Federal Appeal


Income tax
No basis for rejecting taxpayer’s use of mark to market accounting

Taxpayer traded in purchased and written foreign exchange option contracts to reduce exposure to foreign currencies. Taxpayer included option contracts in income, valued at end of taxation year on mark to market basis that recognized changes in market value as gain and loss, claiming losses exceeding $91 million. Minister assessed taxpayer under Income Tax Act (Can.) on basis that contracts should be included and valued only when finally realized. Taxpayer’s appeal was allowed in part, on basis that realization principle applied except for its purchased foreign exchange option contracts that were found to constitute inventory, and Crown was awarded costs. Taxpayer appealed. Appeals allowed. Tax Court judge’s finding that realization was overarching principle that applied in absence of Act provision authorizing or requiring application of different method directly contradicted precedents establishing that other methods of computing income could be used where they provided more accurate picture of income. Taxpayer made prima facie demonstration that mark to market accounting provided accurate reflection of income and Crown did not show that realization produced better picture of taxpayer’s income. There was no basis for rejecting taxpayer’s use of mark to market accounting in computing income. There was no doubt that Act allowed intangible property to be treated as inventory or that, because written options only embodied liability, they were not “property” and could not form part of “inventory”. Requirement that qualifying property be “held for sale” had to be read into definition of “inventory” under governing authority, such that taxpayer’s foreign exchange options did not qualify as inventory as they were not for sale. Purchased and written options impacted on computation of income and had to be recognized in service of goal under s. 9 of Act to provide accurate picture of that income. Taxpayer was entitled to use mark to market method of accounting to compute income derived from foreign exchange option contracts and was entitled to costs before Tax Court and appeal.

Kruger Inc. v. R. (June 22, 2016, F.C.A., Marc Noël C.J., A.F. Scott J.A., and Yves de Montigny J.A., A-296-15, A-195-16) Decisions at 252 A.C.W.S. (3d) 868 and 262 A.C.W.S. (3d) 532 were reversed. 267 A.C.W.S. (3d) 485.

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