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21 Further, in her dissenting reasons, Justice Côté stated that she would have placed far greater importance on subjective elements than the majority. MacDonald’s subjective intentions, 20 while the Federal Court of Appeal swayed toward objective factors. The role of subjective intention was a key point of disagreement in this case: the Tax Court gave significant weight to evidence showing Mr. Subjective manifestations “may sometimes be relevant,” however, the stated intention of the taxpayer “is not determinative.” 19
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15 This is apparent in the majority’s approach: a “linkage analysis” that “begins with the identification of an underlying asset, liability or transaction which exposes the taxpayer to a particular financial risk, and then requires consideration of the extent to which the derivative contract mitigates or neutralizes the identified risk.” 16 The stronger the link, “the stronger the inference that the purpose of the derivative contract was to hedge.” 17 Since the linkage does not need to be perfect, 18 there is a range of potential circumstances that will attract such an inference. 14 In the majority decision, the Supreme Court clarified that, in conducting this test, objective considerations will outweigh subjective considerations. 13įollowing “ long line of jurisprudence,” the Supreme Court decided the issue by assessing the purpose of the forward contract underlying Mr. MacDonald’s forward contract was characterized as a hedge, the related payments would be characterized as capital losses. For context, “ hedge is generally a transaction which mitigates risk, while speculation is the taking on of risk with a view to earning a profit.” 12 If Mr. To determine the proper classification of the settlement payments, the core issue before the Supreme Court was whether the forward contract was speculation or a hedge. 9 However, after having the Tax Court’s decision overturned by the Federal Court of Appeal, 10 the dispute found its way to the Supreme Court of Canada, which ruled against Mr. MacDonald, who successfully appealed the Minister’s reassessments before the Tax Court of Canada. 8 Because of the differential treatment between income loss and capital loss, a taxpayer will typically prefer to have their gains classified on capital account but their losses on income account. MacDonald to the extent that he could deduct them from taxable capital gains. 7 As a further consideration, these losses would only be advantageous to Mr. MacDonald to deduct only half of his originally claimed tax benefit from his taxable income. 5 Conversely, the Minister of National Revenue (“the Minister”) took the position that these payments should be characterized as capital losses, 6 which would allow Mr. 4 He had claimed that these losses should apply against his income account, thus deducting the entire loss. (“TD”), 3 which represented approximately $10 million in losses for him.
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2 At issue was the classification of a series of settlement payments made pursuant to a forward contract between Mr. 1 The reassessments resulted in a potential tax increase upwards of $2 million. James MacDonald, a longtime investor, had his taxes reassessed for three taxation years: 2004, 2005, and 2006, respectively.