Capital Loss v. Loss


Newmont Canada Corporation v. Canada, 2012 DTC 5138 [at 7292], 2012 FCA 214

loan made as investment in mining business

The taxpayer, a mining company, bought over $9 million of shares in, and made over $8 million in loans to, an exploration company ("Windarra"). The loan subsequently was settled for a payment by the exploration company of $1 million, with the taxpayer claiming the $7 million loss as an income loss. The Court accepted the trial judge's finding that the taxpayer was not ordinarily in the business of lending money, that the loans made were incidental to the taxpayer's gold-mining business, and therefore that taxpayer had not rebutted the presumption that shareholder loans are made to secure an enduring benefit, so that the loss was on capital account. Dawson J.A. stated (at para. 32):

I accept the respondent's submission that the monies advanced pursuant to the Windarra Loan could be characterized as "sums expended on the structure within which profits were to be earned," one of the expressions descriptive of a capital transaction cited with approval by the Supreme Court in Johns-Manville [85 DTC 5373, [1985] 2 S.C.R. 46].

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus testimony sufficient to "demolish" assumptions 159
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) 103
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i) interest was bad as settlement proceeds not allocated to it 222

Magicuts Inc. v. Canada, 2001 DTC 5665, 2001 FCA 332

trade receivable contributed on capital account to sub

In order to strengthen the balance sheet of its U.S. subsidiary, the taxpayer contributed a trade receivable to the subsidiary, with the amount contributed credited in part to paid-in surplus and in part to contributed surplus. Given that there was a resulting change in use of the amount represented by the trade debt to capital, an ensuing loss of the taxpayer was on capital account.

Easton v. The Queen, 97 DTC 5464, [1998] 3 CTC 26 (FCA)

exceptions to treating shareholder loans as capital outlays

The two taxpayers, who transferred land inventory to a newly-incorporated corporation, guaranteed a bank loan to the corporation and, later, were called upon to honour their guarantees of that debt, were not able to deduct their losses on income account, given that they had failed to establish that at the time their guarantees were given they intended to sell their shares at a profit. Robertson J.A. indicated (at p. 5465) that the Beamish decision (90 D.T.C 1584) and the Cull decision (87 DTC 5322) could "no longer be considered persuasive authorities".

In reaching his decision, Robertson J.A. noted at page 5468 (DTC) that the law presumes that advances or outlays from shareholder to corporation are capital in nature. The two major exceptions are where the shareholder is ordinarily in the business of lending money (an exception that also extends to outlays made to produce income from the shareholder's own business), and where the shareholder holds the shares on income account (i.e. as a trading asset).

R. v. Mara Properties Ltd., 96 DTC 6309, [1996] 2 S.C.R. 161, [1996] 2 CTC 54

land inventory retained character after wind-up

The taxpayer, which was in the business of developing and selling real estate, acquired, in an arm's length transaction and for a purchase price of approximately $70,000, all the shares of a corporation ("Fraserview") whose sole asset was a parcel of land having a cost amount of approximately $7.5 million. Mara then wound-up Fraserview in accordance with s. 88(1) and immediately thereafter sold the land in an arm's length sale for approximately $3.0 million.

La Forest J., without providing detailed reasons, found that in these circumstances the property retained its character as inventory in the hands of the taxpayer with the result that it realized a non-capital loss on the sale.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) inventory character flowed through to parent on wind-up 111

United News (Wholesalers) Ltd. v. The Queen, 94 DTC 6508, [1994] 2 CTC 180 (FCA)

loans outside money-lending business generally investments

Strayer J. found that the taxpayer, which was a distributor of books and magazines, made an advance of $252,000 to a company ("B/C") to finance an ice show as an investment in light of the taking of steps that an investor would take (receiving a personal guarantee of the individual principal of B/C whom the taxpayer incorrectly believed had assets sufficient to support his guarantee) and the absence of any relationship of the advance to the taxpayer's business. The fact that the taxpayer anticipated a very high rate of the return on the advance was not conclusive. Strayer J. stated (pp. 6510-6511):

"... Normally a person who lends money when he is not in the business of money lending makes an investment unless there are unusual circumstances."

Millford Development Ltd. v. The Queen, 93 DTC 5052, [1993] 1 CTC 169 (FCTD)

mortgage receivable received on inventory sale

The taxpayer, a real estate developer, sold land on income account, taking back a mortgage for a portion of the sale price. In finding that a sale of the mortgage receivable to a related company at a discount four years later in response to financial pressure from a bank gave rise to a loss on income account, Rothstein J. stated (p. 5055):

"The test seems to be whether or not the asset, eg. foreign currency or a mortgage, giving rise to the gain or loss, was acquired for the purpose of effecting a commercial or business transaction. The stage of the underlying transaction with which the asset's acquisition is associated does not seem to me to bear upon the issue."

He also noted that the Minister's position would result in the taxpayer paying tax on income which it did not receive given that the net effect of the sale of the mortgage at a discount was to reduce the proceeds of the previous sale.

The Queen v. Mandryk, 92 DTC 6329, [1992] 1 CTC 317 (FCA)

guarantee made qua shareholder

The taxpayer, who was a practising lawyer but also engaged in real estate transactions on income account, personally guaranteed bank loans to two private corporations (engaged in the laundromat business and a land development business) in which he was a significant shareholder. The resulting losses realized by him were of a capital nature given the presumption that shares of a corporation are an investment and given that the two corporations had carried on their regular businesses for more than five years (indicating that the holding of their shares was not a venture in trade for the purpose of resale at a profit).

Easton v. The Queen, 92 DTC 6218, [1992] 1 CTC 334 (FCTD), aff'd 97 DTC 5464 (FCA)

In finding that the two individual taxpayers sustained capital losses as a result of their guarantee of bank loans made to corporations owned by them and engaged jointly in the development of a failed real estate joint venture, Dubé J. stated (p. 6222) that he viewed the guarantees "as investments on their part in a Joint Venture which they felt was to be for their enduring benefit".

Flexi-Coil Ltd. v. The Queen, 92 DTC 6047, [1992] 1 CTC 245 (FCTD)

Loan advances and guarantees made by the taxpayer in favour of another corporation in which one of its principal shareholders had a substantial indirect investment were made in order to help bail him out rather than with a profit-making intention. Resulting losses accordingly were non-deductible.

Vine Estate v. The Queen, 89 DTC 5528, [1990] 1 CTC 18 (FCTD)

In finding that the taxpayer realized losses on income account on amounts advanced by him (and advanced on his behalf by another of his companies) to a start-up car rental and service station company in Florida (W.J.V. Inc.), Jerome A.C.J. stated:

"it is irrelevant whether the money sent to W.J.V. Inc. was used to cover its operating costs or not. The money spent by him, and the amounts imputed to him, are losses suffered in the course of his adventure in the nature of trade. He was trying to create a company that he could sell and thus produce income, so his losses are deductible in computing his income tax."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) shareholder benefit where benefit on sister corp 195
Tax Topics - Income Tax Act - Section 80.4 - Subsection 80.4(2) 33

Morflot Freightliners Ltd. v. The Queen, 89 DTC 5182, [1989] 1 CTC 413 (FCTD)

The taxpayer, which acted as the North American agent for a Soviet shipping company in respect of the operation of the Soviet company's ships into and out of ports on the Pacific coast of Canada and the Northwestern United States, was unable to deduct advances which it made to support the operations of the taxpayer's U.S. subsidiary, which was the U.S. sub-agent, when political problems for the U.S. subsidiary arising out of the 1979 invasion of Afghanistan effectively destroyed the subsidiary's business. Strayer, J. found "that the advances were provided by the plaintiff with a long-term objective in mind, namely to preserve for the indefinite future its U.S. subsidiary as a viable contracting party through which its agency responsibilities in Far Eastern Shipping could be carried out in the United States".

Le Bel v. The Queen, 87 DTC 5154, [1987] 1 CTC 259 (FCTD)

numerous stock market transactions on capital account

The taxpayer for many years had engaged in numerous transactions in the stock market, and on March 1, 1981 he severed his employment in order to devote all his working hours to the stock market. He realized substantial losses, which were held to be on capital account, partly in light of the fact that for the 1982 taxation year, and all previous taxation years, he had initially reported the transactions as capital transactions.

H.Y. Louie Co. Ltd. v. The Queen, 86 DTC 6228, [1986] 1 CTC 499 (FCTD)

The taxpayer, which was in the business of food preparation, advanced $200,000 in working capital to a company incorporated for the purpose of constructing a condominium in return for the agreement of that company and its other principal that the company would pay the taxpayer $250,000 upon the sale of the condominium units. The taxpayer's funds were characterized as contributed capital, and the total loss of its investment accordingly was found to be a business investment loss.

Isaac Meisels Investments Ltd. v. The Queen, 85 DTC 5029, [1985] CTC 7, [1985] 1 CTC 9 (FCTD)

Advances of $101,000 made by a real-estate company to a subsidiary with a share capital of $100, for the purpose of enabling the subsidiary to construct and sell 100 condominium and townhouse units, constituted the subsidiary's only capital (with the exception of the nominal share capital). When the taxpayer's investment was later lost, it accordingly realized a capital loss.

Factory Carpet Ltd. v. The Queen, 85 DTC 5464, [1985] 2 CTC 267 (FCTD)

The plaintiff established that it acquired shares of Bad Boy Limited with the intention of utilizing non-capital losses of Bad Boy, turning Bad Boy around into a profitable position within a period of two or three years, then liquidating its position at a profit. The shares accordingly were inventory and it was permitted to deduct losses arising from valuing the shares for their nil fair market value in accordance with s. 10(1).

Saskatchewan Co-Operative Credit Society Ltd. v. The Queen, 84 DTC 6225, [1984] CTC 628 (FCTD), aff'd 85 DTC 5599 [1986] 1 CTC 53 (FCA)

As part of the refinancing of a company ("C1") that was in financial difficulty and to which the plaintiff had made substantial loans, the plaintiff paid $1.4 million for preferred shares of C1 whose par value was that amount but whose fair market value was at most $0.7 million. The plaintiff contended that the difference of $0.7 million should be treated as a business loss which arose by virtue of the plaintiff receiving the shares in lieu of payment to it of debts of a greater amount. It was held, however, that the purpose of the plaintiff in subscribing to the preference shares was to assist the continued operation of C1 by making available a substantial amount of equity capital, and any possible capital losses accordingly would have to be claimed at the time of disposition of the shares.

The Queen v. Lalonde, 84 DTC 6159 (FCTD), aff'd 89 DTC 5286 (FCA)

Two doctors, who had never carried on a business of providing security or lending money, made interest-free advances to a non-profit corporation which had been established to construct and operate an old-age home. They also became sureties for bank loans. Since their intention in becoming so obligated was to foster an increase in the number of potential patients for their practice and thereby create an enduring benefit, the ensuing losses were on capital account.

The Queen v. Malone, 82 DTC 6130, [1982] CTC 145 (FCTD)

Since the bonuses paid by an incorporated securities dealer to its salesmen were proportional to the amount they had invested in the company, including advances made by them in order for it to maintain the level of working capital prescribed by The Toronto Stock Exchange, those advances were capital in nature. Losses sustained by a salesman when the company went into bankruptcy and was unable to repay his advances thus were non-deductible in computing his income from his stockbrokering business.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance 41

Tamas v. The Queen, 81 DTC 5150, [1981] CTC 220 (FCTD)

silver futures trading on income account

Losses sustained by the taxpayer radiologist from the purchase and sale of silver futures were fully deductible. "[B]earing in mind that silver brings no interest and no dividend, it becomes obvious that his governing motive was to speculate".

Losses that he sustained from the resale of convertible debentures that he had purchased on margin were also held to be fully deductible, in light of the steep risks involved and the fact that "the interest from the bonds would not cover the interest on the loans, not to mention the repayment of the borrowed capital. The doctor would not have borrowed so heavily and purchased on margin to assemble a safe long-term investment portfolio".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges individual's losses on silver futures trading on income account 81

Paco Corp. v. The Queen, 80 DTC 6328, [1980] CTC 409 (FCTD)

A Canadian company ("Paco") in the business of making and selling machinery used in the manufacture of concrete blocks helped found a small block-manufacturing company in France, loaned substantial amounts to the company to fund operating losses, and then realized a substantial loss on the sale of the company. Since the overriding intent of Paco at the time of making its investment was to establish a demonstrator factory in order to facilitate the sales of its machinery in Europe, and not to establish a manufacturing operation per se, the investment expenditures were deductible.

Sher v. The Queen, 80 DTC 6095, [1980] CTC 168 (FCTD)

It was held that a securities sales representative who acquired shares in the holding company of a stock brokerage company, realized a capital loss when he sold the shares for one dollar. "It is true ... that such venture promised him more earnings and greater insight into the business but it made him also a shareholder in the company. While he did not realize any dividends on the stock he was entitled thereto if any were earned and declared."

Chaffey v. MNR, 78 DTC 6167, [1978] CTC 293 (FCA)

The shareholders of a company ("Canadia") in a tourist attraction business made advances to it because they were confident that it would be successful in its own right, and not because they viewed their advances to Canadia as a part of the promotion and development of the land, in which they also had an interest, for resale at a profit. The advances accordingly were investments, and later losses realized on the sale of the indebtedness were non-deductible.

Frappier v. The Queen, 76 DTC 6066 (FCTD)

The taxpayer, who was a licensed investment dealer, made advances to her clients to cover their losses when the brokerage company for which she worked went into bankruptcy. The advances became deductible losses in the subsequent year (when they were established to be irrecoverable) given that her purpose was to maintain the clients as a source of revenue and continued referrals.

The Queen v. Pollock Sokoloff Holdings Corp., 76 DTC 6181, [1976] CTC 349 (FCA)

An affiliate of the taxpayer made loans to an arm's length individual and then, in response to changes in the Quebec taxing statutes assigned, the loans for their face value to the taxpayer, whose principal business was the making of investments and shares, bonds and real estate. The taxpayer's loss upon the bankruptcy of the debtor was non-deductible. "That amount does not, in my view, represent a cost of the respondent's business on current account. In effect, it represents a diminution in the value of property that had been transferred to the respondent as part of an exchange of assets with a related company, which exchange was effected with the sole objective of improving the tax position under provincial tax laws."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(ii) loan must be made by taxpayer 126

MNR v. Kelvingrove Investments Ltd., 74 DTC 6357, [1974] CTC 450 (FCTD)

The taxpayer's business activities, after selling rental properties for $842,382 in cash, consisted of purchasing and selling gold futures, purchasing and selling stocks, purchasing swap and deposit receipts, and the making of four loans, including the loan in question, which had been made to a company owned by two minority shareholders of the taxpayer who also were sons of its controlling shareholder. The loan was held to have been made as an integral part of the taxpayer's business, and the taxpayer suffered its loss on income account.

The Queen v. Lavigueur, 73 DTC 5538, [1973] CTC 773 (FCTD)

It was found that the taxpayers in the course of their rental business made loans to their tenants in order to retain them as tenants. Substantial losses realized on loans made to one such tenant were deductible notwithstanding that the taxpayers at one point received approximately 1/3 of the shares of that tenant as a means of guaranteeing loans already made and to be made.

The Queen v. F.H. Jones Tobacco Sales Co. Ltd., 73 DTC 5577, [1973] CTC 784 (FCTD)

The taxpayer, whose business was the processing of tobacco, guaranteed a loan to a tobacco distributor ("Tabacs Quebec"), the proceeds of which Tabacs Quebec used to acquire shares of a tobacco manufacturer ("Tabacs Trans-Canada") which theretofore had been purchasing only about 20% of its tobacco needs from the taxpayer, but which agreed that thenceforth it would purchase exclusively from the taxpayer. Noel, J. held that since the purpose of the taxpayer in guaranteeing the loan was to ensure growth in its sales to Tabacs Trans-Canada, a loss which it suffered when it was required to make good on its guarantee was deductible.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 62

McLaws v. Minister of National Revenue, 72 DTC 6149, [1972] CTC 165, [1974] S.C.R. 887

When a corporation owned by the taxpayer was facing bankruptcy, the bank proposed to call its loans, but offered to extend additional credit to keep the corporation going provided that the taxpayer gave a personal guarantee secured by the deposit of securities with the bank. The loss sustained by the taxpayer when he was required to honour his guarantee a year later was a capital loss. Although he was entitled to receive guarantee fees from his corporation, it was found that he gave the guarantee in order to protect and preserve a source of income, rather than to earn the guarantee fees.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) guarantee obligation not borrowed money 119

Stewart & Morrison Ltd. v. Minister of National Revenue, 72 DTC 6049, [1972] CTC 73, [1974] S.C.R. 477

The taxpayer incorporated an American subsidiary to carry on its business in the U.S. and advanced the necessary funds for the subsidiary to carry on its business. The subsequent loss which the taxpayer sustained on these advances was a capital loss. Unlike the Berman case, where the taxpayer made voluntary payments to strangers for the purpose of protecting its business goodwill, here the payments were loans to a separate corporation.

Minister of National Revenue v. Freud, 68 DTC 5279, [1968] CTC 438, [1969] S.C.R. 75

loan loss sustained on speculative start-up venture

The taxpayer, who was a lawyer, organized and, with some friends, funded a U.S. corporation for the purpose of developing and promoting a series of prototypes of a car. A loss which the taxpayer's sustained when this venture failed and advances which he had made to the corporation (after the other shareholders has refused to put in any other money) became unrecoverable was found to be fully deductible by him given that the venture itself clearly was a speculative adventure and any gain which would have been realized by him from disposing of his investment in the corporation would have been taxable on income account. Pigeon J. stated (p. 5281):

"Fairness to the taxpayers requires us to be very careful to avoid allowing profits to be taxed as income but losses treated as on account of capital and therefore not deductible from income when the situation is essentially the same."

Terminal Dock and Warehouse Co. Ltd. v. MNR, 68 DTC 5060 (Ex Ct), aff'd 68 DTC 5316 (SCC)

advances to employees on capital account

One of the activities of the taxpayer, whose main business was that of a dock and wharfage company, was to finance the purchase of shares in its U.S. parent by employees (primarily employees of affiliates) by acquiring such shares for cash and selling the shares to the employee for the same price, payable over 15 years with a below-market rate of interest and secured by a pledge of the shares.

The taxpayer was unsuccessful in its submission that this represented a financing business. A loss realized by the taxpayer when it sold its portfolio of employee receivables to a bank in connection with "cleaning up" its balance sheet for a public offering was a capital loss.

Minister of National Revenue v. Steer, 66 DTC 5481, [1966] CTC 731, [1967] S.C.R. 34

The taxpayer and his associate each received 1/4 of the shares of a petroleum company together with the royalty interest in consideration for guaranteeing 1/2 of the indebtedness of the company to a bank of $125,000. The taxpayer was called on his guarantee in 1957, deducted a loss of $62,500 for that taxation year, and after proving as a creditor in the company's bankruptcy received dividends in 1959 and 1961 for $6,109 and $3,200. Judson J. characterized the guarantee as a deferred loan to the company, part of which was recovered in bankruptcy, with the result that the taxpayer's loss was a non-deductible capital loss.

Frontenac Shoe Ltée v. MNR, 63 DTC 1129 (Ex Ct)

Amounts advanced by the taxpayer (which was a shoe manufacturer and retailer) to a supplier of leather that was in financial difficulty were not deductible when the supplier ceased operations and the amounts had to be written off.

See Also

Panda Realty Ltd. v. MNR, 86 DTC 1266, [1986] 1 CTC 2417 (TCC)

loan made to preserve rental income

The taxpayer was able to deduct a loss sustained from guaranteeing a loan to a tenant as it was provided in order to preserve an ongoing source of rental income.

MacDonald v. The Queen, 2017 TCC 157, rev'd 2018 FCA 128

cash-settled forward sale of shares not sufficiently linked to underlying shareholding to be a hedge

An individual, whose career had included senior positions at a stock brokerage, and who had 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 (at para. 86) 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” (para. 107).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges “the law still requires a close linkage between the purported hedging instrument and the underlying asset” 565

Turner v. The Queen, 2016 TCC 77 (Informal Procedure)

averaging-down investment in one public company not indicative of business

The taxpayer, who was a professional engineer, invested heavily in the shares of one public company (“Central”) (as a result of investing more and more as its share price went down), which became bankrupt in 1992. He initially borrowed from the banks to fund his investments until his credit with them ran out, after which he borrowed heavily on his credit cards. He had not traded in securities since then. In 2012 and 2013, the Appellant he deducted non-capital losses which he carried forward from the earlier years as well as continuing to deduct interest on his outstanding debt relating to the earlier investments.

Masse DJ concluded that the taxpayer’s claimed non-capital losses did not exist as he had not been carrying on a business: his trading had never shown a profit, he had no formal training in securities trading, he borrowed on credit cards at a 20% interest rate and dealt in only one security. Furthermore, his virtually complete failure to keep records meant that he was not in a position to demonstrate th existence of a business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base interest added to ACB 150

SRI Homes Inc. v. The Queen, 2014 DTC 1185 [at 3693], 2014 TCC 180

shareholder loans to trailer park companies were made to earn income in taxpayer's own manufactured home business

The taxpayer, whose business was the production and sale of manufactured homes, disposed of a number of assets to a related company, including shareholder loans to two partly-owned companies ("Valley" and "Lakeside"), which operated trailer parks. The companies would establish and sell lots and manufactured homes to occupy the lots. The taxpayer deducted non-capital losses on the disposition of the shareholder loans to a related company, which was prompted because a purchaser of the taxpayer's shares was not interested in these assets.

Graham J allowed the deductions. After affirming the taxpayer's position that the fair market value of the loans at the time of disposition was less than their book value, Graham J found that the losses were on income account, noting that this case was similar to Paco. The taxpayer was in the business of lending money (e.g. transactional or start-up financing for its dealers), but the shareholder loans were not part of this business, as the factors that characterized the taxpayer's usual loans (such as security) were not present.

However, Graham J also found that the money was lent for the purpose of earning income in the taxpayer's own business in selling manufactured homes given that Valley and Lakeside were an outlet for sales of its manufactured homes, so that on this ground the losses were deductible on income account.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other full repayment of shareholder loan, subsequent to its sale for less than book value, was not anticipated 129

Prochuk v. The Queen, 2014 DTC 1050 [at 2917], 2014 TCC 17

trading RRSP funds does not make the annuitant a trader

The taxpayer, whose principal source of income was his RRSP, received distributions of $63,750 on an investment made outside his RRSP in a purported foreign currency trading fund promising a fixed yield of 17.5% p.a., before the fund's fraudulent nature was discovered. His $186,250 loss was not from an adventure in the nature of trade because the evidence was clear that the taxpayer approached the $250,000 investment as an investor and not a trader, including that the investment was held passively and was locked in for 28 months (para. 55). Respecting his active trading of investments held in his RRSP, "trades within an RRSP are not relevant in deciding whether an individual is in the business of trading" (para. 48).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business trading RRSP funds does not make the annuitant a trader 116
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares trading RRSP funds does not make the annuitant a trader 116

Mittal v. The Queen, 2013 DTC 1020 [at 106], 2012 TCC 417

stock trading with 4X turnover on income account

C Miller J found that the taxpayer, an engineer by profession, was engaged in a business of stock trading and that his deduction of losses should be allowed. His time investment (25 hours per week) on investment reading and trading, and the nature of his trading activities, were consistent with an adventure in the nature of trade. The taxpayer engaged in 160 trades in a single year, representing a value of $3,237,279, which was approximately four times his total investment capital.

C Miller J stated (para 21) "I agree that there is no magic formula, no bright line test, that if you engage in say over 50 transactions it must be an adventure." He found that the evidence at hand tended to show a businesslike approach to the taxpayer's trading.

Zsebok v. The Queen, 2012 DTC 1127 [at 3145], 2012 TCC 99

leveraged frequent stock trading

Sheridan J. found that, on balance, the taxpayer's characterization of his share trading as an adventure in the nature of trade was correct and his losses were on income account. The frequency of trades suggested that the transactions were capital in nature - trades were done in only 5%-10% of the days in a given year, with shares held for an average of 60+ days. However, the taxpayer sometimes would hold shares for a matter of days or even hours, and he tended to trade mainly in three stocks. The taxpayer was also heavily over-leveraged. The taxpayer's full-time employment did not substantially interfere with his ability to devote his attention to managing his trades because his job entailed monitoring the markets with professional tools.

Swain v. The Queen, 2012 DTC 1086 [at 2921], 2012 TCC 46

The taxpayers were unsuccessful in deducting as a loss the amount of a loan allegedly made by their law partnership to a corporation ("EM Diagnostics") to finance the research and patenting of new breast cancer screening techniques. In addition to doubting on the evidence that the partnership had made such a loan, Boyle J. noted that the loan had no apparent connection to the partnership's business.

Chronis v. The Queen, 2010 DTC 1188 [at 3441], 2010 TCC 218

Losses sustained by the taxpayer, when most of the property used by him in a business of selling pirated satellite television signals was seized by the RCMP, were fully deductible. Most of the property was inventory, and the balance of the property gave rise to a terminal loss.

Hayter v. The Queen, 2010 DTC 1176 [at 3395], 2010 TCC 255

The taxpayer sustained a total loss with respect to a joint venture to buy laptops and resell them at a gain, given that a purported vendor of the laptops was engaged in fraud. The taxpayer's loss was a fully deductible loss given that he and his co-venturer attended meetings with the seller's representatives and were not mere passive investors.

However, in another transaction with the same vendor, the loss was a capital loss and not a fully deductible loss given that the taxpayer played no active role and had no knowledge of the details of the transaction, which suggested that there were no indicia of a business.

Krauss v. The Queen, 2009 DTC 1394 [at 2155], 2009 TCC 597

The taxpayer disposed of a development property to a wholly-owned corporation on capital account rather than as inventory given that her practice had been to hold properties indefinitely as rental properties, and such transaction represented only a change in the form of her ownership of the property.

Shaw-Almex Industries Limited v. The Queen, 2009 DTC 1377 [at 2080], 2009 TCC 538

The taxpayer obtained a guarantee of the obligations of a US-resident sister corporation ("Fusion") to a US bank for the purpose for the purpose of capitalizing Fusion's operations. Accordingly, when it agreed to repay the loan to Fusion when Fusion became insolvent and the guarantee otherwise would have been called (which would have adversely affected the taxpayer's with the guarantor), the resulting loss to it was a capital loss. The principle (at para. 36) that "if payment under the guarantee is made for income-producing purposes related to the taxpayer's own business and not that of the corporation for which it repays the loan, then the expense may be treated as being on income account" did not apply.

Words and Phrases

Valiant Cleaning Technology Inc. v. The Queen, 2008 DTC 5112, 2008 TCC 637

Substantial advances which the taxpayer made to a U.K. subsidiary were made because the taxpayer's customer (Ford Motor Company) was requiring the taxpayer to operate on a global basis and the taxpayer feared that it would cease to be a major direct ("Tier 1") supplier to Ford if it did not maintain U.K. operations. As the advances were made in order to safeguard the taxpayer's stream of income from its Canadian business, the losses when sustained were currently deductible.

Saskatchewan Wheat Pool v. The Queen, 2008 DTC 2520, 2008 TCC 8

A corporation ("MAALSA") that was jointly funded by the taxpayer and two other provincial wheat pools transferred vacant land held by it to the taxpayer and the other wheat pools in satisfaction of debt that represented over 10 times the fair market value of the transferred property. Bowman, C.J. found that although the cost to the taxpayer of the land acquired by it was deemed by s. 79.1(6) to be equal to the amount that was owing to it, the land was acquired by the taxpayer on income account given that the Pools intended to sell the property as soon as possible after it was surrendered to them and that this transaction gave rise to an accounting profit. Furthermore, if attention were paid to the entire sequence of events, this did not help the taxpayer as the circumstances established MAALSA also held the land as inventory.

Howard v. The Queen, 2008 DTC 2788, 2008 TCC 51

individual responsible for promoting a company's stock

Losses which the taxpayer, who was the Vice-President (Finance) of a start-up company, realized on disposing of shares of that company, most of which he had acquired through the exercise of employee stock options, were found to have been realized on income account given his evidence that he was responsible for promoting the company's stock among investors and devoted virtually all his time to monitoring and assessing the performance of the shares, and that he intended to resell his shares for profit at the earliest best opportunity.

Laramee v. The Queen, 2007 DTC 1723, 2007 TCC 635

The taxpayers invested directly in the shares of a real estate development company that was developing a golf course (and of a related corporation that it was proposed would carry on operations of the golf course) but used a holding company to lend money on an interest-bearing basis to fund the project. Miller J. would have found that any loans made by them to the real estate development company would have been on income account given the speculative nature of the venture and their intention to have the golf course sold once it was operational. However, the loans advanced by them to the holding company were an investment so that the loss sustained by them on those loans was on capital account. Miller J. noted that if the project had been successful, the holding company would have received principal plus interest on its loans to the development company.

Greenberg v. The Queen, 2007 DTC 124, 2006 TCC 608

The taxpayer, a lawyer, who followed a practice of lending to start-up private companies and receiving shares of the companies (generally a 50% bloc) for nominal consideration, with a view to realizing gain after the companies had raised further funds through private placements or by going public. A loss he sustained on such a loan was on income account.

Hawa v. The Queen, 2007 DTC 28, 2006 TCC 612 (Informal Procedure)

frequent stock trading

The taxpayer, who in 2001 had made 151 purchases of stock in 16 companies, which were held for short periods of time, was found to be engaged in a business in the ordinary sense of the word with respect to his trading activities, with the results that the losses he sustained were on income account.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 103

Corvalan v. The Queen, 2006 DTC 2907, 2006 TCC 200

The taxpayer, who worked as a mining engineer for a junior exploration company, realized losses on capital account when he sold shares of his employer that he had acquired earlier in the year on the exercise of employee stock options given that his trading activities were limited to the sale of shares of his employer over several years, and he did not have any education, training or certification in stock trading and there were no other "badges of trade".

Excell Duct Cleaning Inc. v. The Queen, 2006 DTC 2040, 2005 TCC 776

loans made by franchisor in ordinary course of business

Sums which the taxpayer, a franchisor, advanced to another company ("991830") that was 2/3 owned by executives of the taxpayer and 1/3 owned by the individual operator of 991830 was found to give rise to a loss on income account when a 991830 terminated its operations, on the basis of a finding that the taxpayer made loans to various new franchisees in the ordinary course of its business activities in order to help the franchisees set up their businesses and thereby generate royalty income to the taxpayer.

Cathelle Inc. v. The Queen, 2005 DTC 858, 2005 TCC 360

Advances made by the taxpayer to its subsidiary to refinance receivables owing by the subsidiary to it were characterized as being made for the purpose of providing the subsidiary with working capital and as, therefore, being on capital account. The resulting loss is a capital loss rather than a fully deductible expense.

Rajchgot v. The Queen, 2004 DTC 3090, 2004 TCC 548, aff'd 2005 DTC 5607, 2005 FCA 289

limited trading in shares of one company

The taxpayer, who acquired shares of Tee-Com in 1995, 1996 and 1997 and disposed of the shares at a substantial loss in 1997, was found to have realized such losses on capital account. The frequency of his transactions was not high (approximately 11 purchases during the period), the length of his holdings did not show an intention for a "quick flip", he did not have any special connection with Tee-Com, and it was not unusual for an investor to spend significant time research and monitoring his investment. Furthermore, losses realized in 1995 and 1996 were reported on capital account, and there was no evidence to justify a change to income-account treatment in 1997.

Walchuk v. The Queen, 2003 DTC 2184, 2004 TCC 42

partnership unit normally capital property

Before going on to find that a loss realized by a stockbroker on the insolvency of a partnership carrying on a restaurant business in Greece was on capital account, Miller J. stated (at p. 2188) that "to overcome the normal status of a partnership unit as capital property is a more onerous task than doing likewise for shares, simply due to the nature of the structure", and noted that there was no evidence of conduct that was more consistent with the intention of the taxpayer being to enhance the value of the business with a view to resale at a profit, rather than carrying on the business with a view to profit.

Smith v. The Queen, 2003 DTC 215 (TCC)

The taxpayer, who was a stockbroker, capitalized a holding company with shares and debt in order for the holding company, through a subsidiary, to acquire a franchise. The loss sustained by him was on income account in light of his intent to make the franchise profitable and sell it for a quick profit, and in light of the short ownership of the franchise (less than two years) and bank financing of the franchise.

Grant v. The Queen, 2000 DTC 1985 (TCC) (Informal Procedure)

The promoters of limited partnerships were traders in real estate and sold properties to the partnerships with the intention that the partnerships would sell them at a profit as soon as possible. Accordingly, losses arising from write-downs of the properties that were allocated to the taxpayers were deductible by them.

Williams Gold Refining Co. of Canada v. The Queen, 2000 DTC 1829 (TCC)

Debts owing by an affiliated company to the taxpayer that arose from the payment by the taxpayer of third-party expenses of the affiliate were found to be deductible on income account on the basis of evidence that the controlling shareholder's purpose in creating the affiliate was to improve the profitability of the taxpayer both by providing an expanded market for its products and by reducing its overhead costs.

Magicuts Inc. v. The Queen, 98 DTC 2085 (TCC)

The Taxpayer's U.S. subsidiary developed over time a large balance owing to the taxpayer in respect of products and equipment sold by the taxpayer to the subsidiary for a profit and as a result of the taxpayer paying for various other expenses of the subsidiary. The Minister's disallowance of a deduction by the taxpayer of the amounts owing to it by the subsidiary was confirmed on the basis of a finding that Rip TCJ. that, by cancelling portions of the debt owing to the taxpayer, it contributed such portions to the subsidiary's capital and that such contribution represented a change of use of the money from a trade debt to capital.

Hamilton v. The Queen, 97 DTC 787, [1997] 1 CTC 2446 (TCC)

The taxpayer paid licence fees owing by a corporation of which he was a shareholder on an understanding that the corporation would reimburse him through issuing flow-through shares to him. This undertaking was not fulfilled and McArthur TCJ. affirmed the reassessment of the Minister that the payment by the taxpayer was a capital loss.

Robertson v. The Queen, 97 DTC 449, [1996] 2 CTC 2269 (TCC)

A loss sustained by the taxpayer, the deputy chairman and the director of a public corporation, when he sold shares of the corporation approximately 11 months after acquiring them on exercise, was a capital loss.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) deputy chairman and director of public company dealt at arm's length with it 70
Tax Topics - Income Tax Act - Section 39 - Subsection 39(4) 36
Tax Topics - Statutory Interpretation - Interpretation Act - Section 32 s. 32 deals with departures from form rather than content 43

Campbell v. The Queen, 96 DTC 1221 (TCC)

leveraged acquisition of convertible debentures

In finding that the taxpayer realized a deductible loss on the sale by him of Saskatchewan Potash Corporation convertible bonds that the taxpayer had purchased 11 months previously, Teskey TCJ. stated (at p. 1225):

"A taxpayer who borrowed the total purchase price of the securities, for a fixed one-year term at an interest rate in excess by approximately 3% to 4% above the return the securities being purchased would produce, cannot be said to have made an investment in the circumstances herein, where the Appellant had no way of paying off the indebtedness incurred except by sale of the bonds."

Fickes v. The Queen, 94 DTC 1969, [1994] 1 CTC 2884 (TCC)

A loss suffered by the taxpayer as a result of his guarantee of a bank loan made to a company in which he had a share investment, and related accounting fees, were non-deductible given that the evidence did not disclose that the taxpayer showed a clear intention that he was acting as a trader when he bought the shares or when he guaranteed the bank loan, or that he purchased the shares with the intention of transforming the company in order to turn it into a profitable enterprise and sell his shares. In addition, the loan was made for the purpose of providing working capital to the corporation.

Faucher v. The Queen, 94 DTC 1581, [1994] 2 CTC 2001, [1994] 2 CTC 413, 95 DTC 5007 (TCC)

Lamarre Proulx, TCJ. accepted the taxpayer's evidence that he and other investors, who had capitalized a numbered company in order to indirectly purchase a ceramic tile manufacturing plant that had just declared bankruptcy, had no intention to become tile manufacturers and had no knowledge of ceramic tile production but, rather, intended to resell their shares in relatively short order once the plant was in full operation. Accordingly, a loss on income account was realized when their investment became worthless.

E.C.E. Group Ltd. v. MNR, 92 DTC 2019, [1992] 2 CTC 2376 (TCC)

Over a four-year period the taxpayer provided consulting services to a corporation partially-owned by it ("ADT") and included the fees in its income. These services represented approximately 1% of its total work. When it sold the fee receivables to the other shareholder for approximately 1/6 of their face amount, it was entitled to deduct the loss:

"The evidence establishes that the Appellant's trade account with ADT had not at any material time constituted a form of equity financing or investment in ADT, that its genesis was the Appellant's income earning operations, that it had not gained any separate characteristics by the passage of time or by the manner it was reflected in ADT's financial statements and that it remained a trade account until its disposition (p. 2025)."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i) disposition before year end 116

Lawson v. Johnson Matthey plc, [1992] BTC 324 (HL)

The collapse of the taxpayer's currency trading and banking subsidiary would have effectively terminated the taxpayer's business (through a loss of creditor confidence). In order to prevent such a collapse, the taxpayer agreed that it would contribute £50 million to the subsidiary, sell the shares of the subsidiary to the Bank of England for £1 after which the Bank of England would provide the requisite financial support to the subsidiary. In finding that the £50 million payment of the taxpayer was deductible, Lord Keith stated (p. 326):

"A number of decided cases make it clear that a payment made to get rid of an obstacle to successful trading is a revenue and not a capital payment ... This must be no less true of a payment made to save the whole of an existing business from collapse."

Hill v. MNR, 91 DTC 1094, [1991] 2 CTC 2356 (TCC)

The taxpayer entered into an agreement with the corporation owned by him and his wife to be paid fees in full consideration for providing guarantees of loans to be made to the corporation by The Royal Bank. However, in the absence of specific evidence that the fees actually paid by the corporation to the taxpayer were consideration for the provision of guarantees rather than for other services, Bonner J. found (at p. 1096) that the "guarantees were not shown to have been given in the course of a business or adventure in the nature of trade involving the provision of guarantees for reward". In addition, in the taxation year in question the taxpayer's quantum of liability under the guarantees was not fixed: negotiations with the bank in this regard were not concluded until four years later.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 169 105

K.J. Beamish Construction Co. Ltd. v. MNR, 90 DTC 1584, [1990] 2 CTC 2199 (TCC)

In finding that losses sustained on non-interest bearing advances made by the taxpayer to a real estate corporation of which the taxpayer was a shareholder and losses sustained pursuant to a guarantee were on capital account, Christie A.C.J. declined to follow the reasoning of Reed J. in the Cull decision.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Corporate/Separate Personality shareholder has no interest in corporation's assets 170
Tax Topics - General Concepts - Personality 119

Anglemont Estates Ltd. v. MNR, 88 DTC 1770, [1989] 1 CTC 2004 (TCC)

A corporation whose business included the development and sale of real property and the sale of accounts receivable realized a deductible loss when it made a sale to its parent corporation of accounts receivable with a face amount of $300,000 for a sale price equal to their estimated fair market value of $239,730, with the sale price being satisfied by way of set-off against a dividend payable to the parent corporation.

Gestion Louis Riel Inc. v. MNR, 85 DTC 550, [1985] 2 CTC 2211 (TCC)

An interest-free loan made by the taxpayer to an affiliated corporation that was in financial difficulty was found (without giving detailed reasons in support of this conclusion) to have been made as an adventure in the nature of trade, so that the resulting loss of the taxpayer was sustained on income account.

Guinea Airways Ltd. v. Federal Commissioner of Taxation (1949), 83 C.L.R. 584 (HC of A.)

A loss which an air transport company sustained when a large stock of spare parts (much greater than the annual quantity required for the maintenance of its aircraft) was destroyed in the Second World War, was a capital loss.

Administrative Policy

25 September 2012 Internal T.I. 2011-0409281I7 F - Papier commercial - Obligations XXXXXXXXXX

compensating clients for half their loss was currently deducible, whereas purchasing securities at original cost was its cost

The corporate taxpayer, which was a portfolio manager, suspended transactions involving asset-backed commercial paper (ABCP) of its clients during the 2008 financial crisis, and subsequently agreed to purchase some of the client ABCP for its pre-crisis value. CRA found that the excess amount paid by the taxpayer for the purchases (which it reflected in its financial statements as an immediate loss) was not deductible under s. 9 and was not an eligible capital expenditure under s. 14(5), and instead was part of the cost of the ABCP.

The taxpayer also compensated some clients for 1/2 of their loss on certain bank obligations owing to them, which payments were deductible under s. 9. CRA also stated (TaxInterpretations translation):

...we do not believe that the taxpayer acquired an eligible capital property. In sum, nothing indicates that, by the payment of the above amounts, the clientele of the taxpayer were augmented or that its business structure was expanded.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base acquiring client securities at the clients' cost rather than their lower FMV was reflected in portfolio manager's cost 162

29 July 2004 Internal T.I. 2003-0023761I7 F - Contrat de SWAP d'équité

excerpted in 2009-0323991I7 F

In connection with its monetization of the shares of a corporation, the taxpayer transferred the shares of that corporation to a Newco ("Société2") in consideration for shares of Société2, entered into an equity swap with a financial intermediary with respect to the shares of Société2 under which it agreed to pay the appreciation in the value of the shares of Société2 above a ceiling level, and the counterparty agreed to pay the depreciation in value of the shares of Société2 below a floor level, and the taxpayer borrowed money from another financial institution. Given the close connection between the loan and the equity swap contract, including the fact that the amount of the loan corresponded to the floor value of the swap contract, the loss sustained by the taxpayer when the equity swap was settled was on capital account.

18 June 1993 T.I. (Tax Window, No. 32, p. 3, ¶2593)

The treatment outlined in IT-239R2 would apply to an indemnity payment made by shareholders of a bonded company to a bonding company, provided that subrogration occurred.

31 July 1992 External T.I. 5-911918 -

If guarantee fees received by the guarantor are considered to be business income, it does not necessarily follow that any loss incurred by the guarantor in honouring the guarantee will be on income account.


Dunbar, "Sale of Stock Plan Shares May Produce Fully-Deductible Loss", Taxation of Executive Compensation and Retirement, October 1991, p. 499.



McNeill v. The Queen, 2000 DTC 6211 (FCA)

After noting that the Tax Court had found that the taxpayer's objective in breaching these covenants was to keep his clients and his business, Rothstein J.A. found that the analysis in 65302 British Columbia Ltd. Re the deductibility of fines and penalties also applied to a court award of damages.

In responding to a Crown's contention that the damage award could be considered to be incurred on capital account, Rothstein J.A. indicated that "the finding of fact of the learned Tax Court Judge that the appellant's object in breaching the agreement was to keep his clients in business is conclusive. The damages were awarded for loss profits" and found the damages amount to be deductible.


See Also

Kallis v. The Queen, 2021 TCC 58

taxpayer did not make loans in a business-like manner

The taxpayer used funds that he had generated from a successful career in the oil and gas industry to make interest bearing loans to third parties. He used word of mouth, met prospective borrowers socially, spent about four hours a week on this activity, and kept minimal records. Two of these third parties eventually became insolvent: a company (“AFC”) that had been financing a pay-day loan company owed him $10,025,000 on various unsecured debentures that had been bearing interest at around 16%; and a junior venture capital company (“FCM”) owed $3.5 million on four unsecured loans bearing interest at 22.5%.

Before finding that such losses were on capital account, Wong J found (at paras. 24-25):

… I cannot find that he was in the business of lending money during the years under appeal because the positive indicia of a business were either absent or minimally present. For example, he used his own surplus funds for the loans, his AFC debentures were unsecured, his portfolio of borrowers was very limited, and there was no evidence introduced to support the conclusion that the number of loans was significant in the circumstances or that their arrangements were complex. It also does not appear that he negotiated terms with AFC, such as duration and interest rate; rather, his discretion seemed limited to deciding whether not to buy or extend a debenture.

With respect to advertising and promotion, he relied on word of mouth within his Calgary community and he screened potential borrowers by taking them out for social activities. … [H]e did not keep business records in relation to his lending activity; rather, the level of recordkeeping is more consistent with a non-business (i.e. investment) situation. … I cannot find that he went about his loan activities in an orderly, businesslike way, as a business person would normally be expected to do.

Leonard v. The Queen, 2021 TCC 33

loss on mortgage that was acquired in order to acquire the underlying property under foreclosure proceeding on income account was also from an adventure

Following default by a Hawaiian developer (“Anderson”) on mortgage debt owing by him to a U.S. bank on two adjoining lots (one, “Lot B-3,” with a house on it, and the other, “Lot B-2,” an undeveloped lot), the taxpayer (Leonard), agreed to use a $5.7 million loan from the bank to purchase Lot B-3 and the debt of $1.5 million, evidenced by a note and secured by a mortgage on Lot B-2, owing by Anderson to the bank. Sommerfeldt J found that such debt and mortgage had been purchased at a discount of approximately $200,000 to the $1.5 million principal owing.

As part of foreclosure proceedings against Anderson, a deficiency judgment in the amount of $1,472,006 was filed in favour of Leonard and against Mr. Anderson, and a judicial sale conducted by public auction was concluded pursuant to which Leonard (as the only bidder) acquired Lot B-2 for approximately $500,000. To the date of the hearing, he had been unable to sell Lot B-2.

In finding that Leonard had acquired the debt and mortgage as part of an adventure in the nature of trade, Sommerfeldt J rejected (at para. 53) the submission of the Crown that “Leonard intended to make a profit only by selling Lot B-2, and not by receiving repayment, or disposing, of the Mortgage, the Note and the Debt that he had acquired from the Bank,” and stated (at para. 53) “that a continuing profit-making intention pervaded the entire Transaction, from the acquisition of the Mortgage, the Note and the Debt from the Bank to the completion of the judicial sale and the listing of Lot B-2 for sale.” Factors favouring the transactions being an adventure in the nature of trade included such intention, the distressed nature of the purchased debt and mortgage and the financing with borrowed money, and these factors outweighed the dissimilarity between his dredging business and these distressed debt transactions, and the absence of significant work or effort to put debt or Lot B-2 into a more marketable condition.

Accordingly, the loss realized by him was on income account.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) Court not bound by an erroneous admission by one of the parties 115
Tax Topics - Income Tax Act - Section 9 - Timing cost of mortgage debt acquired as adventure not deductible when expended 53
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition foreclosure proceedings resulted in disposition of the mortgage but not of the debt it had previously secured 471
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) - Subparagraph (b)(i) on a foreclosure, the taxpayer disposed of his mortgage, even though the debt it secured remained outstanding 429
Tax Topics - General Concepts - Evidence Manitoba law, being where the Tax Court hearing was held, was the lex fori governing the mortgage foreclosure proceeding at issue regarding a U.S. property 178



MacDonald v. Canada, 2020 SCC 6

cash-settled forward “objectively” was a capital share hedge notwithstanding no matching share sale

In 1997, 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. Over several years starting in 2004, he closed out the forward at a loss. At the time of entering into the forward, he also monetized about half of his BNS shareholding through a loan from a bank (TD Bank) affiliated with the forward counterparty to which he pledged his shares and the forward contract – but then repaid the loan in 2004. 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 affirming the Federal Court of Appeal’s decision to reverse this decision on the basis of objective indications that the forward sales hedged the taxpayer’s BNS holding, Abella J stated (at para. 37):

The forward contract had the effect of nearly perfectly neutralizing fluctuations in the price of [the] shares held by Mr. MacDonald, pointing to a close linkage. The purpose of the forward contract as a hedging instrument is most apparent when one considers the forward contract alongside the loan and pledge agreements between Mr. MacDonald and TD Bank. Seen in this light, there was considerable linkage between the forward contract and Mr. MacDonald’s … shares.

In the course of arriving at this conclusion, she indicated that:

  • A derivative contract is a hedge if its purpose is to “hedge exposure to a particular financial risk such as the risk posed by volatility” (para. 19)
  • “Purpose is ascertained objectively … . [T]he primary source of ascertaining a derivative contract’s purpose is the linkage between the derivative contract and any underlying asset, liability or transaction purportedly hedged.” (para. 22)
  • “The absence of a synchronous transaction used to offset gains or losses arising from a derivative contract is not equivalent to the absence of risk and is not, by itself, determinative of the characterization of a derivative contract” (para. 34), so that “The fact that Mr. MacDonald did not sell his … shares immediately to offset his losses under the forward contract does not sever this connection” (para. 42)
  • “[C]ash settled forward contracts and forward contracts settled by physical delivery are economically equivalent and treating them differently for tax purposes would create ‘an unjustified artificial distinction’.” (para. 36)
  • Options (along with forwards) were “one of the “two basic types of derivatives” (para. 18), so that the principle that “Gains and losses arising from hedging derivative contracts take on the character of the underlying asset, liability or transaction being hedged … . [whereas] speculative derivative contracts are characterized on their own terms, independent of an underlying asset or transaction” (para. 20) also applied to options.

The dissenting reasons of Côté J indicated (at para. 60) that the majority’s decision meant that “a derivative instrument that shorted shares in TDB was a hedge of the BNS Shares regardless of the taxpayer’s intentions.”

Locations of other summaries Wordcount
Tax Topics - General Concepts - Purpose/Intention intention re forward contract determined on basis of objective linkage to hedged asset rather than testimony as to subjective purpose 335
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges cash-settled forward sales were a hedge of a shareholding notwithstanding their settlement without a corresponding share sale and a stated intention to speculate 654

The Queen v. Macdonald, 2018 FCA 128, aff'd 2020 SCC 6

cash-settled forward was hedge of share bloc irrespective of speculative 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 (at paras. 92-93):

[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 (at para. 82):

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… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges cash-settled forward hedged bloc of shares irrespective of speculative intention 581