|Carrie Aiken||Dan Jankovic|
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.
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