Date: 20000313
Docket: A-516-97
CORAM: LÉTOURNEAU J.A.
ROTHSTEIN J.A.
SHARLOW J.A.
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1] Canadian Imperial Bank of Commerce (CIBC), in filing its income tax returns for the 1977 taxation year, claimed an inventory allowance under paragraph 20(1)(gg) of the Income Tax Act for its gold and silver bullion. Its claim was subsequently amended to include an inventory allowance for its gold coins.
[2] Paragraph 20(1)(gg) came into force in 1977 and was repealed in 1986. Paragraph 20(1)(gg) permitted a deduction of an amount equal to 3% of the opening cost amount of tangible property (other than real property) that was described in the taxpayer"s inventory and held by the taxpayer for sale in the ordinary course of its business.
[3] The Crown allowed the inventory allowance for CIBC"s gold coins, but refused the inventory allowance for its bullion and foreign currency. The Crown"s position was, and still is, that CIBC"s bullion and foreign currency were not described in its inventory and were not held for sale, and that foreign currency is not tangible property.
[4] CIBC appealed to the Tax Court. The Tax Court Judge dismissed the appeal on the basis that the bullion and foreign currency were not held for sale. He did not deal with the Crown"s other arguments. CIBC appealed the decision of the Tax Court Judge.
(a) Whether the bullion was "held for sale"
[5] The first issue considered by the Tax Court Judge was whether CIBC"s bullion was "held for sale." The determination of that issue requires an examination of the bullion transactions CIBC entered into with its customers.
[6] In the early 1970s, CIBC became active in the gold and silver market and took steps to permit its customers to participate in that market by various methods. One such method was to purchase bullion from CIBC. Title to the bullion would pass from CIBC to the customer at the time of purchase. The customer would either take physical possession of the bullion or, for a fee, leave it with CIBC for safekeeping.
[7] It was established at trial that CIBC routinely sold customers bullion it had on hand. There was no evidence as to the quantity of bullion sold in the 1977 taxation year. However, there was evidence that bullion was distributed to CIBC"s various branches in quantities required to meet anticipated demand. If a customer wished to purchase bullion at a branch that had no inventory at that time, arrangements would be made to have the bullion delivered to the customer.
[8] If there were nothing more to CIBC"s bullion business than sales of bullion from its own vaults, there would be little doubt that CIBC held its bullion for sale. However, there are other aspects to CIBC"s bullion business that led the Tax Court Judge to conclude the contrary.
[9] CIBC"s customers could participate in the gold and silver market without purchasing bullion by purchasing a bullion certificate or investing in an account called a "vostro account". A bullion certificate gives the holder the right to a stated quantity of bullion on five days notice. The holder of a bullion certificate, upon giving CIBC the required notice, was entitled and obliged to take delivery of the stipulated quantity of bullion upon surrendering the certificate at the end of the notice period. It is undisputed that for present purposes, a vostro account is substantially the same as a bullion certificate except that no certificate is issued.
[10] In practice, the holder of a bullion certificate who did not wish to take delivery of the bullion could take its cash equivalent, determined at the time the certificate was surrendered. The evidence at trial was that most holders of bullion certificates preferred to surrender their certificates for cash. It is presumed that they had no need or desire for the bullion itself, but only wished to be in a position to profit from fluctuations in the value of gold or silver.
[11] From CIBC"s point of view, its customers" bullion certificates and vostro accounts represented liabilities of CIBC. The quantum of those liabilities was uncertain because it depended upon the value of gold or silver when the customer was entitled to delivery. Because of that uncertainty, CIBC had a risk of loss if there was an increase in the value of gold or silver between the date of issuing a bullion certificate and the date of its surrender. On the other hand, if the value of gold or silver were to fall, CIBC had a risk of loss on gold or silver previously acquired.
[12] To limit its risk of loss from fluctuations in the value of gold and silver, CIBC endeavoured to ensure that at all times, its bullion liabilities were approximately matched by bullion assets. In the terminology used at trial, CIBC"s practice was to maintain an "essentially flat overall position" between its bullion liabilities and its bullion assets.
[13] CIBC"s bullion assets consisted of bullion and coins that it owned, and also "nostro accounts" which gave it the contractual right to demand delivery of bullion. CIBC does not claim an inventory allowance for bullion that CIBC merely had the right to claim under its nostro accounts.
[14] The manner in which CIBC maintained its essentially flat overall position may be illustrated by a simplified example.
[15] If CIBC issued a bullion certificate to a customer for a certain quantity of gold, it would endeavour to ensure that it simultaneously increased its bullion assets by the same quantity, either in the form of gold bullion or a nostro account. If the customer decided to surrender the certificate for bullion at a time when the market price was higher than the customer"s purchase price of the bullion certificate, CIBC would have or would have access to the same quantity of bullion acquired at approximately the same price. That eliminated the risk that CIBC might have to deliver more expensive bullion to the customer than the customer had paid for.
[16] If the customer then surrendered the bullion certificate for cash instead of taking bullion, thereby reducing CIBC"s bullion liabilities, CIBC would endeavour to reduce its bullion assets by the same quantity, either by selling bullion or reducing a nostro account for cash. That eliminated the risk that CIBC would suffer a loss from a fall in the market price of bullion.
[17] CIBC was under no legal or contractual obligation to maintain an essentially flat overall position. As a matter of law, CIBC was free to satisfy its bullion liabilities from bullion on hand or from bullion it acquired after a customer gave notice of intention to surrender a bullion certificate. There was no legal or practical reason why CIBC could not meet its bullion liabilities with bullion acquired specifically for that purpose as needed.
[18] The Tax Court Judge found that CIBC was holding bullion as a reserve or hedge against its bullion liabilities (the bullion certificates and vostro accounts held by its customers). He considered that sufficient to disallow CIBC"s claim for the inventory allowance because, he said, paragraph 20(1)(gg) "requires that inventory be held for sale. That does not mean that inventory can be held for sale and for other purposes."
[19] In my view, the reasoning of the Tax Court Judge is incorrect. The correct principle is that tangible property may be held for sale even if it also serves another purpose, as long as that other purpose does not preclude a sale. Here, CIBC"s bullion served an important function in CIBC"s risk management strategy, but while serving that purpose it was also held for sale. The two purposes are not mutually exclusive.
[20] This does not offend the well established principle that goods are not held for sale while they are dedicated to a purpose that is not consistent with the possibility of sale. That principle dictates that, for example, a car dealer cannot claim the inventory allowance for cars in its leasing fleet: Plaza Pontiac Buick Limited v. Her Majesty the Queen, 94 D.T.C. 6058 (F.C.A.). Similarly, a corporation cannot on the one hand enter into a contractual obligation that amounts to an equitable transfer of inventory and at the same time assert that its inventory is held for sale: GSW Appliances Limited v. Her Majesty the Queen, 93 D.T.C. 5502 (F.C.T.D.).
[21] Counsel for the Crown argues that CIBC"s bullion, like the inventory in GSW Appliances , was committed to the holders of bullion certificates. That is simply not the case. No specific bullion owned by CIBC was earmarked for delivery to the holder of a particular outstanding bullion certificate or vostro account, or to all outstanding bullion certificates and vostro accounts. The bullion certificates and vostro accounts did not result in an equitable transfer of title to bullion. On the contrary, the terms of the bullion certificates or vostro accounts precluded the passing of title to bullion until the customer surrendered the certificate or made a call on the nostro account. A bullion certificate could be seen as an agreement for the sale of bullion, but because the bullion is not ascertained at the time the certificate is issued, the sale would not be completed until the certificate is surrendered and the bullion is delivered (refer, for example, to the Sale of Goods Act, R.S.O. 1990, c. S-1, sections 2 and 19). Thus, the bullion certificates or vostro accounts held by CIBC"s customers did not preclude CIBC from selling the bullion it had on hand to customers who wished to buy it outright.
[22] For these reasons, the Tax Court Judge was incorrect to conclude that the CIBC"s bullion was not held for sale.
(b) Whether the bullion was "described in inventory"
[23] The foregoing conclusion makes it necessary to deal with a question the Tax Court Judge did not consider, which is whether the bullion was "described in" CIBC"s inventory.
[24] Counsel for CIBC argued that the Crown"s arguments on this point were limited by certain answers given by its representative in examinations for discovery. There is no such limitation. The answers given by the Crown"s representative are not factual admissions and do not amount to an undertaking to restrict the scope of the Crown"s arguments on the interpretation of paragraph 20(1)(gg).
[25] However, none of the Crown"s arguments on this issue has merit. Property is "described in" a taxpayer"s inventory if it is inventory as a matter of fact and law. Inventory in its ordinary sense is simply stock in trade, or property held for sale in the ordinary course of a business. For income tax purposes inventory generally is any property the cost or value of which is relevant in determining income: Friesen v. Canada , [1995] 3 S.C.R. 103. The bullion CIBC had on hand at a particular time meets both descriptions.
[26] Counsel for the Crown originally submitted an argument to the effect that CIBC could not benefit from paragraph 20(1)(gg) because it did not use the "cost of goods sold" formula in computing its profit. He abandoned that argument before the hearing, but maintained the argument that property cannot be described in inventory unless its cost is relevant in computing its income. He argued that, because CIBC used the "mark-to-market" method of determining its bullion profits, its cost of bullion held at the beginning of the relevant taxation year was not relevant in determining profit for that year or any subsequent year.
[27] That argument cannot be accepted. The mark-to-market method of accounting, as explained at the hearing, involves daily adjustments to the carrying cost of bullion to reflect current values. Those adjustments are a component of the computation of profits. The value of gold and silver fluctuates daily. It follows that the value of bullion held at the beginning of 1977 is necessarily a component of CIBC"s profit computation for that year, and so the bullion meets the statutory definition of inventory.
[28] For the foregoing reasons, CIBC is entitled to the inventory allowance for 1977 for its bullion.
(c) Whether the foreign currency was "held for sale"
[29] The Tax Court Judge held that CIBC was not entitled to the inventory allowance in respect of its foreign currency because it did not hold foreign currency for sale in the ordinary course of its business, but rather realized profits by converting foreign currency in what he characterized as essentially a service transaction for a fee rather than sale.
[30] That characterization of the CIBC"s foreign currency transactions is not correct. The evidence is clear that CIBC acquired foreign currency through the currency market and held it in its branches, where it was exchanged for Canadian currency in response to customer demand. The transactions by which CIBC disposed of foreign currency to its customers are clearly sales of the foreign currency. It makes no difference that the sale price is determined by reference to a formula that includes the current market value of the foreign currency plus a mark-up, or that CIBC may charge a transaction fee.
[31] The Tax Court Judge placed considerable reliance on Blue Water Currency Exchange Ltd. v. Minister of National Revenue, 87 D.T.C. 306 (T.C.C.). The facts of that case are distinguishable from the facts of this case. The business of Blue Water consisted of providing Canadian currency to customers, taking foreign currency as consideration. By contrast, CIBC sold foreign currency to its customers. In CIBC"s case, foreign currency was both acquired and held for sale.
(d) Whether foreign currency was "described in inventory"
[32] As to whether the foreign currency was "described in" CIBC"s inventory, the analysis is the same as for CIBC"s bullion. As CIBC"s foreign currency transactions were on income account, its foreign currency was inventory of CIBC and therefore was "described in" its inventory.
(e) Whether foreign currency is tangible property
[33] Neither counsel cited any jurisprudence dealing squarely with the question of whether foreign currency is tangible property. There is no reason why the issue should not be determined on the basis of the ordinary meaning of the words. On that basis, foreign currency clearly is tangible property.
[34] Foreign currency is property, and is capable of being touched, bought and sold. Its value depends solely upon its physical existence. It has no value once destroyed, which distinguishes it from something that is merely a chose in action or evidence of a chose in action, like a promissory note, share or debenture that can be destroyed without affecting the legal rights and obligations it represents.
[35] In Bank of Canada v. Bank of Montreal, [1978] 1 S.C.R. 1148, the Supreme Court of Canada held that Canadian banknotes were promissory notes within the meaning of the Bills of Exchange Act. That conclusion turned on the form of Canadian banknotes issued prior to 1967, which contained on their face a promise on the part of the Bank of Canada to pay a stipulated sum of money to the bearer. The record discloses no evidence as to the form of the foreign currency in respect of which the CIBC is claiming the inventory allowance. There can be no inference that the principle in the Bank of Canada case applies generally to all foreign currency, or to the foreign currency in respect of which CIBC claimed the inventory allowance.
[36] Counsel for the Crown argued that to permit an inventory allowance to be claimed for foreign currency would be inconsistent with the object of paragraph 20(1)(gg) as summarized in Bastion Management Ltd. v. Canada, [1995] 2 F.C. 709 (F.C.A.), per Linden J.A. at 714:
| In the late 1970s, taxpayers with inventories were suffering from the effects of inflation, which artificially increased the apparent profit on which they had to pay tax. According to the then-Finance Minister, the purpose of this provision was to partially offset the effects of inflation by allowing the taxpayer to deduct 3% of the opening value of qualifying inventories [. . .]. |
[37] There is no evidence in the record as to how inflation affects or might affect the profitability of a business that consists in whole or in part of selling foreign currency. Even if there were such evidence, however, it would not be of much assistance in determining the correct interpretation of paragraph 20(1)(gg). The benefit of paragraph 20(1)(gg) is available to any taxpayer to which its words apply, whether or not the taxpayer"s profits are or may be artificially increased by inflation.
[38] The Tax Court Judge indicated that, even if CIBC was entitled to the inventory allowance for foreign currency held for sale to customers, there was no such entitlement for foreign currency held against potential withdrawals by customers holding foreign currency deposits. It was not suggested in argument that there is any error in that aspect of his reasons. As there was no evidence as to how much of CIBC"s foreign currency was held for sale and how much was held for depositors, there was an agreement between the parties that the allocation would be 50/50.
[39] The appeal with respect to CIBC"s bullion should be allowed in full, and with respect to its foreign currency should be allowed as to 50%. As CIBC was substantially successful in this appeal, it should be entitled to its costs.
Karen R. Sharlow
J.A.
"I agree
Gilles Létourneau J.A."
"I agree
Marshall Rothstein J.A."