The taxpayer effectively converted a NZ$150 million borrowing into U.S. dollars by entering into a forward contract for the exchange of New Zealand dollars for U.S. dollars with a Japanese bank. It realized a foreign exchange gain of U.S.$19 million on the maturity of the debenture (based on changes in the spot N.Z./U.S. exchange rate) and a further gain of U.S.$2 million on the forward exchange contract resulting from the exchange thereunder of U.S.$79 million for NZ dollars worth U.S.$81 million (or, under another possibly acceptable method of viewing the contract, as the result of acquiring N.Z. dollars at a cost that was U.S.$2 million less than the amount for which they were immediately disposed of in order to discharge the borrowing).
McLachlin J. found that the U.S.$19 million gain was realized on capital account given that the purpose of the borrowing was to provide the taxpayer with working capital for a five-year term. In finding that the U.S.$2 million gain was also on capital account, she noted (at para. 70) that:
"Whether a foreign exchange gain arising from a hedging contract should be characterized as being on income or capital account depends on the characterization of the debt obligation to which the hedge relates."