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

This week Switzerland opens consultation on draft legislation to implement the OECD’s global minimum tax rate, while Germany cuts VAT amid the highest inflation rate in decades.
ITR looks into the biggest transfer pricing cases in 2022 including multinational companies McDonald’s, BlackRock, and Rio Tinto.
TP technical leader at ‘big four’ firm KPMG Philip Roper talks to senior reporter Leanna Reeves about how businesses can mitigate the transfer pricing impact of higher interest rates in the UK.
Vikas Garg talks to reporter Siqalane Taho about how regulation, technology and the goods and services tax has affected the manufacturing company.
A major shift is underway in tax as the profession transitions from a mostly accounting and finance sector to a hybrid industry that requires significant IT skills, say tax experts.
The Biden administration is about to give $80 billion to the Internal Revenue Service to enhance the tax authority’s enforcement processes and IT systems.
Audi, Porsche, and Kia say their US clients will face higher prices under the Inflation Reduction Act after the legislation axes an important tax credit for electric vehicle production.
This week Brazil’s former President Luiz Inacio Lula da Silva came out in support of uniting Brazil’s consumption taxes into one VAT regime, while the US Senate approved a corporate minimum tax rate.
The Dutch TP decree marks a turn in the Netherlands as the country aligns its tax policies with OECD standards over claims it is a tax haven.
Gorka Echevarria talks to reporter Siqalane Taho about how inflation, e-invoicing and technology are affecting the laser printing firm in a post-COVID world.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree