11 January 1990 Income Tax Severed Letter AC58577 - Hedging Gains and Losses - Whether "Resource Profits"

19(1)                                             5-8577
                                                  John Shaw
                                                  (613) 957-8968

January 11, 1990

Re: Hedging gains and losses - whether "resource profits" and "income from a mine", subsections 1204(1) and 1104(5) of the Regulations

This is in reply to your letter of August 23, 1989, in which your requested that we again examine the matter of whether hedging gains and losses related to expected production form a mine, but with respect to hedges which will not be satisfied by delivery of such production, could constitute "resource profits" an "income from a mine" for the purposes of subsections 1204(1) and 1104(5) of the Regulations to the Income Tax Act respectively.

In our view, as we stated at the 1989 Canadian Tax Foundation Round Table (a copy of the question and our response is attached), profits and losses from such hedges could not represent "resource profits" or "income from a mine'. We have examined the two cases you noted - Atlantic Sugar Refineries Limited v. M.N.R. 49 DTC 602 and Dominion Steel & Coal Corp. Ltd. v. M.N.R. 57 DTC 147 - but do not consider either decision of much assistance in resolving the matter, at least beyond their assistance in removing any minor doubt that such hedging gains on hedging arrangements were on income account or were on account of capital . In neither case was it necessary to establish whether the hedging gains constituted income from an activity described in as narrow terms as those used in the applicable provisions of the Regulations.

Three cases which, we find of much more relevance are Gunnar Mining Limited v. M.N.R. 68 DTC 5035, Cominco Ltd. v. H.M.Q. 84 DTC 6535 and Guthrie v. United States (323 F. 2D 143, 6th Circuit 1963). In Gunnar Mining, the Supreme Court excluded interest income from short-term investments held to meet debenture repayments required under a sinking fund provision from "income derived from the operation of a mine", despite the income obviously relating to some extent to the mining business of the taxpayer. In Cominco, business interruption insurance was found not to be "production profits" or 'resource profits". In Guthrie, business interruption insurance was held not to be mining income. The IRS, in Letter Ruling 78-42097, considered Guthrie as support for its view that hedging gains and losses were not to be taken into account in determining mining income for depletion purposes.

We note your reference to Australia's acceptance of gains and losses on hedging contracts as income form the working of a mining property, but are disinclined to follow Australia in this matter or to comment on the Australian decision. It is interesting to note that paragraph 23(o) of the Australian tax act the relevant statutory provision is repealed effective December 31,1990.

Yours truly,

Chief Resource Industries Section Rulings Directorate