MacDonald – Federal Court of Appeal effectively affirms George Weston, and finds that the existence of a hedge does not turn on intention

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. Starting about seven years later, he started closing out the forward at a loss. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.

In finding that the taxpayer’s losses under the forward were realized on capital account, Noël CJ stated:

[A]n intention to hedge is not a condition precedent for hedging. It suffices that the person concerned owns assets exposed to market fluctuation risk when the derivative contract is entered into and that the contract has the effect of neutralizing or mitigating that risk.

Mr. MacDonald was not an “accidental hedger”. He was aware of the hedging effect which the Forward Contract would have on the BNS shares … .

After noting that George Weston dealt with a hedge of asset ownership rather than of transactional risk (and before agreeing with the Crown that George Weston was “dispositive” of the case before him), he stated:

A risk arising from ownership is equally capable of being hedged and there is no reason why the established rule that hedging gains or losses are treated the same way as the assets being hedged for tax purposes, should not apply… .

Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128 under s. 9 – capital gain v. income – futures/forwards/hedges.