8 March 1994 External T.I. 9334005 - GAINS AND LOSSES ON STOCK INDEX FUTURES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

Opinion - 933400

Principal Issues:

Mutual fund trust investing in stock index futures - capital gain or income

Position TAKEN:

General presumption of income

Reasons FOR POSITION TAKEN:

The "investing of funds" by a mutual fund does not lead to a "quid pro quo" that gains are on account of capital. Such gains would fall within the ambit of "adventure in the nature of trade".

LEGAL:

n/a

FINANCE OPINION:

n/a

JURISPRUDENCE:

	various -	Vancouver Art Metal Works 93 DTC 5116
				Stringam Farms 77 DTC 317
				Jed Ladin 78 DTC 1007

RCT PUBLICATIONS:

			IT 346R
			IT 479R
HAA NUMBER:

HAA 6954 - 1

		933400
XXXXXXXXXX	J.P. Dunn

Attention: XXXXXXXXXX

March 8, 1994

Dear Sirs:

Re: Gains and Losses on Stock Index Futures Contracts

We are writing in response to your correspondence of November 18, 1993 wherein you had requested the views of the Department regarding the classification of gains or losses realized on stock index futures contracts as being on account of income or capital. We apologize for the lengthy delay in responding to your request.

The particular situation described in your letter is that of a "quasi-mutual fund unit trust" which would purchase publicly traded "stock index futures". It is our understanding that a "quasi-mutual fund unit trust" is a trust as described in paragraph 204.4(2)(d) of the Income Tax Act (the "Act") relative to registered investments for certain deferred income plans.

As the question of whether any investment is held on account of income or capital is academic when viewed from the perspective of a deferred income plan, our comments are directed towards circumstances in which units of the mutual fund trust, shares of a mutual fund corporation or similar investment vehicle are not held as part of a deferred income plan.

As noted in your letter, the determination of whether any particular gain or loss is on account of income or capital is always a question of fact to be resolved having regard to all the circumstances surrounding the transaction. Such circumstances would include the intention of the taxpayer at the time of the acquisition of the particular property. You have also noted that the "acquisition" or "sale of stock index futures is similar in nature to a transaction in "naked options" in that no property is actually purchased or sold and, further, that paragraph 25 of Interpretation Bulletin IT-479R states that, while transactions in "naked options" are normally on income account, the Department will accept the reporting of gains or losses on capital account provided this practice is followed consistently from year to year."

While we would agree that this statement accurately reflects the views of the Department, we would also note that the aforementioned publication effectively excludes from such treatment those considered to be "traders or dealers in securities" or those engaging in transactions considered to be "adventures in the nature of trade". Paragraph 15 of that Interpretation Bulletin states that,

"...gains and losses made by a corporation whose prime activity is trading in securities will be considered to be on income account, notwithstanding that the corporation does not hold itself out to the public as a trader or dealer in securities."

Also, Interpretation Bulletin IT-346R entitled "Commodity Futures and Certain Commodities" states at paragraph 5 thereof,

"(C)orporate taxpayers whose prime or only business activity is trading in items to which the comments in this bulletin apply are subject to the income treatment."

The Department considers that these comments are equally applicable to other taxpayers such as mutual fund trusts or corporations.

Where the only activity of a mutual fund trust is the participation in stock index futures, it is clearly arguable, as you note, that its only undertaking would be the investing of funds. It does not necessarily follow, however, that the resultant gains or losses would be on account of capital. Generally, it is the opinion of the Department that a mutual fund trust or corporation which invests primarily in stock index futures would be engaged in transactions considered to be "adventures in the nature of trade" such that the related gains and losses would be on income account. However, as noted previously, a determination with respect to a factual situation could be made only upon examination and analysis of all the facts and circumstances relevant to that particular situation.

Although we trust that our comments are of assistance, we caution that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch