The Queen v. MacDonald (June 29, 2018 – 2018 FCA 128, Nöel C.J. (author), Pelletier, De Montigny JJ.A,).
Précis: This case turned on the treatment of cash settlement payments of $9,936,149 made by Mr. MacDonald on a derivative contract in his 2004-2007 taxation years. Mr. MacDonald treated them as business losses, CRA assessed them as capital losses on a hedge of Bank of Nova Scotia shares owned by him. The Tax Court allowed Mr. MacDonald’s appeal and CRA appealed to the Federal Court of Appeal. The Court of Appeal allowed CRA’s appeal, with costs, holding that the Tax Court had erred in failing to follow the recent Tax Court decision in George Weston Limited v. The Queen, 2015 TCC 42 [George Weston].
Decision: Chief Justice Nöel set out the underlying facts as follows:
 Also around this time, Mr. MacDonald became interested in obtaining a loan in order to finance various investments. On June 6, 1997, Mr. MacDonald was offered a credit facility by the TD Bank. The offer envisaged that Mr. MacDonald would pledge a certain number of his BNS shares and assign any payment he could become entitled to receive pursuant to a forward contract (the Forward Contract) between himself and TD Securities Inc. (TDSI) to be entered into as collateral for the loan. The offer also contemplated that the Forward Contract would be maintained while the loan was in place and that Mr. MacDonald would provide TD Bank with a net worth statement on an annual basis.
 Mr. MacDonald entered into the Forward Contract as planned on June 26, 1997 with TDSI. It could only be cash settled – i.e.: no shares were thereby to be acquired or sold. Based on its terms, TDSI would pay Mr. MacDonald the amount by which the Reference Price (the closing price of the BNS shares on the Toronto Stock Exchange on the Forward Date) fell below the Forward Price ($68.43) multiplied by the 165,000 shares which were subject to the Forward Contract (the Reference Shares). In the event the Reference Price was to exceed the Forward Price, Mr. MacDonald would be required to make payments to TDSI.
 The Forward Contract was to terminate on its Forward Date, initially June 26, 2002 and later extended to March 26, 2006. Mr. MacDonald also had the option to make settlement payments on the number of Reference Shares of his choice before the Forward Date, in which case the Forward Contract would be partially terminated with respect to the number of Reference Shares covered by the payments. Mr. MacDonald availed himself of this option on twelve occasions between 2003 and 2006.
 Thus, the number of the Reference Shares that were subject to the Forward Contract varied downwards due to settlement payments made by Mr. MacDonald. It also varied upwards due to the issuance of a stock dividend and a stock split which took place while the Forward Contract was in force. However, at no time was the number of Reference Shares under the Forward Contract greater than the total number of BNS shares owned by Mr. MacDonald.
 Mr. MacDonald entered into a Securities Pledge Agreement also as planned on July 2, 1997. By this agreement, Mr. MacDonald pledged 165,000 of his BNS shares to the TD Bank and assigned any payment to which he could become entitled under the Forward Contract as additional collateral.
 Mr. MacDonald accepted the credit facility offer on July 2, 1997. Pursuant to its terms, Mr. MacDonald undertook to maintain in place the Forward Contract for the number of Reference Shares corresponding to the 165,000 shares which had been pledged.
 Although this credit facility authorized Mr. MacDonald to borrow up to $10,477,485, he only availed himself of part of this credit – $4,899,000 – which he used for the purpose of investing in other ventures. These borrowed funds were fully repaid prior to the close of Mr. MacDonald’s 2004 taxation year.
 Upon Mr. MacDonald’s repayment of the loan, the Forward Contract remained in place. However, contrary to what Mr. MacDonald anticipated, the value of the Reference Shares did not decrease and remained above their Reference Price. As a result, between 2004 and 2006, Mr. MacDonald was required to make cash settlement payments totalling $9,966,149.
 At trial, Mr. MacDonald testified that he intended to profit from the anticipated decline in the value of the BNS shares but nevertheless retain ownership of the shares based on his belief that they would perform well in the long term and he entered into the Forward Contract as it allowed him to achieve both objectives. While he did sell some of his BNS shares during the years when the Forward Contract was in place, he explained that this was done in order to rebalance his portfolio and to reduce his overall exposure to Canadian financial institutions which had increased when, in the context of another take-over, he became the owner of a substantial number of shares issued by the TD Bank.
 In computing his income for his 2004, 2005 and 2006 taxation years, Mr. MacDonald took the position that the cash settlement payments totalling $9,966,149 made during those years gave rise to business losses that were deductible against income from other sources.
 The Minister took issue with this characterization and denied the losses for the years in which they were claimed on the basis that the cash settlement payments gave rise to capital losses. The 2007 reassessment denies a minimum tax carry forward credit to which Mr. MacDonald became entitled by reason of the business loss claimed for his 2005 taxation year.
Chief Justice Nöel concluded that the Tax Court Judge had erred in failing to follow the George Weston decision:
 Based on the case law, an intention to hedge is not a condition precedent for hedging. It suffices that the person concerned owns assets exposed to market fluctuation risk when the derivative contract is entered into and that the contract has the effect of neutralizing or mitigating that risk.
 Mr. MacDonald was not an “accidental hedger”. He was aware of the hedging effect which the Forward Contract would have on the BNS shares that he pledged to the TD Bank and that it would continue to have on the corresponding number of shares that he held thereafter while the Forward Contract was in force.
 The Tax Court judge’s decision allows Mr. MacDonald to deduct the settlement payments as business losses even though the corresponding number of BNS shares that he held while the Forward Contract was in place are capital property in his hands thereby failing to adhere to the linkage principle, as developed by the case law.
 The Tax Court judge erred in law in not following binding precedents, in particular the definition of a hedge given by the Supreme Court in Placer Dome. She further erred in distinguishing George Weston on the basis that Mr. MacDonald had no ownership risk to hedge. Had she appreciated that Mr. MacDonald’s BNS shares were exposed to risk and followed the case law, she would have been bound to conclude that this risk was mitigated by the Forward Contract that he entered into.
As a result CRA’s appeal was allowed with costs.