Interest rate swap transactions were entered into between a controlled foreign affiliate of the taxpayer ("BCo") and a foreign financial institution specializing in derivative contracts ("FCo"). There was a fixed coupon swap of FCo computed and paid every six months at a fixed notional interest rate on a US-dollar notional principal and a second arm payable by BCo on (presumably the same) US dollar notional principal at the prevailing US six-month LIBOR rate but payable every X years.
CRA rejected the taxpayer's position that a net amount payable or receivable by the taxpayer under this composite swap position should be computed on an annual basis, thereby resulting in current deductions of a net loss on an accrual basis. After referring to the realization principle, CRA stated:
...a gain could only be realized and a loss could only be incurred upon the termination of the swaps at the specified termination date. Only on the termination date would the taxpayer have the absolute right to receive, or the legal obligation to pay, the cash settlement. Only on the termination date could the cash settlement amount be ascertained.