Supreme Court of Canada rules derivatives contract to be a hedge

Supreme Court of Canada rules derivatives contract to be a hedge in the tax case of James MacDonald vs The Queen.

The Supreme Court of Canada (SCC) has dismissed an appeal in the case of a taxpayer who argued that payments of approximately $10 million he made as part of a derivatives contract were losses on account of income, rather than capital.

In an 8 to 1 decision released on March 13, the SCC upheld the decision made by the Federal Court of Appeal that the derivatives contract in question constituted a hedge, and not a speculative transaction as argued by the taxpayer. The FCA ruling overturned a Tax Court of Canada’s decision that was found in favour of the taxpayer.

A taxpayer’s forward derivative contract was a hedge, not speculative, and so the taxpayer’s losses were capital and not income losses, the Supreme Court of Canada. This is a decision that needs to be carefully considered before considering an aggressive tax position.

I find it interesting that the taxpayer would take the position that his “investments” could be active income. It would seem that if he was not an active trader and he entered into a contract expecting to make money, then the income would be capital in nature. My question is; If the contract had made money, would then take the position that it was a capital gain?

I can’t imagine anyone making a transaction to lose money, so let’s rule that out. So, making an investment to make money would be the objective, so no one would prefer it to be a taxable source of income when they could instead pay half the taxes by having it a capital gain, so to me the strategy is transparent.

To me if it looks like a duck then it is a duck.

In this day and age, the idea that you can safely have aggressive tax strategies has misses the bigger picture. The message today is don’t pick unnecessary fights with CRA.  Win or lose it is not worth the fight.

Instead see that a tax liability is a sign of success. Pay your fair share and not a penny more.

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