Exchangeable Debentures – Paragraph 20(1)(f)
In Imperial Oil Ltd. v. Canada, 20 the Supreme Court of Canada held that paragraph 20(1)(f) does not apply to foreign currency losses. The CRA stated verbally at the 2006 Canadian Tax Foundation Annual Conference that commodity-based loans and exchangeable debenture financings currently in place would still be eligible for paragraph 20(1)(f) treatment. The recent decision in Tembec Inc. v. The Queen, 21 held that paragraph 20(1)(f) did not apply to the conversion of certain convertible debentures. The Tax Court of Canada came to this conclusion after referring to the Imperial Oil case and the decisions in Teleglobe Canada Inc. v. The Queen, 22 and King Rentals Ltd. v. The Queen. 23
Question
Could the CRA provide its views in respect of the application of paragraph 20(1)(f) to exchangeable debentures, considering the decision of the Federal Court of Appeal in the Tembec case?
Response
The Supreme Court of Canada denied the leave application by Tembec Inc., so the decision is now firm and binding.
At the 2006 annual conference, reference was made to technical interpretations and rulings issued with respect to commodity-based loans and exchangeable debentures. We concluded that a deduction was available under subparagraph 20(1)(f)(ii) with respect to the increase in the amount payable on maturity of the commodity-based loan or on the exchange date of the debenture. At the time, we stated that the position taken in the above-noted technical interpretations and rulings would continue to be maintained for commodity-based loans and exchangeable debentures in place at that time. We added, however, that in light of the comments expressed in the Supreme Court’s decision in the Imperial Oil case, the CRA would consult with its Legal Services staff to determine whether its positions are supportable at law. We also mentioned that if these consultations resulted in a change in the CRA’s position, it would be announced to the public when the decision was made.
The CRA expects to complete its analysis of this issue by the fall of 2009. Should a change of position be necessary, it will be announced and administered on a prospective basis.