15 April 1988 Income Tax Severed Letter 5-3339 - [Eligibility of Certain Trust Activities]

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.

Revenue Canada Taxation Head Office

W.C. Harding (613) 957-3499

April 15, 1988

Dear Sirs:

This is in reply to your letters of May 7, 20, and June 5, 1987, requesting a technical interpretation in respect of the eligibility of certain trust activities within the provisions of subsection 132(6), subparagraphs 108(2)(b)(iv) and 204.4(2)(a)(v) of the Income Tax Act (the Act) and subsection 5000(7) of the Income Tax Regulations (the Regulations).

We apologize for the delay in responding to your concerns, however, as you are aware, the subject matter of your letters required an in depth study on our part before we could make a substantive response.

The activities that you are concerned with are:

(1) purchasing, and subsequently selling, stock index futures and bond futures;

(2) purchasing, and subsequently selling, commodities or commodity futures; and

(3) purchasing, and subsequently selling, securities on margin and making short sales.

In this regard you requested us to confirm that:

(a) the undertaking of each of the investments set out above will be considered the acquisition of "shares, bonds, mortgages, [or] marketable securities" for purposes of subparagraphs 108(2)(b)(iv) and 204.4(2)(a)(v) of the Act and Regulation 5000(7); and

(b) income derived from such transactions will be accepted as income "derived from, or from dispositions of" such investments for purposes of the provisions of the statute and regulations set out in (a) above.

You also requested us to provide a technical interpretation to the effect that acquisitions or short sales of marketable securities such as stock index futures would be considered an "investment" for the purposes of subsection 132(6) of the Act.

In our opinion:

A. Stock index futures, bond futures and commodity futures would be "marketable securities" for purposes of subparagraphs 108(2)(b)(iii) and 204.4(2)(a)(ii) of the Act and Regulation 5000(7).

B. Commodities would not be marketable securities.

C. Income earned on the settlement of futures contracts will be considered to be derived from the futures contracts for the purposes of subparagraphs 108(2)(b)(iv), 204.4(2)(a)(v) of the Act and Regulation 5000(7).

D. Income earned on the disposition of commodities will not be considered to be derived from the disposition of marketable securities for purposes of the provisions noted in C. above but will be considered as being from an active business.

E. A deposit left with a securities broker may be considered as being a cash deposit if it is left in that form for only a short period (one or two days). A margin deposit would otherwise be considered as a debt security which would have to comply with the relevant provisions governing the forms of investment allowable to a fund. Under the above-noted provisions, margin deposits would not generally qualify as being securities or marketable securities.

F. In general, short sales will not be considered as being an ineligible activity of a fund where the trust has the underlying securities or liquidity to meet any ensuing obligations.

G. Transactions with respect to marketable securities such as stock index futures and bond futures will be considered to be investing for purposes of paragraph 132(6)(b) of the Act.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on this Department.

We trust the foregoing will be of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate