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, for the purpose of determining the gain or loss realized on a short sale undertaken to hedge a taxpayer's position with respect to identical shares held on capital account, the borrowed shares and other shares held by the borrower on capital account that are otherwise identical to the borrowed shares would be considered to be "identical properties" within the meaning of subsection 47(1).
Position TAKEN:
As stated in paragraph 18 of IT-479R, the gain or loss on the "short sale" of shares is generally considered to be on income account. Subsection 47(1) does not apply to redetermine the cost of shares sold on income account. However, the position in paragraph 18 of IT-479R is a general presumption and is subject to a review of the facts. In this regard we may consider a short sale entered into in order to hedge a taxpayer's position with respect to identical shares held on capital account to be a short sale that is on capital account.
Additionally, if a taxpayer is eligible to make an election under subsection 39(4) and does so, the gain or loss on a "short sale" of shares that are Canadian securities would be on account of capital. If a taxpayer has made the election under subsection 39(4) and the shares are Canadian Securities subsection 47(1) would apply in determining the taxpayer's adjusted cost base.
Reasons FOR POSITION TAKEN:
Consistent with the Department's published position set out in paragraph 18 of IT-479R and several opinion letters.
XXXXXXXXXX 2001-006904
P. Diguer
May 24, 2001
Dear XXXXXXXXXX:
Re: Subsection 47(1) of the Income Tax Act (Canada) (the "Act")
This is in reply to your facsimile dated February 6, 2001, in which you request our views on the application of subsection 47(1) of the Act as it relates to securities lending arrangements and short sales.
In particular you describe a situation where a taxpayer has entered into a short sale to hedge his or her position with respect to identical shares held on capital account. You ask whether, for the purpose of determining the gain derived from the short sale, the borrowed shares, the shares acquired for re-delivery to the lender and other shares held by the borrower on capital account that are otherwise identical to the borrowed shares, would be considered to be "identical properties" within the meaning of subsection 47(1) of the Act.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R4 dated January 29, 2001. However, advance income tax rulings are not given where the major issue is whether a transaction should be viewed as being of an income or capital nature. Nevertheless, we offer the following general comments in connection with your request which we hope are of assistance to you.
As stated in paragraph 18 of IT-479R, the gain or loss on the "short sale" of shares is generally considered to be on income account and as a consequence subsection 47(1) would not apply since this particular provision sets out rules that apply to identical properties for the purposes of subdivision c of Division B of the Act which deal with capital gains and capital losses. However, the position in paragraph 18 of IT-479R is a general presumption and is subject to a review of the facts. In this regard we would consider a short sale entered into in order to hedge a taxpayer's position with respect to identical shares held on capital account to be a short sale that is on capital account.
Additionally, if a taxpayer is eligible to make an election under subsection 39(4) and does so, the gain or loss on a "short sale" of shares that are Canadian securities would be on account of capital. If the shares sold in a short sale transaction are capital property subsection 47(1) would apply to determine the taxpayer's cost of the shares sold at both ends of a short sale transaction if the shares acquired by the taxpayer under the terms of the short sale are otherwise identical to previously acquired shares held by the taxpayer. As a result, a gain or loss may arise on the sale of the borrowed shares as well as on the sale of the shares acquired for re-delivery to the lender. CCRA's views on the meaning of "identical properties" is discussed in IT-387R2.
We trust our comments will be of assistance to you. .
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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