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: Are the transactions in commodities futures on account of income or capital?
Position: On account of income
Reasons: Part of the business of mutual fund corporation
C. Tremblay, CMA
February 25, 2011
Dear XXXXXXXXXX :
This is in reply to your letter of January 6, 2011, wherein you requested that XXXXXXXXXX (the "Corporation") be accorded capital treatment on futures positions held by the Corporation. You advise that the Corporation has recently introduced a Commodities Futures Strategy.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments.
As you are aware, CRA's position with respect to commodity transactions is outlined in Interpretation Bulletin IT-346R, titled Commodity Futures and Certain Commodities. As indicated in paragraph 3 of IT-346R, trading in commodities creates fully taxable profits or fully allowable losses (i.e., income treatment) when a taxpayer has transactions in commodities connected with the taxpayer's business as part of the business operations. Further, as stated in paragraph 4 of IT-346R, also accorded income treatment for tax purposes are transactions in commodities by taxpayers who have access to special (insider) information about the commodity which they use to their benefit in one or more such transactions. If the activities of trading in commodities are conducted through a corporation whose primary or only activity is transacting in commodities, any resulting gains or losses would be subject to income treatment, as described in paragraph 5 of IT-346R. In such circumstances, ordinarily gains and losses arising from the commodity transactions would either be income from a business carried on by the corporation or income from an adventure in the nature of trade.
The determination of whether any particular gain or loss is on account of income or capital is always a question of fact to be resolved having regard to all the circumstances surrounding a transaction. The reference to speculators in IT-346 is not intended to cover persons who carry on a business of transacting in commodity futures; in our view, those persons should be taxable on income account, regardless of whether it is their primary business activity or is a secondary business. Further, in our view, gains and losses resulting from transactions in commodities by mutual fund corporations or trusts are, generally, considered to be derived from an adventure in the nature of trade and, consequently, on income account. We also maintain that the election available to speculators in paragraph 7 or IT-346R is not available to mutual fund corporations or trusts.
Lastly, we refer you to the following jurisprudence which support that trading in commodity futures or commodities is an adventure in the nature of trade: Gavreau, Beaudry Ltd. v. M.N.R (81 DTC 392), Stringam Farms Limitied v. M.N.R. (77 DTC 317), and Southco Holdings & Management Ltd et al. v. M.N.R. (75 DTC 162).
Accordingly, in our view the Corporation should record its commodity futures market transactions on account of income.
We trust the above comments are helpful.
R. Albert, CA
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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