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Taxation - Assessment - Statutory Interpretation - Whether principal amount of a debt denominated in a foreign currency fluctuates with the Canadian dollar conversion rate relative to that foreign currency so that the loss on repayment of the obligation is deductible in computing income pursuant to paragraph 20(1)(f) of the Income Tax Act rather than in computing capital gains under subsection 39(2) of the Act - Whether paragraph 20(1)(f) allows deductions in computing income of foreign exchange losses sustained on the repayment of a debt denominated in a foreign currency.

In 1989, the Respondent issued US debentures at a discount of 1.199%. Ten years later, it redeemed debentures with a face value in American dollars, but the Canadian dollar had depreciated against the American dollar. The Respondent incurred a loss on redemption. Part was attributable to the discount on issuance and the balance was a foreign exchange loss. The Respondent and the Minister of Revenue disagreed with respect to how to allocate the loss in computing income. They referred three questions to the Tax Court of Canada to determine what portions, if any, of the loss were deductible under the computation of business profits under subparagraphs 20(1)(f)(i) and 20(1)(f)(ii) of the Act or were a capital loss under subsection 39(2) of the Act. The Tax Court held that $1,548,325 is deductible under s. 20(1)(f)(i), nothing is deductible under s. 20(1)(f)(ii), and $26,283,387 is a capital loss under s. 39(2). The Respondent appealed and the Crown cross-appealed. The Federal Court of Appeal allowed the appeal and cross-appeal and held that no amount is deductible under s. 20(1)(f)(i), $20,873,784 is deductible under s. 20(1)(f)(ii), and there is no deemed capital loss under s. 39(2).