24 March 2003 Internal T.I. 2003-0184127 - COMMODITY OPTIONS

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 re option on securities in IT-479R applies to options on commodities

Position: No

Reasons: IT position is limited to securities options

									March 24, 2003

HEADQUARTERS						HEADQUARTERS
Assessment and Collection Branch				Corporate Financing Section
Business Returns and Payments 				Denise Dalphy, LL.B.
  Processing Directorate					941-1722

Attention: Ms Louise Deslauriers
			2003-018412

Opinion on Commodity Future Contracts

This is in response to your electronic message of January 17, 2003 wherein you enquired about the taxation of option premiums on commodity futures.

Facts

You enquired about the following two situations:

1. A taxpayer with a December 31 year-end sells an option in December 2002 that expires in March 2003. He receives a $1000 premium. As of December 31, 2002, the option has not been exercised.

2. A taxpayer with a December 31 year-end purchases an option in December 2002 that expires in March 2003. He pays a $1000 premium. In December 2002, the taxpayer does not know what his course of action will be in respect of the option.

Our Comments

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. Although this position does not provide symmetry and may result in timing differences in computing income, the Act does not provide another result.

Of course, 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.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate