The appellant, a former bank executive, entered into a cash-settled forward contract with a securities dealer shortly before accessing a credit facility secured by the same shares underlying the forward contract.
The appellant characterized losses from the forward contract as income losses on the basis that the contract was speculative, while the Minister reassessed and characterized them as capital losses on the basis that the contract was a hedge of capital shares.
The majority held that the characterization of a derivative contract turns on its purpose, ascertained objectively through linkage analysis, and that the forward contract's nearly perfect neutralization of price fluctuations in the underlying shares, considered alongside the loan and pledge agreements, demonstrated the requisite linkage to constitute a hedge.
The dissent would have restored the trial judge's findings of fact, holding that intent — assessed through both subjective statements and objective manifestations — is necessary to find a hedge, and that the credit facility and securities pledge agreement entered into with a separate entity were irrelevant to the characterization of the forward contract.
Appeal dismissed, Côté J. dissenting.
