One of the main tax issues associated with derivatives is whether the gains/losses from hedging should be treated as capital gains or income (when they are recognized for tax purposes). The tax treatment makes a dramatic impact on the overall outcome since only 50% of capital gains/losses are treated as income for tax purposes. For those who have booked gains from hedging, especially if there is no associated capital losses to offset, there is a strong preference to treat these hedging gains as capital gains for tax purposes. Treating the gains from hedging as capital gains reduces their tax impact.
As a long-time George Weston shareholder, I’m happy to hear they were able to win their case to classify the gains from a hedge of a US based holding as capital gains income. This should also set a precedent for other Canadian businesses who are hedging the value of their US holdings. I agree with the outcome of this tax case since it shouldn’t matter if the risk being hedged was also traded during the period of the hedge. There are lots of situations where a hedge is desirable even when the underlyingrisk may not have a taxable consequence during the same time-frame as the hedge itself.
