How does GWL impact CRA's position on foreign currency hedges for net investments in foreign operations? CRA responded:
The CRA accepts… GWL. While the decision affirmed that there are circumstances in which a foreign currency derivative can be considered a hedge of a taxpayer's net investments in foreign operations there must, however, be evidence that demonstrates that the derivative is sufficiently linked to the underlying capital assets. …
… The Court concluded that the taxpayer would not have entered into the swaps if it had not acquired the US Operations. …[T]he notional value of the swaps closely approximated the investments in the US Operations, the taxpayer's formal derivative policy and its credit facilities prohibited it from speculating in derivatives, and… there was no evidence that the swaps were related to an underlying item that was on income account …[nor] of a profit or speculation motive… .
The Court did not consider the early termination of the derivative in these circumstances, to cause the derivatives to be considered speculative in nature. The termination occurred after the taxpayer's risk had declined (its debt to equity ratio had returned to acceptable levels) and the derivatives were no longer required to protect GWL's capital structure.