25 May 1994 External T.I. 9404215 - GAINS OR LOSSES ON FUTURES AND SHARES

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.

Principal Issues:

Will gain or loss incurred by a seat owner-member of the Toronto Futures Exchange investing in futures and stock (common and or preferred), be on account of capital or income?

PositionS TAKEN:

1.General presumption of income for gain or loss on futures.

2. Depends on the facts of the situation. Possibility of a capital gain if investment in shares is occasional and for the purpose of earning property income.

Reasons FOR POSITION TAKEN:

1.The Courts have long established that trading commodity futures or commodities is either a business or an adventure in the nature of trade, and therefore on income account.

Paragraph 5 of IT-346R equally applies to taxpayer other than corporation (ref. 933400).

2.IT-479R

		                                              5-940421
XXXXXXXXXX                                              L. Roy

May 25, 1994

Dear Sir/Madam:

Subject: Gains and Losses on Futures Contracts and Stocks

This is in reply to your letter addressed to the Toronto District Office which was forwarded to us for reply. You have requested our comments regarding the classification of gains or losses realized on futures contracts and stocks as being on account of income or capital. We apologize for the lengthy delay in responding to your request.

All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. However, advance rulings are not given where the major issue is whether a transaction should be viewed as being of an income or capital nature. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

The determination of whether a particular gain or loss is on account of income or capital is always a question of facts to be resolved having regard to all the circumstances surrounding the transaction. Such circumstances include the course of conduct and the intention of the taxpayer at the time of the acquisition of the particular property.

In the case of commodity futures or commodities, the Courts have long established that trading in commodity futures or commodities is either a business or considered to be an adventure in the nature of trade, such that related gains and losses would be on income account.

Paragraph 5 in Interpretation Bulletin IT-346R states that corporate 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 this paragraph is equally applicable to other taxpayers. In our opinion, a seat owner-member of a Futures Exchange whose business activity consists of trading in futures would have to report his transactions on income account.

Occasional investments in shares by trader in futures could result in gains or losses on account of capital rather than on account of income. Again, this is a question of facts to be resolved having regard to all the circumstances surrounding such investments.

These comments should not be interpreted as confirming that your investments in futures or shares generate capital gain rather than income.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate