CRA rules that the financing cost embedded in receiving a prepayment of the forward price under a forward constituted IFE

On the trade date, the taxpayer entered into agreements for the forward sale of a commodity, which required physical delivery on a monthly basis and, on such trade date, received a prepayment of the forward prices payable under the forward sale agreement. On each monthly delivery date, the taxpayer purchased the commodity from its subsidiaries at the current spot price and, due to an appreciation in the spot price, realized a loss for the difference between the spot price and the prepayment amount, which consisted of two components:

• the difference between the spot price and the forward price (the “Sale Loss”); and
• the difference between the prepayment amount and the forward price (the “Financing Cost Loss”).

CRA ruled that:

• the Financing Cost Losses constituted “interest and financing expenses” (“IFE”) under the s. 18.2(1) definition thereof; and
• the Sale Losses were not amounts described in A(e) of the IFE definition and, therefore, were not included in the taxpayer's IFE.

Neal Armstrong. Summary of 2025 Ruling 2025-1063831R3 under s. 18.2(1) – IFE.