Tax Court denies mark to market for foreign exchange option contracts

In Kruger Incorporated v. Her Majesty the Queen (2015 TCC 119) the Tax Court of Canada concluded that, for the purposes of computing taxable income, the taxpayer could not value its foreign exchange option contracts on a mark to market basis.

The taxpayer, Kruger Incorporated, argued that it could recognize a taxable gain or loss at the end of each taxation year by marking to market foreign exchange option contracts it held as inventory. In Kruger’s view, mark to market was an appropriate method for calculating taxable income because it is the preferred method to value derivative property under accounting principles. The Tax Court rejected Kruger’s argument, noting that mark to market valuation is contrary to the realization principle for computing income and therefore should only be applied in the limited circumstances where it is sanctioned by the Income Tax Act (e.g., financial institutions that hold “mark-to-market property” as defined by the Act).