Where the business of a corporation entails the purchase or sale of a particular commodity (e.g., the sugar purchases of a sugar refiner), gains or losses on commodities futures contracts in that commodity in which the corporation engages in connection with that commodity will be realized on income account (Atlantic Sugar).

An individual who engages in frequent trading of commodities futures likely will also realize gains or losses on income account (Friesen), although in some circumstances CRA will permit speculators including frequent traders to treat their transactions in commodities futures as being on income account provided that this treatment is consistently followed by the taxpayer (IT-346R).

See further commentary under "Commodities."


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

individual's losses on silver futures trading on income account

Losses sustained by the taxpayer radiologist from the purchase and sale of silver futures were fully deductible. Dubé J stated (at p. 5152):

[B]earing in mind tht silver brings no interest and no dividend, it becomes obvious that his governing motive was to speculate. An intention to resell at the earliest and most opportune time in a fluctuating market in order to recoup his heavy losses had to be the motivating factor behind the purchase.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss silver futures trading on income account 114

Atlantic Sugar Refineries v. Minister of National Revenue, 49 DTC 602, [1949] S.C.R. 706

short sale of sugar futures for business hedging on income account

The taxpayer was in the business of purchasing, refining and selling sugar. It did not normally engage in hedging transactions. However, on the outbreak of the Second World War, it faced price controls on the sale of its product but was required to purchase large quantities of sugar at a rapidly escalating spot price. In order to try to offset its anticipated losses from this situation, it made short sales of sugar future contracts on the applicable New York exchange, and realized gains when it closed out the contracts.

Locke J rejected a submission that "this was simply a speculation in raw sugar resulting in a capital profit such as might have resulted from a speculation in shares" and stated (at p. 604):

In trades where natural products are purchased in large quantities, hedging is a common, and in some cases, a necessary practice, and the cost of such operations in trades of this nature is properly allowable as an operating expense of the business. Where, as in the present case, the trader elects to close out his short sales and take a profit, this is, in my opinion, properly classified as profit from carrying on the trade.

See Also

MacDonald v. The Queen, 2017 TCC 157

“the law still requires a close linkage between the purported hedging instrument and the underlying asset”

The taxpayer had held a significant investment in the common shares of Bank of Nova Scotia (“BNS”) since 1988. In 1997, due to “storm clouds,” he entered into a forward contract with TD Securities Inc. for the forward sale by him of a reference number of BNS shares, except that the Forward Contract could only be cash settled. The forward sale date initially was June 26, 2002, but the contract was subsequently extended. He made cash settlement payments under the contract in 2004, 2005 and 2006 totaling $9,956,837 (which he fully deducted as being on income account), and the contract was terminated on March 29, 2006.

Lafleur J found that these payments would have been on income account before considering whether the Forward Contract was a hedge of his capital investment in the BNS shares, given inter alia that:

  • it afforded him “an opportunity to speculate on the outcome that the price of the BNS Shares would drop in the short term” (para. 60)
  • it “could only be cash settled” (para. 61)
  • “it involved great potential for risk and reward…and was not used to lock-in any gain in the BNS shares” (para. 61)
  • “Mr. MacDonald was exposed to no risk by holding the BNS shares since he did not want to sell them for the very long term. Accordingly, by entering into the Forward Contract… he increased his risk… .” (para. 68)

Turning to whether the Forward Contract instead was held on capital account on the basis of being a hedge of a capital asset (the BNS shares), she stated (at paras. 85-86, 95):

[A]n essential component of a hedge is that the strategy used to hedge must result in an offset of investment risk… . [A] hedging 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… . [T]he law still requires a close linkage between the purported hedging instrument and the underlying asset.

In finding that these hedging criteria were not satisfied, so that his settlement payments under the Forward Contract were fully deductible, she stated (at paras 107 and 112):

… [T]he settlements 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.

Mr. MacDonald owned the BNS [and predecessor] shares for approximately 30 years prior to entering into the Forward Contract. … Mr. MacDonald only had an unrealized gain on the BNS shares but an actual loss on the settlement of the Forward Contract. I am of the view that without Mr. MacDonald having sold BNS shares in very close proximity with the settlement of the Forward Contract, one cannot conclude that Mr. MacDonald had mitigated or reduced a risk. …

The fact that the taxpayer also received a TD loan (which was much less than the maximum he could have borrowed and was largely repaid by 2004) was of limited relevance.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss cash-settled forward sale of shares not sufficiently linked to underlying shareholding to be a hedge 193

Friesen v. The Queen, 95 DTC 492 (TCC)

The taxpayer, who did not have any business enterprises relating to the commodities in question, traded 66 times in commodities contracts (both long and short) from 1987 to 1989. In light of the number of trade transactions and the nature of the subject matter of the transactions, losses realized by him in 1988 and 1989 were fully deductible, notwithstanding that he included a small amount of profit as a capital in his 1987 income tax return (a year that was not an issue). Bell TCJ. stated (at p. 493) that "it is clear that the manner in which a taxpayer reports a profit does not determine the nature of that profit".

Administrative Policy

6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.16

After noting that “the CRA has already stated that it accepts the decision … in George Weston,” CRA noted, however, that:

The approach taken by the TCC in [MacDonald] respecting, inter alia, the linkage principle appears to be irreconcilable with previous jurisprudence, including George Weston Limited. ...

Nevertheless, the CRA is currently considering whether to change its approach pending the Federal Court of Appeal decision in James S. A. MacDonald.

21 October 2015 Internal T.I. 2015-0592781I7 - treatment of bond locks

hedges re dividend or interest obligations of parent on income account

Canco, which was wholly-owned by its Canadian Parent, entered into “Dividend Bond Locks” and “Interest Bond Locks” (collectively, the “Bond Locks”) with third-party counterparties. The Dividend Bond Locks were said by Canco to hedge against an increase in the dividend rate on preferred shares issued by Parent which provided for periodic resetting of the dividend rates thereon. Canco had to make a payment on the termination of the Dividend Bond Locks. The terms of the Interest Bond Locks were similar, except that they related to Debentures of Parent. Their settlement also was at a loss.

How should amounts paid under the Bond Locks be treated? CRA responded:

[T]he CRA’s administrative position on interest rate derivatives has been to treat them as being independent from other transactions and therefore on income account. Weston addresses the linkage principle in the context of foreign exchange derivatives that hedge investments in foreign operations. …

Given that it is our view that Weston should not have any effect on Rulings’ policy regarding interest rate derivatives, Rulings’ policy regarding interest rate derivatives would continue to apply and therefore the Bond Locks should be considered to be on income account. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing losses on interest or dividend rate hedges could be amortized/any gains immediately includible 213

5 March 2014 Internal T.I. 2013-0500891I7 - Hedging

s. 85(1) roll of FX forward to sub

Parent hedged a U.S.-dollar borrowing by entering into foreign currency forward contracts. In order to utilize capital loss carryforwards of a wholly-owned subsidiary ("Subco"), it assigned its rights and obligations under the forward contracts to Subco, and they elected under s. 85 for rollover treament. Subco then received a cash payment on settlement of the forward contracts. CRA first found that the forward contracts were capital property to Parent:

While the hedge was put in place a few years after the issuance of the debt, the aggregate amount of the forward contracts was similar in amount to the debt and the maturity date of the contracts matched the maturity date of the debt.

CRA then applied the following statement at the 1983 Roundtable to confirm that Subco's gain was on capital account:

We…are prepared to accept the 85(1) roll and would also accept that the profit would still be a capital gain, despite the short holding period, where the roll was between two sister corporations or a parent and its controlled subsidiary and the ultimate sale was to an arm's length third party.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1) s. 85(1) roll of FX forward to sub 104
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange s. 85(1) roll of FX forward to sub 183

8 October 2010 CTF Annual Conference Roundtable, 2013-0507191C6 - Monetization of Securities - 2010 CTF Conference

equity forward gain on income account

Respecting arrangments for the monetization of shares of public corportions, CRA stated:

Ruling F in document 2007-0246461R3 provides that the amounts that will be received or paid by the corporations in settlement of the rights or obligations flowing from the forward contract will be on account of capital.

We are now of the opinion that the return that was included in the forward contract (through an increase of the forward price) would constitute income rather than capital. It should be noted that the agreement that was designated as a forward contract in document 2007-0246461R3, now appears to us to be more in the nature of an equity swap.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(b) payment under an equity swap not a capital loss because no disposition (and on income account) 177

2007 Ruling 2007-0246461R3 F - Monétisation d'actions d'une société publique

cash settlement of monetization contract on capital account
Proposed transactions

Holdco A and Holdco X (which are holding companies of the CEO and executive vice-president, respectively, of ACO, which is a Canadian public company) will enter into the Term Contract (having a maximum term of X years) with a Canadian financial institution (“FI”) under which they each will have an obligation to make a payment to FI if the closing price of referenced Class A (subordinated voting common) Shares of ACO is higher than the benchmark price on the settlement date, and with a correlative obligation of FI to make a payment on the settlement date if such closing price is lower. Concurrently with signing the Term Contract, Holdco A and Holdco X will secure their obligations thereunder by granting a hypothec to FI on their Class B (multiple voting common) Shares of ACO (but with the continued right to vote those shares and receive dividends thereon). They also will receive an interest-bearing loan from IF (to be used by them to make investments yielding interest or dividends higher than the loan interest) and will grant a second-ranking hypothec to FI on their Class B Shares and a first-ranking hypothec on their interest in the Term Contract to secure these loans. On the settlement of the Term Contract, Holdco A and Holdco X have the option of settling their obligations by delivering the subject Class A Shares (through converting their Class B Shares into Class A Shares) or by settling in cash.


Include that the amounts which are paid or received by Holdco A and Holdco X on the settlement of the Term Contract will be on capital account.

12 January 2005 External T.I. 2004-0101161E5 -

stock futures trading

Would trading by an individual, who makes trades every day and where they constitute the major source of income, in stock index futures which are listed and traded in countries other than Canada be taxable on income or capital account? CRA responded:

Trading in stock option futures would normally be taxed on income account, unless, for example, it relates to the acquisition of capital. Generally, an individual who makes trades in stock index futures every day, particularly where those trades constitute the major source of income to that individual, will be taxed on the profit therefore on income account.

4 August 1994 External T.I. 9414045

mutual fund not a “speculator” re futures trading

Would trading in futures by a mutual fund give rise to capital gains, rather than ordinary income? CRA responded:

Although Interpretation Bulletin IT-346R allows speculators to report their transactions on capital account, a “speculator”, as defined in the Bulletin, is, essentially, anyone other than an active and knowledgeable investor. Generally, those whose business involves trading in the underlying instruments and those who trade futures contracts are not considered to be speculators and report their transactions on income account. In our view, a mutual fund trust or corporation would not be considered to be a “speculator” within the meaning ascribed to that term in the Bulletin.

25 May 1994 External T.I. 5-940421 -

A seat owner-member of a Futures Exchange whose business activity consisted of trading in futures would be required to report his transactions on income account.

31 March 1994 T.I. 933701 (C.T.O. "Mutual Fund Trust Investing in Futures - Income Account")

A mutual fund that invests primarily in derivatives, futures and like investments will realize resulting gains and losses on income account. Although transactions with respect to commodity futures contracts by a mutual fund trust are considered to be investing for purposes of s. 132(6), it does not follow that the resulting gains or losses would be on account of capital.


Nigel P.J. Johnston, Roger E. Taylor, "Taxation of Hedges and Derivatives: Recent Developments", 2016 Conference Report (Canadian Tax Foundation), 13:1-36

Potential treatment of a dynamic hedge as on capital account (pp. 13:11-12)

A static hedge is one that does not have to be rebalanced as the price or other characteristics of the underlying asset it hedges changes. …

In contrast, a dynamic hedge involves adjusting the hedge as the underlying security changes in value throughout the life of the contract. Assume that a party sells a call option on 100 shares of X Co, and that party's obligations under the call option are determined by X Co's share price when the option contract matures. If the party wants to hedge its contingent obligations under its short-option position, it can purchase a certain number of X Co shares at inception of the option contract. The number of shares is determined by considering a variety of factors, including the probability of X Co shares trading above the option strike price at maturity. As the stock price changes during the term of the option, the party will typically adjust its hedge position by buying or selling X Co shares in the market….

The Canadian fund manager mentioned above may similarly decide to engage in a dynamic currency-hedging strategy.

[T]he CRA's interpretation [2013-0481691E5] suggests that transactions resulting from a dynamic currency-hedging strategy adopted by a Canadian fund manager will generally be on income account.

However, based on George Weston, we believe that a compelling argument can be made that gains and losses resulting from a dynamic hedging strategy to hedge a capital asset should also be on capital account despite the fact that there may be numerous transactions. In our view, the relevant issue is the character of the risk that is being hedged (depreciation in value of a foreign-currency-denominated capital asset), not the number of transactions.

Raj Juneja, "Taxation of equity derivatives", 2015 CTF Annual Conference paper

Potential capital treatment of equity derivatives (p.17:18-19)

[E]quity derivatives in many cases are not entered into to hedge exposure to other property. Rather, other transactions may be entered into to hedge a party's obligation under the equity derivative (the party with a short position will typically purchase the reference shares to hedge its position under the equity derivative). ...

The CRA appears to assume [e.g., in 2011-0418541I7] that a derivative that is not entered into for hedging purposes is speculative. However, this will not always be the case. For example, what if a person acquires a long position under a TRS in respect of shares because it was restricted from purchasing the underlying shares, and the reason for entering into the TRS was to receive dividend equivalent payments (and not a gain on settlement) but the person happens to realize a gain on settlement? In these circumstances, the gain on settlement should be on capital account.