7 July 2009 External T.I. 2009-0321871E5 - Election under subsection 39(4)

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: Description of securities for an election pursuant to subsection 39(4)

Position: General Comments provided

XXXXXXXXXX 						2009-032187
V. Srikanth
July 7, 2009					

Dear XXXXXXXXXX :

Re: Filing of election under subsection 39(4)

This is in response to your letter dated May 1, 2009, wherein you requested our opinion about the filing requirements for the election pursuant to subsection 39(4) of the Income Tax Act (the "Act"). Specifically, you wanted to know, when filling form T123- Election on Disposition of Canadian Securities ("Form T123"), if a description of one Canadian security applies to the disposition of all Canadian securities held by a taxpayer.

Our Comments

Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advanced Income Tax Rulings. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not advance income tax rulings and we are prepared to provide you with the following comments.

Subsection 39(4) of the Act states:

"Except as provided in subsection (5), where a Canadian security has been disposed of by a taxpayer in a taxation year and the taxpayer so elects in prescribed form in the taxpayer's return of income under this Part for that year,

(a) every Canadian security owned by the taxpayer in that year or any subsequent taxation year shall be deemed to have been a capital property owned by the taxpayer in those years; and

(b) every disposition by the taxpayer of any such Canadian security shall be deemed to be a disposition by the taxpayer of a capital property."

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.

As you are aware, Form T123 is available for use by a taxpayer when making an election under subsection 39(4) of the Act. Your concern is if the description of one Canadian security on the form will apply to the disposition of all Canadian securities held by the taxpayer. As can be seen from the wording of subsection 39(4) of the Act, when a taxpayer disposes of one or more Canadian securities and makes an election in a prescribed form (Form T123), the effect of such an election is that all Canadian securities disposed of in the year of election and subsequent years, subject to certain exceptions (as noted below), will be given capital gain or loss treatment. So to answer your specific question, in our view, when making an election pursuant to subsection 39(4) of the Act, description of one Canadian security will apply to the disposition of all Canadian securities of a taxpayer in that or any subsequent taxation year.

According to subsection 39(5) of the Act, an election under subsection (4) does not apply to a disposition of a Canadian security by a taxpayer (other than a mutual fund corporation or a mutual fund trust) who at the time of the disposition is:

• a trader or dealer in securities,
• a financial institution (as defined in subsection 142.2(1)),
• a corporation whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof, or
• a non-resident,

or any combination thereof.

As explained in paragraph 4 of IT- 479R, "an election that has been made under subsection 39(4) does not apply to any securities disposed of during the time that subsection 39(5) applies to a taxpayer. If subsection 39(5) ceases to apply, a previous election under subsection 39(4) becomes reapplicable after that time."

Further, please note that, while it is true that after filing an election pursuant to subsection 39(4), a taxpayer cannot treat any of its dispositions on income account, based on the facts of a particular case, the taxpayer may be considered to be dealing on account of income and not capital, and therefore, reassessed accordingly. The Courts made the following comment in Vancouver Art Metal Works Ltd. 93 DTC 5116, FCA, when addressing this issue:

"[A] taxpayer does not necessarily lose his election rights under subsection 39(4) when he buys and sells securities for his own account. However, he loses such right when he becomes a trader or a dealer, that is to say, when he professionally engages 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".

We trust our comments will be of assistance to you.

Yours truly,

R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch