6 October 2010 External T.I. 2010-0381231E5 - Extensive Trading in Securities

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 a "day-trader" is precluded from electing under 39(4) and whether, if the election under 39(4) is not available, income from trading through a corporation would be considered active business income for the purposes of the small business deduction.

Position: If the taxpayer's dealings amount to carrying on a business, then the taxpayer is precluded from electing under 39(4). If this is the case, then the business income could be considered active business income for the purposes of the small business deduction.

Reasons: Previous positions taken.

XXXXXXXXXX
									2010-038123
									Andrea Boyle, CGA
October 6, 2010

Dear XXXXXXXXXX :

Re: Extensive Trading in Securities

I am writing in reply to your letter dated September 20, 2010, in which you asked for confirmation regarding our views on individuals or corporations which trade extensively in publicly-traded securities. Specifically, you asked whether "day-traders" can elect to treat dispositions of Canadian securities as capital gains/losses and whether income generated from dispositions of securities in a corporation would be considered active business income for the purposes of the small business deduction.

The particular situation outlined in your email appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

Subsection 39(4) Election

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) to treat all gains and losses from Canadian securities on account of capital. However, pursuant to subsection 39(5), this election is not available to traders or dealers in securities.

In our view, "a trader or dealer in securities" includes not only brokers or professionals who are registered or licensed professionally, but also includes individuals or corporations that engage in the business of dealing in securities when such dealings
amount to carrying on a business. The determination of whether or not a particular taxpayer carries on a business of trading or dealing in securities is a question of fact which can only be determined following an assessment of all the facts relating to the particular taxpayer's circumstances.

Generally, as indicated in paragraph 10 of IT-479R Transactions in Securities, if a taxpayer's course of conduct indicates that the taxpayer 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 taxpayer would be considered to be carrying on a business with respect to his or her securities transactions. 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 include, amongst other factors, the frequency of transactions, the period of ownership, and the taxpayer's knowledge and time spent studying the securities market. Although no individual factor is sufficient to characterize the activities of a taxpayer as a business, the combination of a number of those factors may well be sufficient for that purpose.

Active Business Income

For the purposes of the small business deduction, the expression "active business carried on by a corporation" is defined in subsection 125(7), and means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure in the nature of trade.

If a taxpayer's course of conduct indicates that the taxpayer is carrying on a business in a similar manner as a trader or dealer in securities, then, in our view, the "principal purpose" of the business would not be to derive income from property (for instance, rental income or interest income) and the corporation would not be considered to be a "specified investment business." Consequently, the corporation would likely be considered to be carrying on an active business and, if all the other criteria were met, would be entitled to the small business deduction. It should be noted that the "principal purpose" of a corporation must be determined annually after all the facts relating to the business carried on by that corporation in that year have been considered and analyzed.

We trust that these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch