MacDonald – Tax Court of Canada finds that “the law still requires a close linkage between the purported hedging instrument and the underlying asset”
An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. However, the “storm clouds,” which he had correctly anticipated, blew away more quickly than feared and, approximately eight years later, he closed out the forward at a loss. Consistently with his intentions all along, he continued to hold his BNS stake thereafter.
This loss was fully deductible unless the forward was a hedge of a capital investment (his BNS shares). Lafleur J stated that to be such a hedge, an instrument must be “directly linked (or symmetrical) to the underlying asset that is the subject of the hedge in terms of both quantum and timing.” She found that this test was not satisfied here given inter alia that “the settlements [under the forward] were not based on any anticipated sale of the BNS shares and the sale of BNS shares by Mr. MacDonald did not occur in close proximity to the settlements.”
Neal Armstrong. Summary of MacDonald v. The Queen, 2017 TCC 157 under s. 9 – capital gain v. income – futures/forwards/hedges.