A bond lock (or treasury lock) is a useful hedging contract which can reduce the impact of interest rate fluctuations on a prospective debt offering during the structuring and marketing period before the issuance of the debt: see https://www.bmocm.com/products/marketrisk/intrderiv/treasury/.  If interest rates rise during this period, the rate on the new financing will be higher but the company will realize a gain (cash receipt) on the bond lock at the time the debt is issued – offsetting the higher cost of the financing.  Conversely, if interest rates fall during this period, the rate on the new financing will be lower but company will realize a loss (cash payment) on the bond lock – bringing the hedged yield up to the company's original target rate.  In 2015-0592781I7 (recently released), the CRA Rulings Directorate considered the tax treatment of such bond locks.  Here are some interesting points:

  • The CRA’s long-standing administrative position has been – and continues to be – that interest rate derivative contracts are on income account under s. 9.  The decision in George Weston Ltd. v. The Queen, [2015] 4 C.T.C. 2010 (TCC) has not caused the CRA to rethink this long-standing position (see page 13).
  • A gain or loss on a bond lock should be on income account under s. 9.  This view is consistent with the CRA’s position in 2008-027244 dealing with a “gilt lock” (the U.K. equivalent of a bond lock).  That is not all: 
    • “There is a good case to be made” that an income account loss on a bond lock should be amortized over the term of the debt obligation, based on Canderel Ltd. v. The Queen, [1998] 2 C.T.C. 35 (SCC) (see page 18).
    • On the other hand, an income account gain on a bond lock cannot be amortized over the term of the debt obligation because “…the Canderel trilogy, including Ikea, contemplates the potential amortization of deductions but not the potential amortization of income or gains” (see page 18).