CRA confirms that the “cost” of call options closed out by their writer is nil, and that the “cost” of a short sale is the FMV of the borrowed shares

Box 20 of Form T5008 Statement of Securities Transactions that is prepared by investment dealers respecting the transactions conducted by them on behalf of their clients reports (in Box 20) the cost of such securities. CRA indicated that the cost of a call option that is sold by its writer on an exchange is nil, and that where the writer then terminates its obligations under that option by purchasing a matching option on the exchange, that purchase is treated as a separate transaction for T5008 reporting purposes.

In the case of a short sale transaction, the cost of the shares sold short is the fair market value of the shares at the time they are borrowed for the purpose of being sold short – so that the cost of the sales sold short is not the cost of the shares subsequently purchased to cover the short.

S 49(1) deems the writing of a call option on capital account to be a disposition, with the implication that the call premium received by the writer is deemed to be proceeds of disposition. CRA confirmed its position “that expenses incurred in connection with the granting of an option may be deducted from the proceeds of disposition when calculating a taxpayer's gain.”

Neal Armstrong. Summaries of 22 January 2020 External T.I. 2014-0559281E5 F under Reg. 230(2), ITA s. 40(1)(a)(i) and s. 49(1).