16 December 2008 External T.I. 2008-0269481E5 - Income/capital treatment - foreign currency trades

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Individual currently participates in foreign currency trading on a part-time basis. He plans to eventually leave his employment and carry on currency speculating through a corporation. Whether the comments in IT-346R would afford him capital treatment.

Position: None

Reasons: Question of fact.

XXXXXXXXXX 							2008-026948
S. Fron
December 16, 2008

Dear XXXXXXXXXX :

Re: Speculative Foreign Exchange Gains and Losses

This is in reply to your letter dated January 24, 2008 concerning the treatment of gains and losses related to foreign currency trading. In your letter you referred to Interpretation Bulletins IT-95R Foreign Exchange Gains and Losses and IT-346R Commodities Futures and Certain Commodities (in particular paragraph 7 thereof) and queried whether your part-time foreign currency trading activities would be treated as on account of capital. In addition, you noted that in the future you may give up your regular job to pursue your trading interests and that you are undecided as to whether you will incorporate for the sole purpose of speculating on currencies.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Furthermore, paragraph 15(e) explains that we do not provide rulings when the major issue is whether a transaction should be viewed as being of an income nature or of a capital nature. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

It is a question of fact whether any person's (including an individual's) commodity or commodity futures trading is on account of income (by virtue of carrying on a business) or capital. Furthermore, applying the income treatment to transactions in commodity or commodity futures is not limited to situations where this is the primary business activity of the taxpayer. Paragraphs 9 to 32 of IT-479R, Transactions in Securities provides general comments for purposes of determining whether transactions are income or capital in nature. Determination of whether a transaction is on account of income or capital can only be made following an assessment of all the facts relating to the particular taxpayer's circumstances.

Paragraph 10 of IT-479R states:

10. Where the whole course of conduct indicates that

(a) in security transactions the taxpayer is disposing of securities in a way capable of producing gains and with that object in view, and

(b) the transactions are of the same kind and carried on in the same way as those of a trader or dealer in securities,

the proceeds of sale will normally be considered to be income from a business and, therefore, on income account.

The factors used to determine whether a taxpayer's conduct indicates the carrying on of a business are based on previous case law and are listed in paragraph 11 of IT-479R:

(a) frequency of transactions - a history of extensive buying and selling of securities or a quick turnover,

(b) period of ownership - securities are usually owned for only a short period of time,

(c) knowledge of the securities market - the taxpayer has some knowledge of or experience in these markets,

(d) security transactions form a part of the taxpayer's ordinary business,

(e) time spent - a substantial part of the taxpayer's time is spent studying the securities market and investigating potential purchases,

(f) financing - security purchases are financed primarily on margin or some form of debt,

(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and

(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.

Furthermore, as noted in paragraph 12 of IT-479R, although none of the individual factors listed above may be sufficient to characterize the activities of a taxpayer as a business, the combination of a number of those factors may well be sufficient for that purpose.

Interpretation bulletins are intended to be an aide to taxpayers. The comments in IT-346R represent our general position. It should be noted that we may not apply the positions provided for in interpretation bulletins to taxpayers who apply the stated positions in an inconsistent manner or who attempt to avoid tax by structuring their affairs to benefit from the stated position when they otherwise would not have qualified.

The determination of income or capital treatment is a question of fact and is based on the above factors, accordingly we cannot conclude as to the treatment of the related gains and losses while you remain employed and speculate on currency futures on a part-time basis. Where you participate in currency futures activities on a full-time basis, we would generally view the gains and losses to be considered on account of income, regardless of whether the investing activities are transacted personally or through a corporation.

We trust that our comments are of assistance to you.

Lita Krantz
Assistant Director
for the Director
Income Tax Rulings Directorate
Ontario Corporate Tax Division