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 trader who incorporates his business qualify for the small business deduction?
Position TAKEN:
Question of fact. General comments provided based on 2000-0030125.
Reasons FOR POSITION TAKEN:
XXXXXXXXXX 2000-004970
D. Yuen
Attention: XXXXXXXXXX
December 15, 2000
Dear Sirs:
This is in reply to your facsimile of September 20, 2000, wherein you asked several questions regarding an individual who spends a great deal of time monitoring and actively working on his portfolio, has a short time period of ownership and has an expanding knowledge of the securities market. The trading in securities is the individual's only business and the holding of the securities is speculative, with some dividend income being earned. Unless otherwise stated all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act").
Your Questions and Comments:
1. Would you consider the trading conducted by the individual to be on account of income or capital in nature?
2. If the trading is on account of income, would you consider it to be an adventure or concern in the nature of trade?
3. If the trading is considered an adventure in the nature of trade, and the investment portfolio is rolled over to a corporation owned by the individual, would the income be eligible for the corporate small business deduction?
4. It is your opinion that the individual would be considered to be carrying on a business and any gains would be treated as income and not capital.
5. It is also your view that the portfolio would qualify for the rollover provisions under section 85 and once in the corporation, the income generated would be taxed at the small business rate.
6. You do not think he is carrying on a specified investment business since the holding of the securities is speculative in nature.
7. It is your view that the dividend income is a by-product of the types of shares traded. Holding them at a certain point in time will result in dividends, however, that is not the main intent of holding them.
As explained in Information Circular IC 70-6R3 dated December 30, 1996 which was issued by Revenue Canada (the "Circular"), it is not our 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 the Circular.
Whether a transaction should be viewed as being an adventure in the nature of trade, of an income nature or of a capital nature is a determination based on the facts of a particular situation (see paragraph 15(e) of the Circular). Whether a corporation can qualify for the small business deduction will also depend on, among other criteria, whether a business is being carried on which is a question of fact that can only be determined after a review of the transactions. Accordingly, it would be difficult to make any of the above determinations 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. The expression "active business carried on by a corporation" is defined in subsection 125(7) 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) 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, there is a presumption that 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 the corporation is disposing of securities of a similar kind and in a similar fashion as a trader or dealer in securities 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 trader in securities carries on an active business.
These comments are provided in accordance with the guidelines set out in paragraph 22 of the Circular and are not considered binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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