14 September 2000 External T.I. 2000-0030125 - DAY TRADER-SMALL BUSINESS DEDUCTION

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:

Does a day trader who incorporates his business qualify for the small business deduction?

Position TAKEN:

Question of fact, but it would likely be an active business and would likely not be considered a specified investment business.

Reasons FOR POSITION TAKEN:

Frequency of transactions and period of ownership would indicate an active business. Traders and dealers in securities are generally not considered to have a business the "principal purpose" of which is to earn income from property and thus would not be a "specified investment business".

XXXXXXXXXX 2000-003012
C. Tremblay
September 14, 2000

Dear XXXXXXXXXX:

This is in reply to your letter of June 5, 2000, wherein you seek our opinion as to whether an individual who is considering incorporating his business can take advantage of the small business deduction. You state that his principal source of income is from daytrading and he trades frequently between four to ten times a day.

Our Comments

As explained in Information Circular, 70-6R3 (copy enclosed), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling submitted in the manner set out in that Circular. Whether a corporation can qualify for the small business deduction will depend on, among other criteria, whether it carries on an active business which is a question of fact that can only be determined after a review of the transactions of the corporation. Accordingly, it would be difficult to make such a determination on a prospective basis (see paragraph 15(j) of the Circular). However, we are prepared to offer the following general comments which may be of assistance.

The Canada Customs and Revenue Agency's position regarding income from active business and the related issues concerning a specified investment business and a personal services business is provided in Interpretation Bulletin IT-73R5 (copy enclosed). The expression "active business carried on by a corporation" is defined in subsection 125(7) of the Income Tax Act (the "Act"), and means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure in the nature of trade.

The term "specified investment business" is defined in subsection 125(7) of the Act and generally means a business the principal purpose of which is to derive income from property, for instance, rental income or interest income, unless the corporation employs in the business throughout the year more than five-full time employees. For example, a corporation that acts as a trader in securities would generally not meet the "principal purpose" test in the definition of "specified investment business" and would be entitled to the small business deduction. In this regard, as stated in paragraph 15 of Interpretation Bulletin IT-479R (copy attached), all gains and losses on security transactions by a trader in securities are part of the normal operation of such a business. If the corporation's course of conduct indicates that in securities transactions, the corporation is disposing of securities of a similar kind and in a similar fashion as a trader or dealer in securities would and the corporation is disposing of securities in a way capable of producing gains and with that object in view, the corporation would generally be considered to be carrying on an active business and would not meet the "specified investment business" definition. Some of the factors to be considered in ascertaining whether the taxpayer's conduct indicates the carrying on of a business are listed in paragraph 11 of Interpretation Bulletin IT-479R and are as follows:

(a) frequency of transaction - a history of extensive buying and selling of securities or a quick turnover,

(b) period of ownership - securities are usually owned for only a short period of time,

(c) knowledge of the securities market - the taxpayer has some knowledge of or experience in the securities markets,

(d) security transactions form a part of the taxpayer's ordinary business,

(e) time spent- a substantial part of the taxpayer's time is spent studying the securities market and investigating potential purchases,

(f) financing - security purchases are financed primarily on margin or some form of debt,

(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and

(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.

Accordingly, it is a question of fact whether a corporation that is a daytrader in securities carries on an active business.

The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Canada Customs and Revenue Agency.

We trust our comments are of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch