As a result of its financing of the acquisition in 2001 of a U.S. bakery business ("Bestfoods") by indirect subsidiaries through a large issuance by it of (mostly) Canadian-dollar debt, the consolidated debt-to-equity ratio of the taxpayer ("GWL"), which was a Canadian public company, increased well above its internal guidelines of 1:1, and resulted in a credit watch warning from S&P. In order to hedge against the effect that a relative depreciation in the U.S. dollar could have on its creditworthiness and share price, GWL entered into long-term (10 to 15 year) cross currency swaps "fairly close" (para. 71) to the acquisition time (likely within one month given a reference to Atlantic Sugar, [1949] S.C.R. 706, at 711-712), whose amount "closely approximated" (para. 16) the total net value of its indirect U.S. investments at that time (i.e., including pre-2001 acquisitions), and were intended as hedges of those net investments (paras. 72, 3). Divestitures by some indirect U.S. subsidiaries in 2002 resulted in it being over-hedged, so that it terminated a portion of its swaps at that point. In 2003, GWL's debt/equity ratio had declined to approaching 1:1 (para. 90), and the U.S. dollar had depreciated to the point where further substantial declines were less likely. Accordingly, GWL terminated all its swaps, resulting in a gain of Cdn.$317 million.
This was a capital gain. Lamarre ACJ noted (at para. 81, see also 98) the principle that "in order to characterize the proceeds from a derivative transaction, one needs to identify the underlying item that created the risk … to which the derivative relates (which item does not necessarily need to be a transaction)" and that if, as was the case here, "it is found that the derivative was used to hedge a capital investment, any gain derived from the derivative will be on capital account." Furthermore, it was relevant that GWL was also "hedging" as this term was "understood under well-established business principles, including GAAP" (para. 92). The Crown position "which denies capital treatment … if there is no sale or proposed sale of the underlying item being hedged … has no legal basis" (para. 97), and "the settlement of derivative contracts in advance of their maturity date does not preclude those transactions from constituting a hedge (Echo Bay…)" (para. 88).
Unlike for Salada ("which was regularly speculating in currency" (para. 79)), the taxapyer had not entered into many other FX derivatives (paras. 24, 89) and the derivative here was a hedge and not speculative (paras. 70, 96, 97, 100). In particular, swaps, unlike futures and options, were unsuited to speculation due to their high initial transaction costs and lower liquidity (para. 106).