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.
Principal Issues: Whether an individual who deals in share options and also buys and sells stock is carrying on a business
Position: General comments
Reasons: Based on comments in IT-479R
2005-012786
XXXXXXXXXX G. Moore
(613) 957-8982
May 30, 2005
Dear XXXXXXXXXX:
Re: Securities Transactions
This is in response to your letter of April 17, 2005, inquiring about the tax treatment of gains and losses arising as a result of dispositions of securities.
On October 28, 2004, you entered into an agreement with a person, Mr. X, to buy and sell call and put options on your behalf on your US $ margin account. As part of your agreement, you agreed to pay Mr. X 20% of the profits generated, net of transactions costs. During the 2004 year, you were involved in purchasing and selling share options on a daily basis. During the period October 28, 2004 to December 30, 2004, 88 transactions occurred. You indicate that your intention was to treat gains and losses arising from the disposition of share options on account of income. You also disposed of two stocks during the 2004 taxation year and will report the gain and loss from these on account of capital. You are asking whether you could report gains and losses on the disposition of Canadian securities on account of capital and the gains and losses on the disposition of share options on account of income.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The CRA's general comments on security transactions can be found in 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 a 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 Act, to treat all gains and losses from Canadian securities on capital account. A special election form, T123, is available for use by a taxpayer when making an election under subsection 39(4). However, pursuant to subsection 39(5) of the Act, this election is not available to certain taxpayers such as traders or dealers in securities. In the court case of Vancouver Art Metal Works Limited v. the Queen (93DTC 5116), the Federal Court of Appeal indicated that the expression "trader or dealer in securities" refers to anyone who carries on a business of trading or dealing in securities, not only to brokers or professionals registered or licensed. This expression refers to anyone who is professionally engaged in the business of dealing in securities or when his dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade.
In addition, 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, 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 securities transactions are on income or capital account.
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 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. The CRA 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.
Where the facts clearly support capital treatment, the CRA will accept reporting of gains and losses on capital account provided this practice is followed consistently from year to year. 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.
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. In our view, based on the limited information provided, we would conclude that your share option transactions should be treated on income account.
We trust that these comments will be of assistance.
Yours truly,
Steve Tevlin,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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