INCO LIMITED

                                                                                                                                          Intervener

                                                    REASONS FOR JUDGMENT

SHARLOW J.A.

[1]                The principal issue in this case is whether, in computing income for purposes of the Income Tax Act, R.S.C. 1985, C. 1 (5^th supp.), a foreign currency loss incurred upon the repayment of a debt denominated in a foreign currency may be deducted under paragraph 20(1)(f) of the Income Tax Act.

[2]                The issues are discussed under the following headings:

Statutory framework

[3]                Section 3 of the Income Tax Act sets out a lengthy formula for the computation of income. It is not necessary for the purposes of this case to reproduce section 3. It is enough to say that it is by virtue of section 3 that capital gains and capital losses are determined independently of income from sources such as employment, business and property.

[4]                As this case involves a dispute about the computation of income from a business, section 9 of the Income Tax Act is relevant. It reads as follows:

[5]                Section 9 is subject to section 18, which prohibits the deduction of certain amounts in computing income from a business or property. Paragraph 18(1)(b) reads as follows:

[6]                One of the many exceptions to paragraph 18(1)(b) is found in paragraph 20(1)(f), the interpretation of which is at the heart of the dispute in this case. It reads as follows:

[7]                The term "principal amount", which appears several times in paragraph 20(1)(f), is defined in subsection 248(1). By virtue of that definition, any amount payable to discharge a debt is part of its "principal amount", except interest or a premium payable if the debtor elects to repay the debt before the end of its term. The definition reads as follows:

[8]                Paragraph 20(1)(f) is one of a number of provisions in the Income Tax Act that permit the deduction of financing costs incurred for the purpose of earning income from a business or property. Other such provisions are found in paragraphs 20(1)(c) and (d) (interest) and paragraphs 20(1)(e), (e.1) and (e.2) (commissions and fees).

[9]                Historically, financing costs have been treated as outlays of or on account of capital, unless they are made in respect of certain financial businesses, such as banking and money lending, in which money is essentially a trading asset. Thus, for most businesses, the deduction of financing costs is prohibited by paragraph 18(1)(b) except as permitted by paragraph 20(1)(c), (d), (e), (e.1), (e.2) or (f).

[10]            The opening words of paragraph 20(1)(f) establish a threshold test, which is met if an amount is "paid in the year in satisfaction of the principal amount of any bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation issued by the taxpayer after June 18, 1971 on which interest was stipulated to be payable". Paragraph 20(1)(f) most commonly applies when debt is issued at a discount (for example, if a $100 bond is issued for $98, the bond is said to be issued at a 2% discount), but it may apply in other circumstances also.

[11]            If the threshold test is met and the contractual terms applicable to the debt meet certain conditions relating to the original issue discount and the yield on the debt, subparagraph 20(1)(f)(i) permits a deduction of the amount by which the original issue proceeds of the debt are exceeded by the lesser of the principal amount of the debt and the amount paid in satisfaction of the principal amount of the debt.

[12]            If the threshold test is met but the conditions in subparagraph 20(1)(f)(i) are not met, then a deduction is permitted under subparagraph 20(1)(f)(ii), but the deduction is limited to a stipulated percentage of the amount that would otherwise have been deducted under subparagraph 20(1)(f)(i).

[13]            The subparagraph 20(1)(f)(ii) percentage is now 50%. In 1999, the year that is relevant to this case, it was 75%. The percentage for a particular taxation year is generally the same as the capital gains inclusion rate for that year (see the capital gains discussion below).

[14]            Capital gains and losses are computed under sections 38 through 55 of the Income Tax Act, and independently of the computation of income from any source. For the purposes of this case, the most important capital gains provision is subsection 39(2), which reads as follows:

[15]            To paraphrase 39(2), a gain or loss on capital account that is caused by a change in the value of a foreign currency relative to Canadian currency is deemed to be a capital gain or loss from the disposition of foreign currency. Subsection 39(2) may apply if, for example, a foreign exchange gain or loss arises upon the payment of a debt or the redemption of a security denominated in a foreign currency, which is the kind of transaction in issue in this case.

[16]            The scope of subsection 39(2) is limited by a phrase within the parentheses in subparagraph 39(2)(a)(i), relating to foreign exchange gains. The phrase is "to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be included in computing the taxpayer's income for the year or any other taxation year". A similar phrase is found in parentheses in subparagraph 39(2)(a)(ii), relating to foreign exchange losses (and also in paragraphs 39(1)(a) and (b), not reproduced, which are applicable to all other capital gains and losses). These parenthetical words ensure that, for income tax purposes, no amount is treated as a capital gain or capital loss if it is part of the computation of income or loss from a source, such as a business or property.

[17]            There are two important differences between the tax treatment of income and losses from a source and the tax treatment of capital gains and capital losses. One difference is the effective rate of tax. The Income Tax Act requires all capital gains and losses to be reduced by a percentage, sometimes referred to as the "capital gains inclusion rate". Currently that rate is 50%, but in 1999 it was 75%. Thus, in 1999, 75% of capital gains were included in income, and 75% of capital losses were deductible.

[18]            The second difference is that a loss on income account may be applied against any income, but the deductible portion of a capital loss can be applied only against the taxable portion of capital gains. Thus, a taxpayer who has capital losses but no capital gains in a particular taxation year may obtain no tax relief for the capital losses in that year.

Facts

[19]            On October 16, 1989, Imperial Oil issued 30-year debentures with a face amount of US$300,000,000 and used the proceeds in its business. It is undisputed that the issuance of the debentures was a capital transaction. Thus, any costs incurred by Imperial Oil with respect to that financing transaction are not deductible in computing Imperial Oil's business income except as permitted by paragraph 20(1)(c), (d), (e), (e.1), (e.2) or (f).

[20]            The debentures were issued at a discount of 1.199% and bore interest at 8.75% per year, so that the annual yield on the debentures, as determined at the time of issuance, was 8.86%. The debentures were redeemable at the option of Imperial Oil on October 15 of each year from 1999 to the end of the term, subject to the payment of a premium upon any repayments in 1999 to 2008, inclusive. Imperial Oil has claimed deductions under paragraph 20(1)(c) for interest payable on the debentures, and those deductions have been allowed.

[21]            On October 15, 1999, Imperial Oil redeemed some of the debentures that had been issued on October 16, 1989. The face amount of the redeemed debentures was US$87,130,000. Imperial Oil paid that amount, plus the redemption premium, to redeem the debentures. (There is no controversy about the tax treatment of the redemption premium.)

[22]            The rate for the conversion of U.S. dollars to Canadian dollars was 1.17660 on October 16, 1989, and 1.48192 on October 15, 1999. Because of that increase in the conversion rate, the Canadian dollar equivalent of the U.S. dollars paid in 1999 to redeem the debentures was more than the Canadian dollar equivalent of the U.S. dollar amount that Imperial Oil received in 1989 for those debentures. The difference, which I will call the "total redemption cost", was $27,831,712. This is illustrated in the following table:

Note 1. Canadian dollars at the conversion rate on October 16, 1989 (1.17660).

Note 2. Canadian dollars at the conversion rate on October 15, 1999 (1.48192).

Procedural history

[23]            When filing its income tax return for 1999, Imperial Oil claimed a deduction under subparagraph 20(1)(f)(i) for the original issue discount, and also reported a deemed capital loss under subsection 39(2). However, because Imperial Oil had no capital gains in 1999, no part of the deemed capital loss was deductible in that year.

[24]            In a notice of appeal filed in the Tax Court of Canada, Imperial Oil took the position that it was entitled to a deduction under subparagraph 20(1)(f)(i) for the total redemption cost of $27,831,712, and that subsection 39(2) had no application. The Crown did not accept that position. In October of 2003, Imperial Oil and the Crown agreed to refer three questions to the Tax Court of Canada pursuant to subsection 173(1) of the Income Tax Act, which reads as follows:

[25]            The three questions submitted to the Tax Court are:

[26]            The reference was heard on November 25, 2003, and resulted in a judgment dated March 10, 2004, in which the questions were answered as follows:

[27]            Although these answers favoured the Crown, the Judge did not award costs to the Crown because his conclusion was based on an analysis that was not supported by the Crown.

[28]            Neither party agrees with the answers given by the Judge. Imperial Oil has appealed to this Court pursuant to subsection 173(4.1) of the Income Tax Act, and the Crown has cross-appealed. The Crown, in addition to arguing that the questions were answered incorrectly, also challenges the Judge's order on costs.

[29]            Imperial Oil's main ground of appeal, as asserted in its notice of appeal and in its memorandum of fact and law, is that the total redemption cost ($27,831,712) is deductible in 1999 under subparagraph 20(1)(f)(i). Its alternative argument is that 75% of the total redemption cost ($27,831,712 x 75% = $20,873,784) is deductible under subparagraph 20(1)(f)(ii) and the remaining 25% is a deemed capital loss under subsection 39(2).

[30]            The Crown argues that subparagraph 20(1)(f)(i) permits a deduction of $1,229,181 (the original issue discount in 1989 Canadian dollars), and that the difference between the total redemption cost and the paragraph 20(1)(f)(i) deduction ($27,831,712 - $1,229,181 = $26,602,531) is a deemed capital loss under subsection 39(2).

[31]            By order dated August 16, 2004, Inco Ltd. was permitted to intervene in Imperial Oil's appeal to argue for Imperial Oil's alternative position. Inco is the appellant in a case similar to this one which was pending in the Tax Court when this appeal was heard. At the hearing of this appeal, Imperial Oil abandoned its main argument and relied solely on its alternative position. After this appeal was heard but before judgment, Inco's appeal was dismissed by the Tax Court (2004 TCC 468). Counsel provided this Court with a copy of that decision, and it has been considered.

The Gaynor principle

[32]            The decision under appeal depends to a large extent on the conclusion of the Judge not to follow Gaynor v. Minister of National Revenue, [1991] 1 C.T.C. 470, 91 D.T.C. 5288 (F.C.A.), affirming [1988] 2 C.T.C. 163, 88 D.T.C. 6394 (F.C.T.D., per Pinard J.), affirming [1987] 1 C.T.C. 2359, 87 D.T.C. 279 (T.C.C., per Sarchuk T.C.J., as he then was). All parties argued that the Judge erred in his analysis of Gaynor. It is convenient to deal with that point first.

[33]            Gaynor involved a dispute about the correct method of computing a capital gain on the disposition of securities that were sold for U.S. dollars and had been bought with U.S. dollars. Ms. Gaynor had argued that she should first determine the difference in U.S. dollars between the proceeds of sale and her cost of the securities, and then convert that amount to Canadian dollars at the rate of exchange at the date of sale. That argument was rejected for the reasons explained as follows by Justice Pratte, writing for this Court (emphasis added):

[34]            In the case now under appeal, the Judge considered Gaynor but concluded, on the basis of Bentley v. Pike (1981), 53 T.C. 590 (Ch. D.), Pattison v. Marine Midland Ltd., [1984] 1 A.C. 362 (H.L.) and Capcount Trading v. Evans (1992), 65 T.C. 545 (C.A.), that the principles to be applied in computing business income arising from a foreign currency transaction may not be the same as the principles to be applied in computing a capital gain arising from a foreign currency transaction. As the dispute in this case involves the computation of business income, the Judge reasoned that he should not be guided by Gaynor because it deals with the computation of a capital gain, not the computation of business income.

[35]            Once the Judge excluded Gaynor from his analysis, he adopted in essence the methodology that was rejected in Gaynor. He held that the amount of the paragraph 20(1)(f) deduction in this case should be determined solely by reference to the conversion rate on the date of the payment that triggered the application of paragraph 20(1)(f), in this case October 15, 1999, the date the debentures were redeemed. He applied that rate to the original issue discount, in U.S. dollars, illustrating his computation in two ways that are mathematically equivalent:

* These are the amounts calculated by the Judge, which appears to be incorrect. This amount should be $1,548,145 ($1,044,689 x 1.48192). However, nothing turns on the precise calculation.

[36]            I do not agree that the principle in Gaynor applies only to the computation of capital gains and losses. Nor do any of the English cases referred to above establish or compel that conclusion.

[37]            Bentley and Capcount are similar to Gaynor in that both involved a dispute about a capital gain on property where the acquisition and disposition were foreign currency transactions. Both Bentley and Capcount were decided consistently with Gaynor.

[38]            Pattison dealt with quite a different question, which was the determination, under ordinary commercial or accounting principles, of the profits of an English bank that entered into certain banking transactions in a foreign currency. Whatever Pattison may say about the correct method of accounting for foreign currency transactions that are an integral part of a banking business, it says nothing about the issue that arose in this case, which is the correct application of a statutory formula where at least one element of the statutory formula is a receipt or payment of foreign currency. In this case, Gaynor is applicable and should have been treated as binding.

[39]            As I read Gaynor, it stands for the proposition that, if a foreign currency transaction is an element of any computation required by a statutory formula, the amount of the foreign currency must be converted to Canadian dollars at the conversion rate prevailing at the time of the transaction. Thus, to apply paragraph 20(1)(f) to a debt denominated in a foreign currency, each element of the computation of the paragraph 20(1)(f) deduction must be converted to Canadian dollars at the conversion rate in effect on the relevant date.

[40]            In this case, the parties agree that paragraph 20(1)(f) must be interpreted and applied consistently with the Gaynor principle, but they disagree on whether the conversion of certain elements of the computation should be done as of October 16, 1989 when the debentures were issued, or October 15, 1999 when the debentures were redeemed. The following discussion deals with that debate.

Paragraph 20(1)(f)

[41]            The first question asked by paragraph 20(1)(f) is whether a payment has been made that meets the threshold test in the opening words of paragraph 20(1)(f). It is common ground that the threshold test is met in this case because, on October 15, 1999 (which is within the taxation year under appeal), Imperial Oil paid an amount in satisfaction of the principal amount of the debentures, the debentures were issued after June 18, 1971, and interest was stipulated to be payable on the debentures.

[42]            Once it is determined that the threshold test for the application of paragraph 20(1)(f) is met, it is necessary to consider whether a deduction is permitted under subparagraph 20(1)(f)(i) or under subparagraph 20(1)(f)(ii). Each of those provisions includes a statutory formula for determining the amount of the permissible deduction. The two formulas have a number of common elements. One is the "principal amount" of the debt obligation in question, and the other is the amount for which the debt obligation was issued.

[43]            The determination of the "principal amount" of a debt depends upon the definition of "principal amount" in subsection 248(1) (quoted above). Applying that definition, the question in this case becomes this: what was the maximum amount payable on account of the debentures immediately before they were redeemed on October 15, 1999 (disregarding interest and the redemption premium)? That question must be answered as of the date of the redemption, so that for the purposes of applying Gaynor, the relevant date is October 15, 1999. The answer is that the "principal amount" of the debentures immediately before their redemption on October 15, 1999, was $129,119,689, the Canadian dollar equivalent, on October 15, 1999, of the U.S. dollar face amount of the debentures redeemed on that date (U.S.$87,130,000 x 1.48192).

[44]            What was the amount for which the debentures were issued? The parties agree that this is a question about the facts as they existed on the date the debentures were issued, October 16, 1989, which is therefore the relevant date for the purposes of applying Gaynor. The parties also agree that the debentures were issued for an amount equal to the difference between their "principal amount" on October 16, 1989, when the debentures were issued, and the original issue discount. The Canadian dollar conversion rate on October 16, 1989 was 1.17660, so that the "principal amount" of the debentures, as of October 16, 1989, was $102,517,158 (U.S. $87,130,000 x 1.17660). It follows that the amount for which the debentures were issued was $101,287,977 ($102,517,158 minus the 1.199% discount).

[45]            I note that applying Gaynor to the determination of the "principal amount" of the debentures on October 16, 1989, when they were issued, and again on October 15, 1999, when they were redeemed, results in an increase in the "principal amount" of the debentures from $102,517,158 to $129,119,689. In other words, the "principal amount" of the debt has increased during the term of the debentures. The Crown disputes the validity of that result.

[46]            Although the Crown accepts that the "principal amount" of a debt can increase during its term, the Crown argues that this can occur only if the increase is mandated by a contractual term governing the debt. I agree with that limitation. It flows directly from the language of the definition of "principal amount", which refers to "the amount that, under the terms of the obligation or any agreement relating thereto, is the maximum amount ... payable on account of the obligation".

[47]            The Crown accepts that such an increase may occur in the case of a commodity based loan, where the amount to be repaid fluctuates with the market value of some commodity. For example, at one time the Farm Credit Corporation had a program under which a loan could be made to a farmer at an interest rate that was substantially lower than the market rate. Under the contract governing the loan, the amount payable by the borrower to discharge the loan would increase as a function of any increase in the value of certain crops grown by the borrower within a stipulated period. It is common ground that this would be a case in which, for income tax purposes, the "principal amount" of the loan could increase.

[48]            However, the Crown argues that in the case of the Imperial Oil debentures, there was no contractual term that required Imperial Oil to pay more Canadian dollars to redeem the debentures in 1999 than it had received when the debentures were issued in 1989. For that reason, the Crown argues that it is wrong to conclude that the "principal amount" of the debentures increased over that period. I cannot accept that argument. A foreign currency loan is the loan of a specified number of units of foreign currency on terms that require the same number of units of that foreign currency to be returned to the lender at the end of the term. It is implicit in the terms of repayment that the Canadian dollar equivalent of the repayment may be more or less than the Canadian dollar equivalent of the amount borrowed. Thus, the fluctuation in the "principal amount" of the debt, as that term is defined in the Income Tax Act, is mandated by the contractual terms governing the debt.

[49]            The Crown also relies upon subsection 248(26) of the Income Tax Act, which reads as follows:

[50]            I am unable to conclude that subsection 248(26) compels the conclusion that the "principal amount" of the debentures on October 15, 1999 was necessarily the same as its "principal amount" on October 16, 1989. Subsection 248(26) was enacted in 1994 to aid in the application of certain amendments to section 80 of the Income Tax Act, which deals with the tax consequences of the discharge of a debt for less than its "principal amount". The notion of the "issuance" of debt is central to the operation of section 80. It must have been thought that clarification was needed to ensure that section 80 would apply to debts that are not evidenced by a typical loan instrument, such as a note or debenture, because it is difficult to conceive of the "issuance" of a debt for which there is no such instrument. In this case, of course, there is no need for a clarifying rule, because there is no doubt about the date on which Imperial Oil "issued" the debt evidenced by the debentures, or the "principal amount" of the debt at that time.

[51]            Even if subsection 248(26) were to be applied in this case, what would its effect be? Subsection 248(26) says that if, at a certain point in time, a person becomes liable to pay an amount that meets a certain description, the liability must be treated for income tax purposes as an obligation (a debt obligation) issued at that time by the debtor, and to have a principal amount at that time equal to the amount of the liability at that time. In this case, one could say that on October 16, 1989, when Imperial Oil issued the debentures, it became liable to pay the original principal amount, $102,517,158. By virtue of subsection 248(26), that debt obligation would be considered to be issued on October 16, 1989, and to have a principal amount at that time equal to $102,517,158. Thus, the effect of subsection 248(26) would simply be to confirm the conclusion that the original principal amount of the debentures is $102,517,158. That is not surprising, since subsection 248(26) is said to have been enacted for greater certainty. The important point about subsection 248(26), however, is that it does not say that, for income tax purposes, the principal amount of a debt denominated in a foreign currency is always equal to the principal amount of the debt at its date of issuance.

[52]            For these reasons, I agree with Imperial Oil and Inco that, for the purposes of paragraph 20(1)(f), the "principal amount" of a debt denominated in foreign currency fluctuates with the Canadian dollar conversion rate, and that in this case, the principal amount of the debentures redeemed on October 15, 1999, increased as described above.

[53]            I return now to the discussion of paragraph 20(1)(f). As the threshold test for its application was met, the issue is whether the deduction is permitted under subparagraph 20(1)(f)(i) or subparagraph 20(1)(f)(ii).

[54]            Subparagraph 20(1)(f)(i) sets out two conditions. If both conditions are met, a deduction is permitted under paragraph 20(1)(f)(i). If one of the two conditions in subparagraph 20(1)(f)(i) is not met, then the deduction is permitted under subparagraph 20(1)(f)(ii).

[55]            The first condition in subparagraph 20(1)(f)(i) reads as follows:

[56]            As indicated above, it is common ground that the amount for which the debentures was issued is $101,287,977, which is the Canadian dollar equivalent, on October 16, 1989, of the principal amount of the debentures less the original issue discount.

[57]            However, the parties do not agree on whether, for the purposes of the first condition in subparagraph 20(1)(f)(i), the "principal amount" of the debentures must be determined as of the date of the issuance of the debentures or as of the date of their redemption. The Crown argues for the use of the date of the issuance of the debentures, October 16, 1989. Imperial Oil and Inco argue for the use of the date of redemption, October 15, 1999. As the following table illustrates, the first condition in subparagraph 20(1)(f)(i) is met only if the Crown is correct on this point:

The Crown supports its interpretation by reference to the purpose of paragraph 20(1)(f), which the Crown says is to provide tax relief only for original issue discounts.

[58]            There are three difficulties with the Crown's position on this point. First, there is nothing in the language of paragraph 20(1)(f) itself that, expressly or by necessary implication, limits the application of paragraph 20(1)(f) to original issue discounts.

[59]            Second, the argument that paragraph 20(1)(f) applies only to original issue discounts is not consistent with the Crown's position on commodity based loans. The Crown has admitted that a paragraph 20(1)(f) deduction may arise if the amount required to repay a commodity based loan is more than the amount advanced. That may occur whether or not there was an original issue discount.

[60]            Third, the Crown's interpretation leads to an anomalous result. Adopting the Crown's interpretation, the "principal amount" of the debentures, for the purposes of the first condition in paragraph 20(1)(f), is the Canadian dollar equivalent of their U.S. dollar face amount as of the date of issuance, October 16, 1989, which is $102,517,158. As explained above, that would lead to the conclusion that the first condition in subparagraph 20(1)(f)(i) is met. For the purposes of this part of the discussion, I will assume, without deciding, that analogous reasoning would lead to the conclusion that the second condition in subparagraph 20(1)(f)(i) is also met. The amount of the deduction under subparagraph 20(1)(f)(i) would then be determined by this formula:

[61]            The difference between the lesser of the first two amounts ($102,517,158) and the third amount ($101,287,977) is $1,229,181, which is (and mathematically must be) the original issue discount in 1989 Canadian dollars. Thus, the interpretation proposed by the Crown appears to suffer from the same flaw as the interpretation adopted by the Judge, which is that it does not correctly apply the Gaynor principle. It is, as counsel for Imperial Oil put it so well, only a half-Gaynor, in the sense that it results in a deduction measured in 1989 Canadian dollars for a financing cost that is paid in 1999 and which, under paragraph 20(1)(f), is deductible only in the year of payment.

[62]            In my view, the more straightforward interpretation proposed by Imperial Oil and Inco is the correct one. Simply put, they argue that, for the purposes of the first condition in subparagraph 20(1)(f)(i), the phrase "principal amount" must be determined as of the date of redemption, October 15, 1999, because it is not until that date that it is possible to determine the "maximum amount payable on account of the obligation," as required by the definition of "principal amount".

[63]            It is worth noting that where Parliament wishes to specify, for income tax purposes, a certain date for the conversion of a foreign currency amount, the Income Tax Act says so. Two examples are found in subsection 79(7) and paragraph 80(2)(k) of the Income Tax Act, relating to the tax consequences of the discharge of certain debts:

There is no such language for paragraph 20(1)(f).

[64]            Returning to the discussion of paragraph 20(1)(f), it is now established that the threshold test was met but the first condition in subparagraph 20(1)(f)(i) was not met. Therefore, subparagraph 20(1)(f)(i) does not apply, and subparagraph 20(1)(f)(ii) does apply. The next step is to determine the amount of the subparagraph 20(1)(f)(ii) deduction according to the statutory formula in subparagraph 20(1)(f)(ii), which reads as follows:

[65]            In table form, the computation is as follows:

(A) "Principal amount" of the debentures	$129,119,689
(B) "Amount" paid in satisfaction of the "principal amount" of the debentures	$129,119,689
(C) Lesser of (A) and (B)	$129,119,689
(D) "Amount" for which the debentures were issued	$101,287,977
(E) Difference between (C) and (D)	$ 27,831,712
(F) Lesser of (B) and (E)	$ 27,831,712
(G) 75% of (F)	$ 20,873,784

[66]            I conclude that Imperial Oil is entitled to a deduction under subparagraph 20(1)(f)(ii) of $20,873,784.

Subsection 39(2)

[67]            Imperial Oil argues that the difference between its total redemption cost ($27,831,712) and the amount of its subparagraph 20(1)(f)(ii) deduction ($20,873,784) is a deemed capital loss under subsection 39(2). In my view, this argument cannot prevail in the face of subsection 248(28) of the Income Tax Act, the relevant parts of which read as follows:

[68]            Subsection 248(28) (like its predecessor, subsection 4(4), now repealed) was enacted because Parliament recognized that, in a statute involving as many complex computations as the Income Tax Act, a transaction may fall literally within the scope of two separate provisions and so be counted twice as an income inclusion, a deduction or a tax credit. Subsection 248(28) is intended to avoid such double counting unless the Income Tax Act clearly compels such a result.

[69]            The argument of Imperial Oil is that, because only 75% of its total redemption cost is deductible under subparagraph 20(1)(f)(ii), the non-deductible 25% is excluded from the computation of its income, and so it falls by default into subsection 39(2). I am unable to accept this argument. The total redemption cost incurred by Imperial Oil on its debentures is a loss on capital account for which Parliament permits a deduction according to a certain formula. Because the total redemption cost happens to fall within subparagraph 20(1)(f)(ii) rather than subparagraph 20(1)(f)(i), the amount of the deduction is designed to be equivalent to the tax relief for a capital loss which, for the taxation year under appeal, is also limited to 75% of the actual loss sustained upon the disposition of a capital property. In substantive terms, allowing a further deduction under subsection 39(2) in respect of the non-deductible 25% of the total redemption cost would be tantamount to allowing more tax relief for a capital loss than Parliament intended.

Conclusion

[70]            I would allow the appeal and the cross-appeal, set aside the judgment of the Tax Court, and replace it with a judgment answering the three questions as follows:

[71]            As Imperial Oil was substantially successful in this appeal, it should have its costs in this Court and in the Tax Court. I do not consider it necessary to deal with the Crown's cross-appeal on costs. The result of this case is substantially the position advocated by the intervener Inco, but Inco is not seeking costs. For that reason, no costs are awarded to Inco.

         (s) "K. Sharlow"          

J.A.

"I agree.

     G.L."

"I agree.

     JBDM"

                                                  FEDERAL COURT OF APPEAL

                            NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                                       A-142-04

STYLE OF CAUSE:                                 IMPERIAL OIL LIMITED and HER MAJESTY THE QUEEN and INCO LIMITED

PLACE OF HEARING:                                 OTTAWA, ONTARIO

DATE OF HEARING:                                   SEPTEMBER 7, 2004

REASONS FOR JUDGMENT:                    SHARLOW J.A.

CONCURRED IN BY:                                  LÉTOURNEAU J.A.

MALONE J.A.

DATED:                                                          OCTOBER 26, 2004

APPEARANCES:

Mr. Al Meghji                                       FOR THE APPELLANT

Mr. Edward Rowe

Mr. Luther P. Chambers, Q.C.           FOR THE RESPONDENT

Ms. Rhonda L. Nahorniak

Mr. Warren J.A. Mitchell, Q.C.                       FOR THE INTERVENER

Mr. Michael W. Colborne

SOLICITORS OF RECORD:

Osler Hoskin & Harcourt LLP           FOR THE APPELLANT

Toronto, Ontario

Mr. Morris Rosenberg                                   FOR THE RESPONDENT

Deputy Attorney General of Canada

Thorsteinssons                                       FOR THE INTERVENER

Toronto, Ontario