Federal Appeal


Income tax

Capital gains and losses

Intention to hedge was not condition precedent for hedging

Hedging instrument. Taxpayer made cash settlement payments in settlement of forward contract, which was bet against price of his common shares in bank. Taxpayer treated cash settlement payments as being on income account under s. 9(1) of Income Tax Act and claimed business losses. Minister of National Revenue reassessed taxpayer on basis that payments were made on account of capital and resulted in capital losses. Tax Court judge allowed taxpayer’s appeal. Judge held that cash settlement payments were payments made on income account resulting in business losses. Judge first held that forward contract was entered into by taxpayer as adventure or concern in nature of trade as speculative instrument. Judge then held that taxpayer did not hedge capital asset of his bank shares when he entered into forward contract because he did not have intention to hedge and there was no link between forward contract and ownership of or transaction in respect of shares. Minister appealed. Appeal allowed and Minister’s reassessments confirmed. Taxpayer’s shares were capital property, so if forward contract had effect of hedging risk linked to those shares, losses would be treated as capital losses. Taxpayer was aware of hedging effect which forward contract would have on his shares. Judge erred in law in not following binding precedent defining hedge in Supreme Court of Canada judgment (PD judgment). Based on test in PD judgment, forward contract was hedging instrument since it neutralized or mitigated risk to which underlying asset of shares was exposed. Intention to hedge was not condition precedent for hedging. Judge erred in distinguishing GW judgment on basis that taxpayer had no ownership risk to hedge. As taxpayer’s shares were exposed to risk, judge ought to have concluded that that risk was mitigated by forward contract.

The Queen v. Macdonald (2018), 2018 CarswellNat 3400, 2018 CarswellNat 3823, 2018 FCA 128, 2018 CAF 128, Marc Noël C.J., Pelletier J.A., and de Montigny J.A. (F.C.A.); reversed (2017), 2017 CarswellNat 3934, 2017 CarswellNat 9106, 2017 TCC 157, 2017 CCI 157, Dominique Lafleur J. (T.C.C. [General Procedure]).

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