Cases
Atlantic Sugar Refineries Ltd. v. MNR, 49 DTC 602, [1949] S.C.R. 706
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
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
5 March 2014 Memorandum 2013-0500891I7 - Hedging
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.
8 October 2010 CTF Annual Conference Roundtable Q. , 2013-0507191C6
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.
12 January 2005 T.I. 2004-010116 -
"Trading in stock option futures would normally be taxed on income account, unless, for example, it relates to the acquisition of capital."
25 May 1994 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.
Commentary
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 ([pin type="node_head" href="303-AtlanticSugar"]Atlantic Sugar[/pin]).
An individual who engages in frequent trading of commodities futures likely will also realize gains or losses on income account ([pin type="node_head" href="303-Friesen"]Friesen[/pin]), 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."