Canada: Mark-to-market available to non-financial institutions

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Canada: Mark-to-market available to non-financial institutions

diep.jpg

Nancy Diep

In a recent decision by the Federal Court of Appeal (FCA), it was confirmed that the adoption of mark-to-market valuation is not restricted to financial institutions for the purposes of computing income for Canadian tax purposes.

The case involved Kruger Inc. (the taxpayer), a Canadian-based company that carries on a paper products business, with most of its production destined for the US. In order to manage its foreign exchange exposure, the taxpayer started in the 1980s to purchase and sell foreign currency option contracts. By the mid 1990s, the taxpayer had a team of specialised derivatives traders that managed the options and other hedges. In effect, the company had become a speculative trader in derivatives as a separate business and, in reporting its profit for tax purposes, it adopted mark-to-market accounting for its trading business.

The Tax Court of Canada found that taxpayers were subject to an overarching principle of taxation that, unless the Income Tax Act provided otherwise, profits and losses could only be recognised when "realised".

In overturning the lower court decision, the FCA resorted to first principles in posing the question of whether the taxpayer's method of accounting provided an accurate picture of its income for the year and found that there is nothing at law that excludes mark-to-market accounting if it achieves this objective. Once a taxpayer demonstrates that mark-to-market accounting provides this accurate picture, the onus is on the Crown (government) to demonstrate an alternative method that provides a "more accurate" picture, which it failed to do here.

As a final interesting matter, the FCA also addressed the question of whether the option contracts qualified as inventory. In the court's view, the contracts were not property held for sale, a key requirement in the meaning of inventory, and so constituted a separate category of property that is not capital property and not inventory, the impact of which still must be accounted for by a taxpayer.

Nancy Diep (nancy.diep@blakes.com), Calgary

Blake, Cassels & Graydon

Tel: +1 403 260 9779

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

The arrival of a seven-strong team from Baker McKenzie will boost WTS Germany’s transfer pricing capabilities and help it become ‘a European champion’, the firm’s CEO said
Germany has forgotten to think about digital reporting requirements, a WTS partner claimed at ITR’s Indirect Tax Forum 2025
E-invoicing is currently characterised by dynamism, with fragmentation acting as a key catalyst for increasing interoperability, says Aida Cavalera of the International Observatory on eInvoicing
Pillar two and the US tax system ‘could work in harmony’, Scott Levine tells ITR in an exclusive interview to mark his arrival at Baker McKenzie
Peter White, who has a tax debt of A$2 million, has been banned for five years from seeking registration with Australia’s Tax Practitioners Board (TPB)
Wopke Hoekstra’s comments followed US measures aimed against ‘unfair foreign taxes’; in other news, Grant Thornton and Holland & Knight made key tax partner hires
An Administrative Review Tribunal ruling last month in Australia v Alcoa represents a 'concerning trend' for the tax authority, one expert tells ITR
A recent decision underlines that Indian courts are more willing to look beyond just legal compliance and examine whether foreign investment structures have real business substance
Following his Liberal Party’s election victory, one source expects Mark Carney to follow the international consensus on pillar two, as experts assess the new administration
A German economics professor was reportedly ‘irritated’ by how the Finnish ministry of finance used his data
Gift this article