18 December 2001 External T.I. 2001-0107655 - SECURITIES-INCOME VS. CAPITAL

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether an individual who deals in put and call options and in connection with those activities also buys and sells securities is carrying on a business.

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

Reasons: Based on comments in IT-479R.

XXXXXXXXXX 2001-010765
M. Eisner, CA
December 18, 2001

Dear XXXXXXXXXX:

Re: Securities Transactions

We are writing in reply to your letter of October 22, 2001, concerning whether or not you are carrying on a business with respect to securities transactions.

XXXXXXXXXX

You have asked whether the transactions in the Accounts 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. We also note that it appears that some or all of the above accounts may be joint accounts with your spouse (there have also been transfers between accounts) and we have not been provided with sufficient information in order to establish whether the attribution rules would apply in respect of these accounts. However, for information on these rules, we have enclosed a copy of Interpretation Bulletin IT-511R, "Interspousal and Certain Other Transfers and Loans of Property".

For your reference, we have also 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. Also, as noted in paragraph 23 of the bulletin, a share option is not a Canadian security within the definition in subsection 39(6) of the Act.

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 25 of IT-479R, it is a question of fact whether the gains or losses on share option transactions are on income account or capital account. However, the CCRA generally presumes that

(a) the gain or loss realized by a holder of options is on the same account as the holder's transactions in shares;

(b) the gain or loss realized by a writer of covered options is on the same account as the underlying shares; and

(c) the gain or loss realized by a writer of naked options is normally on income account. However, the CCRA will accept reporting of gains and losses on capital account provided this practice is followed consistently from year to year.

The presumption indicated above may not apply in those unusual situations where the facts clearly indicate otherwise. Also, in accordance with the comments in paragraph 24 of the bulletin, gains and losses on share option transactions by a dealer in securities are considered to be on income account.

Finally, as indicated in paragraph 18 of IT-479R, the gain or loss on the "short sale" of shares is 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, it would appear, in light of the above factors, that the gains or losses relating to securities in respect of the Accounts in your situation would likely be considered on income account. For the same reasons, in our view, this tax treatment could also apply to the securities transactions in the XXXXXXXXXX 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
Policy and Legislation Branch

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