Kruger – Tax Court of Canada decision calls into question the use of mark-to-market accounting by financial institutions for derivatives

Kruger engaged in extensive trading of FX options, mostly writing European style puts and calls, although it also purchased FX options. It was not a financial institution or subject to oversight of a financial regulator, so that CRA’s policy of letting those entities use mark-to-market a tax accounting for derivatives (which are not covered by s. 142.2) did not apply. Rip J held that "the realization principle is basic to Canadian tax law," so that’s what Kruger was required to follow. An exception was made in the case of purchased FX options, which qualified as inventory, so that accrued losses could be recognized under s. 10. However, as noted, most of the options were ones where Kruger was the writer, which Rip J viewed as liabilities rather than inventory. Rip J also was troubled that because these were European-style options, which were difficult to value, they essentially were being "marked to model" rather than marked to (any) market – although it is not clear if he would have come to any different conclusion if the options were more liquid.

At para. 115 of his reasons there appears to be an implied criticism of CRA for not applying the law (i.e., realization principle) to the banks and other financially regulated enterprises. In 2012, CRA indicated (in 2008-0289021E5) that it may no longer accommodate non-statutory mark-to-market accounting, and this case will not help.

Neal Armstrong. Summaries of Kruger Inc. v. The Queen, 2015 TCC 119, under s. 9 – timing, s. 10(1) and s. 4(1)(a).