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 position in IT-346R, Commodity Futures and Certain Commodities, applies to options
Position TAKEN: No
Reasons FOR POSITION TAKEN:
IT position is limited to commodity futures, debt obligation futures and actual commodities for which a futures market exists.
XXXXXXXXXX 2003-001160
G. Moore
May 28, 2003
Dear XXXXXXXXXX:
Re: OEX S & P 100 Index Options
This is in reply to your fax of April 2, 2003, regarding the income tax treatment of transactions in commodity futures.
In particular, you refer to paragraph 1 of IT-346R, Commodity Futures and Certain Commodities, which refers to GSMA 8% Futures as an example of a future commodity. You are asking if a transaction in OEX S & P 100 Index Options ("OEX Options") would be subject to the same tax treatment as described in Interpretation Bulletin IT-346R, Commodity Futures and Certain Commodities.
The underlying asset for the OEX Options is the S & P's 100 Index, which is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value of their outstanding shares, which is the share price times the number of shares outstanding. These are summed for all 100 stocks and divided by a predetermined base value. The base value for the S & P 100 Index is adjusted to reflect changes in capitalization resulting from mergers, acquisitions, stock rights, substitutions, etc.
It appears that the situation you describe concerns a completed or proposed transaction and therefore, we are unable to provide any confirmation of the tax consequences except, with respect to a proposed transaction, in the context of an advance income tax ruling. Confirmation of the tax consequences respecting a completed transaction must be obtained from the local tax services office. We can offer, however, the following general comments.
Based on the information provided, it appears that the OEX Option described in your enquiry would be an option, not a commodity future, debt obligation future or actual commodity for which a futures market exists. Where an option is held on capital account, the rules in section 49 of the Income Tax Act (the "Act") will apply.
Where options that are sold are on income account and the taxpayer is not a mutual fund trust (where the mark-to-market approach is permitted), the premium received will be included in income when it is received pursuant to section 9 of the Act, provided that the recipient is absolutely entitled to the amount (that is, the amount has the "quality of income" when received, irrespective of whether the option has been exercised). Where a taxpayer pays a premium to obtain an option that will be held on income account, the amount paid will form part of the cost of the taxpayer's inventory.
Our general views regarding security transactions are in Interpretation Bulletin IT-479, Transactions in Securities. As noted in paragraph 9 of IT-479R, the determination of whether a specific security transaction would be considered on account of income or on account of capital is a question of fact which can only be determined after a review of all of the relevant facts. Whether an option transaction is on account of income or capital is a question to be resolved on the basis of the extensive case law that has developed on the issue of income or capital determination.
We hope the above opinion will assist you.
Yours truly,
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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