Convertible Debt: Foreign Exchange Gain

The Federal Court of Appeal recently issued its decision in the tax appeal by the Crown from the Tax Court of Canada's decision in favour of Agnico Eagle Mines Limited (Agnico) and determined that the foreign exchange gains arising on a conversion of US dollar-denominated convertible debentures issued by Agnico should be computed by comparing the Canadian dollar equivalent of the debentures as of the date of issuance of the debentures with the Canadian dollar fair market value of the shares into which the debentures were converted as of the date of conversion.  This decision is at odds with the Tax Court decision, which concluded that no foreign exchange gain arose because the true consideration received on the issuance of the common shares was the subscription price paid for the debentures.  The method of computing the foreign exchange gain mandated by the Court of Appeal resulted in a reduction/elimination of the foreign exchange gain assessed by CRA.