2 August 1995 External T.I. 9500235 - DERIVATIVES HELD BY MUTUAL FUNDS

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:

Can general statement be made wrt to the income treatment (income vs. capital) of gains or losses on "derivative products" used for hedging / non-hedging purposes.

Position TAKEN:

No, a general statement cannot be made wrt "derivative products". Opinion given will reiterate previous positions taken by the Department on specific instruments only.

Reasons FOR POSITION TAKEN:

As the term "derivative products" is not limited in scope and new products are emerging daily, a general position wrt gains & losses being on account of income or capital cannot be made.

		950023
XXXXXXXXXX                                      L. Holloway
(613) 957-8953

Attention: XXXXXXXXXX

August 2, 1995

Dear Sirs/Mesdames:

Re: Derivative Products held by Mutual Funds

This is in reply to your letter dated December 30, 1994, requesting a technical interpretation on the tax treatment of derivative products held by a group of mutual funds (collectively, the "Funds" and individually a "Fund") each of which qualifies as a mutual fund for securities law purposes and a mutual fund trust under subsection 132(6) of the Income Tax Act (the "Act"). In particular you had asked that we confirm that the gains and losses of a Fund in respect of derivative products held by it will be on income account when the Fund uses the derivative products for non-hedging purposes. We apologize for the delay in our response.

Your letter stated that the Funds have used a variety of derivative products for non-hedging purposes to gain synthetic exposure to the underlying interests not otherwise owned by the Funds, including:

-forward equity contracts (exchange traded)

-stock index futures and options on stock index futures (exchange traded)

-bond index futures and options on bond index futures (exchange traded)

-stock index options and bond index options (exchange traded)

-gold futures and gold index futures (exchange traded)

-currency options (over the counter)

Our Comments

The determination of whether any particular gain or loss is on account of income or capital is always a question of fact. Where a mutual fund's intention is to profit from the buying, selling or otherwise taking of a position in futures contracts, forward contracts and options on futures contracts based on among other things, a commodity, a commodity index, a foreign currency, a stock index, or a bond index, there is a presumption that the related gains or losses will be on income account.

The jurisprudence referred to in your letter, in our opinion, supports the view that the nature of the gain or loss derived or sustained from a particular transaction can only be determined after a review of the relevant facts including, but not limited to, the taxpayer's intention, the actual use of funds and the nature of the business carried on by the taxpayer.

We trust our comments will be of assistance to you, however they do not constitute an advance income tax ruling and accordingly, are not binding on the Department with respect to any particular transaction.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch