The taxpayer sold its gold production to bullion dealers at the spot price but also, in order to manage the risk associated with fluctuations in the spot price of gold, entered into cash-settled derivatives such as forward contracts, spot deferred contracts, fixed interest floating lease rate contracts, put options and call options. “Proceeds” for purposes of computing its mining profits under the Mining Tax Act (Ontario) referenced: (a) consideration received from the output of a mine; (b) consideration from hedging; and (c) consideration from future sales or forward sales of the output of the mine That Act in relevant part defined “hedging” as including “the fixing of a price for output of a mine before delivery by means of a forward sale or a futures contract on a recognized commodity exchange.” (LeBel J noted, at para. 51, that in this context “’all consideration from hedging” must necessarily refer to a net concept.”)
In finding that the mining profits of the taxpayer included its profits from settling such derivatives, and in rejecting the taxpayer’s arguments that hedging referred only to contracts which entailed the physical delivery of mine output, LeBel J first noted (at para. 31) that:
at least for the purposes of GAAP, the way in which a derivative contract functions as a “hedge” is unaffected by the method by which the contract is settled
and then went on to state (at para. 46):
[T]he value of a forward sale contract that is settled by delivery of output is for all intents and purposes just the price received for the output. There is no doubt that this amount would be caught by the definition of proceeds, and there would have been no need for the legislature to include this element in a statutory definition of “hedging”. In the circumstances, the presumption against tautology carries considerable weight.
As to the meaning of “hedging,” he stated (at para. 35) that the general principles set out in Echo Mines “have some relevance here.”
He also stated (at para. 51):
[A]lthough forward sales and options are distinguished from one another in terms of the particular way in which each is used to hedge price risk, both are used in much the same way to “fix the price” for output. PDC’s argument about the serious distortion implicit in treating options as a subset of forward sales is belied by the PDC’s own Annual Reports … .