CRA indicates that gains and losses on interest rate hedges can be treated asymmetrically

Headquarters indicated that Weston has not affected its view that losses or gains realized on contracts (referred to by it as “bond locks”) entered into to hedge interest rates (or, in this case, also obligations to pay preferred dividends) were on income account.

It went on to note that as the benefits of the Bond Locks “are primarily related to the interest stream on the Debentures and the dividend stream on the…Preferred Shares” and (unlike Canderel) no immediate benefits were identified, “there is a good case to be made” that losses realized on the interest rate hedges should be amortized over the term of the hedged debentures.

When asked if any gains on the hedges should be amortized as well, Headquarters responded that “Ikea specifically states that there is no possibility of an amortization of income.”

Neal Armstrong. Summaries of 21 October 2015 Memo 2015-0592781I7 under s. 9 – capital gain v. profit – Futures/Forwards/Hedges, and s. 9 – timing.