George Weston Ltd. – Tax Court of Canada finds that a cross-currency swap was a hedge notwithstanding no intention to sell underlying indirect U.S. asset

As a result of indirect U.S. acquisitions financed with Canadian-dollar debt, the creditworthiness (and stock price) of GWL (a Canadian public company) became susceptible to any substantial depreciation in the U.S. dollar. Accordingly, it entered into cross-currency swaps based on the total net value of its indirect U.S. investments at that time. Two years later, when its leverage was back down to a more comfortable level, it closed out its swaps at a gain of Cdn.$317 million.

This was a capital gain. Lamarre ACJ found:

• if, as here, "it is found that the derivative was used to hedge a capital investment, any gain derived from the derivative will be on capital account" (emphasis added); and
• the CRA position (see 2013-0481691E5, 2012-0465561I7 and 2011-0418541I7) requiring that a mooted hedge relate to a directly held asset (or liability) and "which denies capital treatment … if there is no sale or proposed sale of the underlying item being hedged … has no legal basis."

She also accepted evidence that cross-currency swaps, unlike futures and options, are unsuited to FX speculation due to their high initial transaction costs and lower liquidity, which may suggest that they presumptively are on capital account.

Neal Armstrong. Summaries of George Weston Ltd. v. The Queen, 2015 TCC 42, under s. 9 – capital gain v. profit – foreign exchange and General Concepts – Evidence.