22 August 2001 External T.I. 2001-0086155 - SECURITIES TRANSACTIONS

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 an individual who buys and sells securities is carrying on a business with respect to those activities.

Position:

General comments. However, it appears that the transactions would be on account of income.

Reasons:

Based on factors in IT-479R.

XXXXXXXXXX 2001-008615
M. Eisner, CA
August 22, 2001

Dear XXXXXXXXXX:

Re: Securities Transactions

We are writing in reply to your letter of May 30, 2001, concerning whether or not you are carrying on a business with respect to securities transactions.

XXXXXXXXXX

You have asked whether the above securities transactions will be on income or capital account.

Our Comments

As requested, we have considered your situation and have provided general comments, which may be of some assistance. It should be noted, however, that written confirmation of the tax implications inherent in particular transactions is 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 70-6R4, dated January 29, 2001.

For your reference, we have enclosed a copy of Interpretation Bulletin IT-479R "Transactions in Securities" which generally discusses the tax treatment of securities transactions. As explained in paragraph 2 of the bulletin, where the security that is traded qualifies as a "Canadian security", it may be possible for a taxpayer, who files an election under subsection 39(4) of the Income Tax Act (the "Act"), to treat all gains and losses from Canadian securities on capital account. However, as more fully discussed in the bulletin, pursuant to subsection 39(5) of the Act, this election is not available to certain taxpayers such as traders or dealers in securities. In addition, as explained in paragraph 6 of the bulletin, in order for a share of a corporation to qualify as a "Canadian security" as defined in subsection 39(6) of the Act, the corporation must, inter alia, be resident in Canada.

Where a taxpayer has not elected under subsection 39(4) of the Act, or does not qualify for the election, the taxpayer must determine whether the transaction in securities is on income or capital account.

As indicated in paragraph 10 of IT-479R, if an individual's course of conduct indicates that in securities transactions, the individual is disposing of securities in a way capable of producing gains, with that object in view, and the transactions are of the same kind and carried on in the same fashion as a trader or dealer or dealer in securities, the individual would generally be considered to be carrying on a business with respect to his or her securities transactions, such that the transactions would be on income account. In addition, as explained in paragraph 12 of this bulletin, the term "business" includes "an adventure or concern in the nature of trade", which the courts have held can include an isolated transaction in shares where the "course of conduct" and "intention" clearly indicate it to be such. Some of the factors to be considered in ascertaining whether a taxpayer's conduct indicates the carrying on of a business are listed in paragraph 11 of IT-479R and are as follows:

(a) frequency of transactions - 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.

In addition, as indicated in paragraph 18 of the bulletin, the gain or loss on the "short sale" of shares is generally considered to be on income account.

Consistent with the above comments, the determination of whether particular transactions in respect of securities result in business income (or losses) or are on account of capital is, therefore, a question of fact. However, based on the limited facts provided, and assuming that the election under subsection 39(4) of the Act is not applicable, it would appear, in light of the above factors, that the gains or losses in your situation would more than likely be considered on income account.

We trust that our comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 3 -