All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Canada: Foreign exchange gains and losses from forward contracts

aiken.jpg

jankovic.jpg

Carrie Aiken


Dan Jankovic

The Tax Court of Canada in George Weston Limited v R (2015 TCC 42) recently held that an early termination of a currency swap entered into by a Canadian public corporation (GWL) with substantial (indirect) US operations to hedge foreign currency fluctuations and their impact on its consolidated financial statements resulted in a capital gain. The decision rejects outright the Canada Revenue Agency's administrative position that a derivative transaction is on capital account only if the transaction is a hedge that is sufficiently linked to an underlying transaction on capital account (for example, a sale of an asset or repayment of debt) and not an asset or liability and further, that the hedge must be undertaken by the entity that directly owns the item being hedged. GWL entered into the swaps shortly after a large acquisition of a US business by one of its subsidiaries. The scale of the US operations and the fluctuations in the Canada-US dollar exchange rate had significant impact on GWL's Canadian dollar consolidated financial statements, affecting its debt-to-equity ratio, borrowing capacity and credit rating.

In characterising the swaps, the Court emphasised that it is important to identify the risk to which the transaction relates and determine whether the item at risk (whether a debt obligation or foreign investment) is capital or income in nature. GWL's intention was to hedge its US investment (which was on capital account) and protect against currency risk that impacted its capital structure. Absent the investment, GWL would not have entered into the swaps since it did not, as a matter of policy, generally participate in derivatives. The Court concluded that the swap was sufficiently linked to GWL's indirect capital investment and was intended to hedge the associated currency risk even though there was no contemplated sale of the investment at the time the swap was entered into. The fact that the swaps were terminated when the taxpayer decided it was no longer necessary to hedge such foreign currency risk did not alter that conclusion.

Taxpayers may want to revisit their characterisation of hedging transactions for Canadian tax purposes in light of this decision.

Carrie Aiken (carrie.aiken@blakes.com) and Daniel Jankovic (dan.jankovic@blakes.com), Calgary

Blake, Cassels & Graydon

Tel: +1 403 260 9775 and +1 403 260 9725

Website: www.blakes.com

more across site & bottom lb ros

More from across our site

The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.
An OECD report reveals multinationals have continued to shift profits to low-tax jurisdictions, reinforcing the case for strong multilateral action in response.
The UK government announced plans to increase taxes on oil and gas profits, while the Irish government considers its next move on tax reform.
War and COVID have highlighted companies’ unpreparedness to deal with sudden geo-political changes, say TP specialists.
A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.