James S.A. MacDonald v. Her Majesty the Queen

(Federal) (Civil) (By Leave)


Taxation - Hedging - Legislation - Interpretation -Did the Federal Court of Appeal apply the wrong test for determining whether derivative transactions should be taxed on income or capital account? - Did the Federal Court of Appeal apply the wrong standard of review? - Income Tax Act, RSC 1985, c. 1 (5th Supp)


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In June of 1997, Mr. MacDonald accepted a loan from TD Bank wherein he pledged 165,000 Bank of Nova Scotia shares and assigned as collateral for the loan any payment he could become entitled to receive pursuant to a forward contract. Based on its terms, TD Securities Inc would pay Mr. MacDonald the amount by which the Reference Price (the closing price of the BNS shares on the Toronto Stock Exchange on the Forward Date) fell below the Forward Price multiplied by the 165,000 shares. In the event the Reference Price was to exceed the Forward Price, Mr. MacDonald would be required to make payments to TD. The value of the shares did not decrease and remained above their Reference Price. As a result, between 2004 and 2006, Mr. MacDonald was required to make cash settlement payments totaling $9,966,149. In computing his income for his 2004, 2005, and 2006 taxation years, Mr. MacDonald took the position that the cash settlement payments gave rise to business losses that were deductible against income from other sources. The Minister took issue with this characterization and denied the losses on the basis that the cash settlement payments gave rise to capital losses. An appeal to the Tax Court of Canada overturned the Minister’s decision and sent the matter back for redetermination. The Federal Court of Appeal reinstated the Minister’s decision on the basis that Mr. MacDonald had created a hedge.

Lower Court Rulings

August 8, 2017
Tax Court of Canada

2013-4032(IT)G, 2017 TCC 157
Appeal allowed.
March 16, 2018
Tax Court of Canada

2013-4032(IT)G, 2018 TCC 55
Motion for costs granted.
June 29, 2018
Federal Court of Appeal

2018 FCA 128 , A-281-17
Appeal allowed.