A predecessor of the taxpayer monetized its shares of Corporation 2 by entering into a forward sale with a third party (the “Purchaser”) and pledging that forward sale agreement and its shares to a Bank as security for a loan. This forward transaction was subsequently closed out by the taxpayer in connection with its sale of the Corporation 2 shares and use of the proceeds to repay the loan and pay a cash Maturity Payment to the Purchaser based in part on the appreciation in the shares’ value.
The Directorate found that the Maturity Payment did not satisfy the s. 20(1)(f) wording, as a “forward transaction cannot be considered to be any bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation” (Federated Co-op was cited in this regard). Accordingly, the Maturity Payment was a payment on capital account whose deduction claimed under s. 20(1)(f)(i) should be denied. In this regard, it found that there was a “sufficiently close link between the forward transaction and the loan to conclude that the Forward Transaction is a hedge of the loan.” Since it appeared that “the borrowed money in this case is an addition to the borrower's financial capital, the borrowing is capital in nature and the Maturity Payment is, therefore, capital in nature.”