Canadian Lawyer

May 2020

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Page 32 of 59 31 capital losses; if the contract is speculative, the losses would be treated as income losses. Under the appellant's agreement with TD Securities in 1997, when he launched his own business, if the value of the shares he had pledged as security against his loan increased by the future date set in the forward contract, MacDonald would pay TD the full amount of the increase. If the value of the shares went down, TD Securities would pay him, and the money MacDonald received would be used as extra security for the loan for his business provided by the TD Bank. The price of the shares increased, and agreed to be capital assets by the appel- lant and by the bank. MacDonald took the position that he took a forward derivatives contract with TD Securities as speculation. A forward derivatives contract is a custom- ized contract between two parties to buy or sell an asset at a specified price on a future date. It can be used for hedging or specula- tion. A hedge is generally a transaction that mitigates risk, while speculation is the taking on of risk with a view to earning a profit. If the contract is a hedge, any cash settle- ment payments required to be paid under the forward contract would be characterized as HOW INCOME IS TAXED IN CANADA Income is 100% taxable, while capital gains on investments are 50% taxable For losses, the reverse applies: Income or business losses are fully deductible against taxes owing, while capital losses are half deductible

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