24(1)
5-902859
John Shaw
(613) 957-8968
19(1)November 30, 1990
Dear Sirs:
Re: Hedging gains and losses/resource profits
In reply to your letter of October 9, 1990, in our view hedging gains and losses are not included in the computation of the income base or "resource profits" on which resource allowance is calculated, for either mineral producers or producers of oil and gas.
In our view, where a producer enters into a futures contract on a commodity market, it does so either as a speculation or as a form of insurance against a decline in the price of its production. In either event, it will have an income gain or loss, but not one that forms part of its production income. Whether the futures contract is closed out by delivery of production which is highly unlikely has no effect on this result.
That said, we do not consider "forward sale" agreements, at least in their simplest form, to be hedges. In our view, these arrangements are no more than a means of establishing the price for production to be delivered to the purchaser. We understand that there are complex forward sale contracts which permit delivery deferrals at a penalty in the price for the production, but have not examined such contracts, and have, at this time, no firm view as to whether such contracts may be considered, in whole, or in part, as hedges.
for Director Bilingual Services and Resource industries Division Ruling Directorate