In 2002, the taxpayer ("Agnico") issued US-dollar denominated debentures which were convertible at the holders' option into common shares at a conversion price of U.S.$14 per share (or a conversion ratio of 71.429 per each U.S.$1,000 debenture). In December 2005 Agnico issued a notice of redemption for all outstanding debentures, which prompted the conversion of over 99% into common shares before the date specified for redemption. The balance of 0.8% of the debentures were redeemed, with the taxpayer exercising its right to satisfy the redemption price for each debenture by issuing common shares whose number was computed by dividing U.S.$1,000 by a heavily discounted share value.
The Crown took the position that gains were realized under s. 39(2) on conversion, as the U.S. dollar had depreciated substantially relative to the Canadian dollar between the debenture issuance and conversion.
In rejecting one of Agnico's arguments that s. 39(2) did not apply because the fair market value of the shares issued was higher than the debentures' principal amount, Woods J found (at paras. 47, 50) that, applying Teleglobe, "the amount paid out by Agnico is the amount for which the Common Shares were issued" and that "it is necessary ... to search for the consideration as agreed by the parties and as reflected in the stated capital account." Although Agnico had not added any specific dollar amount to its stated capital account, the common shares were issued on conversion because of a commitment to issue them at a price of U.S.$14 per share or U.S.$1,000 per debenture, so that this was the agreed consideration for their issuance.
How then should U.S.$1,000 be translated into Canadian dollars? She stated (at paras. 58, 61-63, 67):
Subsection 261(2) requires that the relevant amounts be translated into Canadian dollars at the spot rates when the amounts "arose."
...
In my view, the appropriate translation date should be when the consideration for the Common Shares was received by Agnico. ...
...[T]he appropriate translation date in this particular case is the date that the Convertible Debentures were issued. This is when the true consideration for the issuance of the Common Shares was received by Agnico. ...
...Suppose convertible debentures are issued for $1,500, [and] the principal amount ... is $1,100 ... . [T]he true consideration [for the shares on the debenture conversion] is $1,500. ...
...[T]he equivalent of $1,588 [the Cdn$ equivalent on that date of U.S.$ 1,000] per [Agnico] Convertible Debenture was received on issuance of the Convertible Debentures and the same amount was paid for the extinguishment of the Convertible Debentures on the conversions. There is no foreign exchange gain.
Agnico's alternative argument (at para. 43), that s. 51(1) "provides that on a conversion ... there was no transaction that could give rise to a gain," was not considered.
Conversely, given that the Debentures' terms "make it clear that the Common Shares issued on redemption are in satisfaction of the Redemption Price which became due and payable on the date of redemption" (para. 73), the amount the taxpayer paid on redemption was based on the Canadian dollar equivalent of such amounts at that time, so that Agnico realized s. 39(2) gains on redemption.