MacDonald v. The Queen (August 8, 2017 – 2017 TCC 157, Lafleur J.).
Précis: Mr. MacDonald was a very senior and experienced financial professional. He had a substantial holding of shares of Bank of Nova Scotia (“BNS”) which he had held for long period of time. He formed the opinion that the BNS shares were likely to decline steeply in value in part because of their large international exposure. Hoping to benefit from that decline he entered into a Forward Contract with TD Securities Inc. which included a collateral pledge of 165,000 BNS shares. Mr. McDonald did not have the option to settle the Forward Contract with the delivery of shares. Mr. MacDonald made cash settlement payments under the Forward Contract of roughly $10 million between 2004 and 2006. He treated the payments as business losses. CRA reassessed Mr. MacDonald in 2009 treating the payments as capital in nature. The position of CRA was that the arrangement was a form of “hedge” designed to protect the value of his BNS holdings.
The Tax Court accepted Mr. MacDonald’s position and found that the Forward Contract was not a hedge of his BNS holdings. As a result the appeal was allowed with costs.
Decision: The Forward Contract arrangement was as follows:
 Mr. MacDonald approached TD Securities Inc. (“TDSI”) to discuss a forward contract to speculate against the trading price of the BNS shares. Mr. MacDonald entered into a forward contract (the “Forward Contract”) with TDSI on the trade date of June 26, 1997, the terms of which were set out in a confirmation letter dated July 2, 1997, (the “Confirmation”), with a forward date of June 26, 2002, (the “Forward Date”). The Forward Contract could only be cash settled. There was no entitlement to elect physical settlement (i.e. delivery of BNS shares) of the Forward Contract. The cash settlement provision was very important to Mr. MacDonald as he had no intention of selling the BNS shares. The Confirmation contained optional early termination provisions pursuant to which Mr. MacDonald could elect to terminate the Forward Contract prior to the Forward Date. The Confirmation required a securities pledge agreement between Mr. MacDonald and TDSI as credit support for purposes of the Forward Contract. However, no copy of that agreement was produced at trial. Mr. MacDonald had testified that he did not have a copy of said document.
 Mr. MacDonald made cash settlement payments under the Forward Contract as follows: $2,204,065 in his 2004 taxation year, $5,855,329 in his 2005 taxation year and $1,897,442 in his 2006 taxation year (the “Cash Settlement Payments”). The Cash Settlement Payments were paid from Mr. MacDonald’s chequing account with TD Bank.
 Pursuant to the Confirmation:
(a) Mr. MacDonald agreed to pay TDSI the amount by which the “Reference Price” (the official closing price of the BNS shares on the Toronto Stock Exchange (“TSX”) on the Forward Date) exceeded the “Forward Price” (as defined in the Forward Contract as being $68.46), multiplied by the number of “Reference Shares”, being the number of BNS shares subject to the Forward Contract (165,000 BNS shares); and
(b) TDSI agreed to pay Mr. MacDonald the amount by which the Forward Price exceeded the Reference Price, multiplied by the number of Reference Shares.
 The Forward Contract was subsequently amended and extended several times to either adjust the Forward Price (to reflect changes to the quarterly dividend on the BNS shares) and the number of Reference Shares (to reflect a split of the shares and a stock dividend), or to extend the Forward Date and to substitute TDSI for TD Global Finance (In these reasons for judgment, I will refer to TDSI and/or TD Global Finance as TDSI). The Forward Contract was terminated on March 29, 2006.
 On June 6, 1997, TD Bank offered a credit facility to Mr. MacDonald which was accepted by the latter on July 7, 1997, (the “Loan”). Mr. MacDonald also entered into a securities pledge agreement with TD Bank (the “Securities Pledge Agreement”), pursuant to which he pledged 165,000 BNS shares and the Confirmation as collateral security for the Loan. Also, as collateral security for the Loan, Mr. MacDonald pledged to TD Bank all amounts which may become payable to him by TDSI pursuant to the Confirmation. The Loan made available up to $10,477,480, subject to a maximum of 95% of the spot price of the BNS shares multiplied by the number of BNS shares under the Securities Pledge Agreement. The Securities Pledge Agreement also refers to an Inter-Creditor Agreement between TD Bank and TDSI, as the pledged securities (the BNS shares, the Confirmation and amounts payable by TDSI under the Confirmation) would be pledged to both of TD Bank and TDSI.
The Crown’s position was that the Forward Contract was a hedge:
 The Respondent took issue with the approach taken by the Appellant. According to the Respondent, as the Minister is taking the view and had reassessed on the basis that the Cash Settlement Payments were payments made on capital account since the Forward Contract was a hedge of the BNS Shares (which are capital assets to Mr. MacDonald), then my analysis should start with a discussion as to whether the Forward Contract was a hedge. If I answer in the affirmative, then I will have to determine the nature of the assets being hedged so as to qualify the Cash Settlement Payments, whether as payments made on income or on capital account. If I conclude in the negative, I will have to determine whether Mr. MacDonald was engaged in a business, which, by definition, under subsection 248(1) of the Act, includes an adventure or concern in the nature of trade. If I do conclude that Mr. MacDonald was engaged in a business, the Cash Settlement Payments will then be considered as payments made on income account resulting in business losses for Mr. MacDonald.
 According to the Respondent, the Forward Contract was not an adventure or concern in the nature of trade; the Forward Contract was “property” and “capital property” as defined under the Act.
 According to the Respondent, Mr. MacDonald’s primary intention in entering into the structured arrangement, including the Forward Contract, was “to lock-in an economic gain on the underlying BNS shares pledged and the Forward Contract, and to protect the value of the BNS shares”. By entering into the Forward Contract, Mr. MacDonald had locked-in a gain as if the BNS shares had been sold by fixing the price (the Forward Price) and by virtue of the Loan, he had gained access to funds similar to the amount that would have been obtained if the BNS shares had been sold in the spot market instead.
The Court rejected the Crown’s position:
 I agree with the following arguments raised by the Appellant. Mr. MacDonald entered into a Forward Contract that could only be cash settled. Hence, the Forward Contract did not involve an exchange, sale or delivery of any BNS shares. The Forward Contract was pure speculation since Mr. MacDonald had to deal with the Forward Contract to get income from it, i.e. he had to terminate it or partially terminate it to get any income; the Forward Contract did not, by itself, yield income. The Forward contract could only be profitable if the trading price of the BNS shares at the maturity date was lower than the Forward Price and only if Mr. MacDonald dealt with the Forward Contract, i.e. if he terminated it or partially terminated it. Furthermore, the Forward Contract itself stamps the transaction as a trading venture as it was highly speculative in nature, it involved great potential for risk and reward, it was isolated and non-recurring, and was not used to lock-in any gain in the BNS Shares. As to whether Mr. MacDonald would receive or be required to make payments under the Forward Contract was entirely dependent upon the future movement in the market price of the BNS Shares on the TSX.
 Although there were cross-references between the various agreements (the Forward Contract, the Loan, the Security Pledge Agreement), the evidence showed that Mr. MacDonald did not consider the Loan as being part of the Forward Contract. He considered the Loan to be a by-product of the Forward Contract, and testified that since the terms and conditions were so advantageous, he accepted the credit offered by TD Bank. The evidence showed that Mr. MacDonald treated the Loan and the Forward Contract as two separate instruments. Only a small percentage of the loan credit offered was borrowed by Mr. MacDonald. In addition, in November 2004, the Loan was repaid in totality; but the Forward Contract remained in place. The fact that Mr. MacDonald invested the amount borrowed in ECM and other publicly listed securities is not relevant with respect to that determination.
 What I have to examine is the intention of Mr. MacDonald at the time of entering into the Forward Contract as confirmed by the execution of the Confirmation. The Confirmation was executed on July 2, 1997; the Forward Contract has a trade date of June 26, 1997. I am of the view that, on balance, the evidence showed that Mr. MacDonald’s intention at the time of entering into the Forward Contract was to gain a profit by speculating that the market price of the BNS shares would drop in value because of the storm clouds he foresaw coming in the financial markets and which he referred to in his testimony: the 1997 Asian Debt Crisis, the collapse of the Thai Bhat, the October 1997 mini-crash of the New York Stock Exchange, the Russian Debt Crisis in 1998 and the 1998 collapse of the Long Term Capital Management hedge fund. In his own words, Mr. MacDonald’s intention “was to achieve a profit on an anticipated decline in the value of Bank of Nova Scotia shares based on the storm clouds that [he] saw in the investment horizon”. It is clear from Mr. MacDonald’s testimony that his intention was to speculate — he wanted to profit from a potential decline in the value of the BNS shares in the light of the state of the financial market around the time he entered into the Forward Contract.
 An important factor supporting my conclusion as to the intention of Mr. MacDonald is that when Mr. MacDonald entered into the Forward Contract, he did not know whether he would be making a payment to TDSI or whether he would receive a payment from TDSI. According to Mr. MacDonald’s testimony, which I found credible and reliable, his unfavourable short term outlook stemmed from concerns he had about these adverse developments in the international markets and because, in his view, BNS, of all of the Canadian banks was the most internationally exposed to such events. His belief was based on the vast experience he had gained during the numerous years he had worked in the financial market and the critical information he had of BNS specifically. Mr. MacDonald’s testimony was clear as to what his intention was in entering into the Forward Contract. As a very well-informed person in the world of finance, he saw storm clouds on the horizon. Also, because he worked at a very high level position at the BNS for many years, he was able to reasonably conclude that the BNS was the most exposed of the Canadian banks to the foreign market turbulence.
As a result, Mr. MacDonald’s appeal was allowed in full:
 On the basis of the foregoing, I am of the view that the Cash Settlement Payments are payments made on income account resulting in business losses for Mr. MacDonald and therefore, the appeal from the reassessments made under the Act for the 2004, 2005, 2006 and 2007 taxation years is allowed, with costs to the Appellant, and the matter is referred back to the Minister for reconsideration and reassessment in accordance with these Reasons for judgment.