In Macdonald v. The Queen, 2017 TCC 157, the Tax Court of Canada held that a $9.9 million cash loss realized on closing out an isolated forward contract was on income account, fully deductible under s. 9(1). The loss represented an adventure in the nature of trade, and did not hedge (offset risk associated with) a capital asset owned by the taxpayer.
- On the question of an adventure, the Court said that the most important factor was whether the taxpayer intended to speculate: i.e., engage in a scheme for profit-making by entering into the forward contract (see paragraph 58). The taxpayer’s intent was objectively evident in this case because he was experienced in banking and finance, and his sole purpose was to profit from an anticipated decline that he saw coming in the trading price of Bank of Nova Scotia (BNS) shares (see paragraphs 59 and 63).
- On the question of whether the forward contact hedged a capital asset, the taxpayer certainly owned more BNS shares than were covered under the forward contract. But this fact alone was not enough to create even a partial hedge in respect of these shares. If this were enough, it would be impossible to ever speculate in a property using a derivative instrument while holding the same type of property for the long term (see paragraphs 68 and 73). Furthermore, the objective facts did not show a “close link” – as required by the jurisprudence – between the forward contract and the taxpayer’s BNS shares, whether in terms of quantum, timing, or offsetting transaction in respect of his BNS shares (see paragraphs 80, 86, 87, 91, 105, and 107).