No Longer Up to You: How Will Your Investments Be Taxed?

In MacDonald v Canada, the Supreme Court of Canada clarified the test for distinguishing between investments meant to speculate, which are taxed on income account, and those meant to hedge, which are taxed on capital account. The Supreme Court’s decision diminishes the importance of the investor’s subjective intent, which elevates the risk that an investor might become an “accidental hedger” and end up with a higher tax bill than they anticipated or intended.

By Tim Haggstrom*


James MacDonald, a longtime investor, had his taxes reassessed for three taxation years: 2004, 2005, and 2006, respectively.1 The reassessments resulted in a potential tax increase upwards of $2 million.2 At issue was the classification of a series of settlement payments made pursuant to a forward contract between Mr. MacDonald and TD Securities Inc. (“TD”),3 which represented approximately $10 million in losses for him.4 He had claimed that these losses should apply against his income account, thus deducting the entire loss.5 Conversely, the Minister of National Revenue (“the Minister”) took the position that these payments should be characterized as capital losses,6 which would allow Mr. MacDonald to deduct only half of his originally claimed tax benefit from his taxable income.7 As a further consideration, these losses would only be advantageous to Mr. MacDonald to the extent that he could deduct them from taxable capital gains.8 Because of the differential treatment between income loss and capital loss, a taxpayer will typically prefer to have their gains classified on capital account but their losses on income account. This was the case for Mr. MacDonald, who successfully appealed the Minister’s reassessments before the Tax Court of Canada.9 However, after having the Tax Court’s decision overturned by the Federal Court of Appeal,10 the dispute found its way to the Supreme Court of Canada, which ruled against Mr. MacDonald in an eight-to-one decision.11


To determine the proper classification of the settlement payments, the core issue before the Supreme Court was whether the forward contract was speculation or a hedge. For context, “[a] hedge is generally a transaction which mitigates risk, while speculation is the taking on of risk with a view to earning a profit.”12 If Mr. MacDonald’s forward contract was characterized as a hedge, the related payments would be characterized as capital losses.13

Following “[a] long line of jurisprudence,” the Supreme Court decided the issue by assessing the purpose of the forward contract underlying Mr. MacDonald’s settlement payments.14 In the majority decision, the Supreme Court clarified that, in conducting this test, objective considerations will outweigh subjective considerations.15 This is apparent in the majority’s approach: a “linkage analysis” that “begins with the identification of an underlying asset, liability or transaction which exposes the taxpayer to a particular financial risk, and then requires consideration of the extent to which the derivative contract mitigates or neutralizes the identified risk.”16 The stronger the link, “the stronger the inference that the purpose of the derivative contract was to hedge.”17 Since the linkage does not need to be perfect,18 there is a range of potential circumstances that will attract such an inference. Subjective manifestations “may sometimes be relevant,” however, the stated intention of the taxpayer “is not determinative.”19

The role of subjective intention was a key point of disagreement in this case: the Tax Court gave significant weight to evidence showing Mr. MacDonald’s subjective intentions,20 while the Federal Court of Appeal swayed toward objective factors.21 Further, in her dissenting reasons, Justice Côté stated that she would have placed far greater importance on subjective elements than the majority.22 The role of, and degree of importance given to, subjective factors arguably remains unclear and open to future debate.  


In the result, the Supreme Court majority’s conclusion is dissatisfactory to Mr. MacDonald and potentially to other investors as well. Mr. MacDonald was experienced in capital markets and corporate finance.23 The future contract was related to The Bank of Nova Scotia (“BNS shares”), which, according to his evidence that was accepted at trial, Mr. MacDonald expected to depreciate in the short-term24 but increase in the long-term.25 Supporting this long-term outlook is the fact that BNS shares were his most substantial share investment, which he intended to hold indefinitely.26 In addition to this long position, the mechanics of the forward contract entered into with TD permitted him to take a short position on BNS shares, since it entitled him to receive payments from TD if the shares decreased in value.27 Notwithstanding the association between the BNS shares already held by Mr. MacDonald and the forward contract, in Mr. MacDonald’s mind, his use of the forward contract as a short position was speculative rather than for hedging:28 “[A]n adventure [or concern] in the nature of trade” that would properly be taxed on income account.29 Indeed, as Mr. MacDonald asserted at the Federal Court of Appeal, an excessively objective test runs the risk of making him an “accidental hedger,” since the test could all but ignore what he actually intended.30 Unfortunately for Mr. MacDonald, Chief Justice Noël of the Federal Court of Appeal was not sympathetic to this argument, on the basis that an investor such as Mr. MacDonald could be expected to understand the connection between the BNS shares and the forward contract, which mitigates or neutralizes the risk associated with the BNS shares.31

By contrast, Côté J. of the Supreme Court asserted that Mr. MacDonald was entitled “to be taxed on the basis of known legal rules,”32 where intent to speculate is “‘the most determinative factor’”33 in deciding whether a transaction is “an adventure in the nature of trade.”34 She reasoned that leaving intent out of the analysis “would only cause confusion.”35 Further, Côté J. argued that a test solely based on risk-mitigation, given that pairings of investments commonly have a high risk correlation, would “introduce a significant degree of uncertainty into the tax treatment of derivative instruments.”36


In summary, while the Supreme Court in MacDonald v Canada clarified the test for distinguishing between a speculation and a hedge in a manner that renders the legal analysis more objective, it may have also generated confusion and uncertainty for investors. As was the case for Mr. MacDonald, it now looms as a possibility that an investor could conduct a transaction with a subjective intention to speculate but nevertheless be taxed as if he or she were hedging. Moreover, this linkage could be established on little more than the observation of, in the eyes of a third-party observer, a sufficient linkage in relation to a separate asset, liability, or transaction of that investor. For investors with large and sophisticated portfolios, these potential linkages may be combinatorially vast in number and complex in nature—and therefore difficult to reliably account for in the course of day-to-day investment decision making. Perhaps more worrisome, even investors with far less experience than Mr. MacDonald and with only modest savings could find themselves similarly caught off guard and burdened with a much higher tax bill than planned for.

* JD Candidate (Saskatchewan).

1 MacDonald v Canada, 2020 SCC 6 at para 11, 443 DLR (4th) 124 [MacDonald SCC].

2 The $2 million figure is arrived at by multiplying the difference between the marginal tax rate on income and capital gains for the relevant period by the $10 million in losses Mr. MacDonald incurred over the relevant period. Assuming Mr. MacDonald’s income was sufficiently above the highest tax bracket for Ontario, the difference between the effective rates for income and capital gains in all relevant years is 23.21% (46.41% less 23.20%): see “Personal Income Tax Rates for Canada and Provinces/Territories for 2006 and 2007” (last modified 18 February 2021), online: <> []; “Personal Income Tax Rates for Canada and Provinces/Territories for 2004 and 2005” (last modified 18 February 2021), online: <> [].

3 MacDonald SCC, supra note 1 at paras 3–5 (“a forward contract is a type of derivative contract that creates an obligation for one party to sell, and another party to buy, an underlying asset…at a pre-determined future date…and at a pre-determined price”).

4 Ibid at para 10.

5 Ibid at para 11.

6 Ibid.

7 Income Tax Act, RSC 1985, c 1 (5th Supp), s 38(b) [ITA]; Canada Revenue Agency, Capital Gains: 2019 (guide), T4037(E)/R19 (Ottawa: CRA, 2019) at 31, online: CRA <> (the information cited can be downloaded by clicking “2019 - PDF - t4037-19e.pdf”) []. Since 2001, capital gains in Canada are valued for tax purposes at an “inclusion rate” of 50%, compared to 100% for employment or business income (ITA, supra note 7, s 38(a)).

8 ITA, supra note 7, ss 3(b), 111(1)(b).

9 MacDonald v R, 2017 TCC 157, [2018] 1 CTC 2239 [MacDonald TCC].

10 MacDonald v Canada, 2018 FCA 128 at paras 1–4, [2019] 2 FCR 302 [MacDonald FCA].

11 MacDonald SCC, supra note 1 at paras 45, 88.

12 Ibid at para 1.

13 Ibid at paras 20–21.

14 Ibid at para 22.

15 Ibid.

16 Ibid at para 32.

17 Ibid.

18 Ibid.

19 Ibid at para 22.

20 MacDonald TCC, supra note 9 at para 63.

21 MacDonald FCA, supra note 10 at paras 92–94. See also MacDonald SCC, supra note 1 at para 59, Côté J., dissenting (“the Federal Court of Appeal…analysis looks only to the economic effects”).

22 See generally MacDonald SCC, supra note 1 at paras 47, 57, 87 (“intent is a question that requires an assessment both of the taxpayer’s subjective intention and of the presence or absence of objective manifestations of that intention” ibid at para 56).

23 Ibid at para 2.

24 MacDonald TCC, supra note 9 at para 10.

25 Ibid at paras 10, 18–22.

26 Ibid at para 22. See also ibid (Written Submissions of the Respondent at para 25); ibid (Written Submissions of the Appellant at para 29).

27 MacDonald SCC, supra note 1 at para 6.

28 Ibid at para 11. See also MacDonald TCC, supra note 9 at para 59.

29 MacDonald SCC, supra note 1 at para 46, Côté J., dissenting (but not on this point). This point refers to the legal framework prescribed by the ITA, supra note 7, ss 3(a) (“determine…the taxpayer’s income for the year from each office, employment, business and property”), 248(1) (“[i]n this Act…business includes…an adventure or concern in the nature of trade”). See also MacDonald TCC, supra note 9 at paras 34–38.

30 MacDonald FCA, supra note 10 at para 70. The term “accidental hedger” was taken from Mr. MacDonald’s written argument (ibid, Written Submissions of the Respondent at para 66).

31 See ibid at paras 71, 93.

32 MacDonald SCC, supra note 1 at para 58.

33 Ibid, quoting Canada Safeway Limited v Canada, 2008 FCA 24 at para 43, [2008] 2 CTC 149.

34 MacDonald SCC, supra note 1 at para 58.

35 Ibid.

36 Ibid at para 60.