25 July 2000 External T.I. 1999-0014665 - Losses and options

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: Whether transactions involving the purchase and sale of options by a taxpayer should be viewed as being on account of income or capital and discussion of loss application rules.

Position: Question of fact - general information provided.

Reasons: See above.

XXXXXXXXXX 		1999-001466

Attention: XXXXXXXXXX

July 25, 2000

Dear Sirs:

Re: Purchase and Sale of Options

This is in reply to your undated letter that was received by us on December 15, 1999. In your letter you requested the Canada Customs and Revenue Agency's ("CCRA") views on the income tax consequences under the i ("the Act") on losses arising from the purchase and sale of options by your company on a foreign stock exchange.

Your request relates to a completed transaction involving a specific taxpayer. Confirmation of the income tax consequences of completed transactions involving specific taxpayers will only be provided where the request is made to the particular taxpayer's local CCRA Tax Service Office and all the relevant facts and information are provided. Notwithstanding the above we can offer the following general comments that we caution may or may not apply to your particular fact situation.

It is a question of fact that must be determined on a case by case basis whether transactions involving the purchase and sale of options or other similar securities by a taxpayer should be viewed as being on account of income or capital. Where the facts indicate that the particular taxpayer is engaged in the business of buying and selling such property (see paragraphs 9 to 11 of Interpretation Bulletin IT-479R) or where the particular transaction(s) can be regarded as being an adventure in the nature of trade (see paragraphs 12 and 13 of IT-479R) any resultant gain or loss will ordinarily be considered as being on account of income and not capital.

Where a taxpayer's losses from such transactions are determined to be on account of income the taxpayer can deduct these losses against its net income from all other sources earned in the year in which the losses were incurred (the "loss year"). To the extent that all or a portion of such losses can not be deducted in the loss year, the excess amount becomes a "non capital loss" of the taxpayer as defined in subsection 111(8) of the Act. Non capital losses can generally be carried back 3 years or forward 7 years to offset other types of income earned by the taxpayer in the loss application year pursuant to paragraph 111(1)(a) of the Act.

Where losses from such transactions are determined to be on account of capital such losses ("allowable capital losses") can, in the year they were incurred, only be used to offset the amount of any taxable capital gains realized by the taxpayer. To the extent that the taxpayer's allowable capital losses exceed the taxpayer's taxable capital gains for a taxation year the amount of such excess is defined in subsection 111(8) of the Act as the taxpayer's "net capital loss". Net capital losses can generally be carried back 3 years or forward indefinitely pursuant to paragraph 111(1)(b) of the Act but can only be used to offset net taxable capital gains of the taxpayer in the loss application year. For more detailed information on the application of these rules please refer to Interpretation Bulletin IT-232R3.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3. You can find IT-479R, IT-232R3 and most of CCRA's other publications on CCRA's website at www.ccra-adrc.gc.ca.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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