Kruger Inc. v. Minister of National Revenue, 2016 FCA 186

• Judge: Noël, C.J., Scott and de Montigny, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: June 22, 2016
• Jurisdiction: Canada (Federal)
• Citations: 2016 FCA 186;(2016), 486 N.R. 200 (FCA)

Kruger Inc. v. MNR (2016), 486 N.R. 200 (FCA)

MLB headnote and full text

Temp. Cite: [2016] N.R. TBEd. JN.023

Kruger Incorporated (appellant) v. Her Majesty the Queen (respondent)

(A-296-15; A-195-16; 2016 FCA 186)

Indexed As: Kruger Inc. v. Minister of National Revenue

Federal Court of Appeal

Noël, C.J., Scott and de Montigny, JJ.A.

June 22, 2016.

Summary:

The Minister of National Revenue denied business losses of over $91 million claimed by Kruger Inc. for its 1998 taxation year from its business of dealing in foreign exchange options. Kruger Inc. appealed.

The Tax Court of Canada, in a decision cited as 2015 TCC 119, allowed the appeal in part and, in a decision cited as 2016 TCC 14, awarded costs in favour of the Minister. The Court rejected Kruger Inc.'s use of "mark to market" accounting, and agreed with the Minister's contention that the losses could only be recognized when realized. The Court accepted, in part, Kruger Inc.'s alternative argument that its foreign exchange options were "inventory", and could on that account give rise to a loss based on their value at year end (Income Tax Act, s. 10). Kruger Inc. appealed, taking issue with the conclusion on the primary issue. Both parties challenged the conclusion on the alternative issue.

The Federal Court of Appeal allowed the appeals. The Tax Court judge, in rejecting "mark to market" accounting, did not adhere to established case law and did not follow the framework of analysis set out in Canderel Ltd. v. Canada (1998) (S.C.C.). In the alternative, having regard to the meaning of "inventory" as defined in s. 248(1) of the Act and the findings of fact, it was not open to the Tax Court judge to hold that any of the foreign exchange options to which Kruger Inc. was a party on December 31, 1998, were inventory. The Court referred the reassessment back to the Minister for reconsideration on the basis that Kruger Inc. was entitled to compute the income derived from its foreign exchange options in accordance with "mark to market" accounting, but without deferring or amortizing any portion of the premiums paid or received during the 1998 taxation year. The Court awarded costs throughout in favour of Kruger Inc.

Income Tax - Topic 1004

Income from business or property - Application of generally accepted accounting principles - [See first Income Tax - Topic 1263 ].

Income Tax - Topic 1051.1

Income from a business or property - Income from business - What constitutes - [See first Income Tax - Topic 1263 ].

Income Tax - Topic 1263

Income from a business or property - Deductions - Business losses - What constitutes a business loss - The Minister of National Revenue denied business losses of $91,104,379, which the corporate taxpayer claimed with respect to its 1998 taxation year - The losses arose from dealing in foreign exchange options - The taxpayer appealed - The primary issue turned on the method according to which the taxpayer could compute income from dealing in foreign exchange options pursuant to s. 9 of the Income Tax Act - The Tax Court judge agreed with the Minister's contention that the profit or losses could only be recognized when realized, thereby rejecting the taxpayer's use of "mark to market" accounting as an acceptable method - The taxpayer appealed - The issue was whether the foreign exchange options to which the taxpayer was a party at the close of its 1998 taxation year could give rise to a loss or profit in the absence of an actual transfer or disposition - That in turn depended on whether the taxpayer was authorized under the Act to use "mark to market" accounting in ascertaining the profit or loss generated by its dealings in foreign exchange derivatives or whether it was bound to apply the principle of realization, as the Tax Court judge held - The Federal Court of Appeal allowed the taxpayer's appeal - The Tax Court judge, in rejecting "mark to market" accounting, did not adhere to established case law and did not follow the framework of analysis set out in Canderel Ltd. v. Canada (1998) (S.C.C.) - See paragraphs 52 to 72.

Income Tax - Topic 1263

Income from a business or property - Deductions - Business losses - What constitutes a business loss - The Minister of National Revenue denied business losses which the corporate taxpayer claimed with respect to its 1998 taxation year - The losses arose from dealing in foreign exchange options - The taxpayer appealed - The primary issue turned on the method according to which the taxpayer could compute income from dealing in foreign exchange options pursuant to s. 9 of the Income Tax Act - The Tax Court judge accepted, in part, the taxpayer's alternative argument that its foreign exchange options were "inventory", and could on that account give rise to a loss based on their value at year end (s. 10(1) of the Act and s. 1801 of the Income Tax Regulations) - The Federal Court of Appeal disagreed - Having regard to the meaning of the word "inventory" as defined in s. 248(1) of the Act and the findings of fact made by the Tax Court judge, it was not open to him to hold that any of the foreign exchange options to which the taxpayer was a party on December 31, 1998, were inventory - "The precise evidence on point is that all the options on hand at the close of the 1998 taxation year were rolled over to 1999 in the expectation that the Canadian dollar would firm up ... . Although the definition of 'inventory' in subsection 248(1) does not spell out the requirement that qualifying property be 'held for sale', this condition must be read into the definition when regard is had to Friesen [v. Minister of National Revenue (1995)], the last pronouncement of the Supreme Court on the subject. ... Giving effect to this meaning, the foreign exchange options purchased by the appellant during its 1998 taxation year and rolled over to 1999 do not qualify as inventory as they were not held for sale." - See paragraphs 73 to 94.

Income Tax - Topic 1342

Income from a business or property - Business inventory - Valuation - [See second Income Tax - Topic 1263 ].

Words and Phrases

Inventory - The Federal Court of Appeal interpreted the meaning of the word "inventory" as defined in s. 248(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) - See paragraphs 73 to 94.

Counsel:

Louis Tassé, Roger Taylor and Rachel Robert, for the appellant;

Josée Tremblay and Josh Kumar, for the respondent.

Solicitors of Record:

EY Law LLP, Montreal, Quebec, for the appellant;

William F. Pentney, Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent.

These appeals were heard at Montreal, Quebec, on April 13, 2016, before Noël, C.J., Scott and de Montigny, JJ.A., of the Federal Court of Appeal. In reasons written by Noël, C.J., the Court delivered the following judgment at Ottawa, Ontario, on June 22, 2016.