12 November 2003 External T.I. 2003-0020565 - CONTRIBUTION OF SHORT CALL OPTION

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:

Can a taxpayer contribute a short position in a call option which they write to a deferred plan?

Position:

It may result in the plan being considered to be carrying on a business. If held by an RESP, it may be revocable; if held by an RRSP or RRIF, will may result in the plan being liable for tax on its taxable income for any year in which it is carrying on a business.

Reasons: The law is clear if an RESP, RRSP or RRIF is carrying on a business.

XXXXXXXXXX 2003-002056
P. Kohnen
November 12, 2003

Dear XXXXXXXXXX:

Re: Technical interpretation - Contribution of a Short Call Option

This is in reply to your submission of May 22, 2003, requesting our comments regarding the rules relating to the transfer of a short position in a call option by the writer of the option to a registered retirement savings plan ("RRSP"), a registered retirement income fund ("RRIF") or a registered education savings plan ("RESP"), herein collectively referred to as "Deferred Plans".

Our Comments

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 income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Copies of information circulars, guides and pamphlets are available at your local Tax Services Office or on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

Under the Income Tax Act (the "Act"), Deferred Plans are not allowed to carry on a business. The determination of whether a Deferred Plan is carrying on a business is a question of fact. However, as is noted in paragraph 23 of Interpretation Bulletin

IT-320R3, the writing of a naked call option by a Deferred Plan, whereby the plan sells a call option in respect of an underlying property which it does not own, may result in the Deferred Plan being considered to be carrying on a business. In our view, the same conclusion could be drawn where a Deferred Plan takes on the short position in the underlying security created by a call option written outside of the plan (i.e., where the writer transfers their position in the option to the Deferred Plan).

An RESP that is carrying on a business is revocable pursuant to paragraph 146.1(2.1)(c) of the Act. Pursuant to paragraphs 146(4)(b) and 146.3(3)(c) of the Act, respectively, an RRSP or RRIF trust will be liable for tax on its taxable income for any year in which it is carrying on a business.

We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further information.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate