CIBC realized an FX loss of C$126.4 million in 2007 when shares of a US subsidiary for which it had subscribed US$1 billion approximately 11 months’ earlier were redeemed for US$1 billion. The Tax Court had rejected the CIBC position that such loss was deemed by s. 39(2) to be a capital loss from foreign currency and therefore was excluded from the application of the s. 40(3.6) stop-loss rule (which applied only if the loss were viewed as having arisen from the disposition of the subsidiary’s shares.)
In dismissing CIBC’s appeal, Webb JA stated (at para. 45):
There is nothing in subsection 40(3.6) of the ITA that would require the application of subsection 39(2) of the ITA before the loss realized on the redemption of shares is deemed to be nil by subsection 40(3.6) of the ITA. As subsection 40(3.6) of the ITA is a provision that expressly provides for the determination of the amount of the loss, it overrides subsection 40(1) of the ITA. As a result, the loss realized by CIBC on the redemption of shares is deemed to be nil and, therefore, there is no loss that could have been deemed to be a capital loss under subsection 39(2) of the ITA.
In distinguishing BMO (which found that s. 39(2) deemed the loss from a disposition of shares arising from a foreign exchange fluctuation to be a capital loss from a disposition of foreign currency and not from the disposition of shares, so that there was no capital loss from shares to which the stop-loss rule in s. 112(3.1) could apply), he noted that s. 112(3.1), by its terms, only applied to “that share of the loss determined without reference to this subsection,” and then stated (at para. 46):
The wording of subsections 40(3.6) and 112(3.1) of the ITA provided that, in 2007, all other provisions of the ITA affecting the loss (including subsection 39(2), as it was then worded) applied before subsection 112(3.1) of the ITA applied and that subsection 40(3.6) of the ITA applied before subsection 39(2) of the ITA applied.