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Taxation - Assessment - Whether foreign exchange losses on purchases and redemptions of debentures denominated in U.S. dollars were deductible from income for taxation purposes under paragraph 20(1)(f) or were a capital loss under paragraph 39(3)(b) of the Income Tax Act.

In 1989 and 1992, Inco borrowed money by issuing debentures in US dollars. In 2000, Inco redeemed some of these debentures and purchased some on the open market. Due to the decline in the value of the Canadian dollar between 1989 and 2000, it cost Inco more, in Canadian dollars, to redeem or purchase the debentures than it would have at the time the debentures were issued. Accordingly, in computing its income tax for the year 2000, Inco seeks to deduct foreign currency exchange losses under paragraph 20(1)(f) of the Income Tax Act.

At issue is whether para. 20(1)(f) Act allows the deduction and whether the difference between the price paid on the purchase of the debentures and their face amounts at issuance was deductible under paragraph 20(1)(f) or should have been a capital loss under paragraph 39(3)(b) of the Income Tax Act. The Minister disallowed the deduction and Inco appealed to the Tax Court of Canada. The Tax Court of Canada dismissed the appeal. The Federal Court of Appeal allowed an appeal and ordered a reassessment.