3 March 1982 Income Tax Severed Letter A-6183 - [Interpretation Bulletin IT-479]

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.

XXXX

Peter E. Salvatori 593-7295

March 3, 1982

Dear Sir:

Re: Interpretation Bulletin IT-479

This is to reply to your letter of January 14, 1982 in which you have requested clarification of certain observations made in Interpretation Bulletin IT-479 . We will answer your questions in the order in which they are presented.

A. Insiders and Insider Trading

1. While the definitions of the expression "insider" found in Canadian security legislation and the related jurisprudence may be relevant in determining whether a taxpayer is an insider, this concept is, for the purposes of Interpretation Bulletin IT-479 , not necessarily a reflection of the local securities law from time to time in place in any given jurisdiction.

39(4) Elections

2. (a) According to Interpretation Bulletin IT-479 , paragraph 5, a taxpayer will not be considered to be a "trader or dealer in securities" unless he transacts in securities as a result of and using special inside knowledge of a particular corporation or of a particular industry. Therefore, a taxpayer who merely possesses and does not use "inside information" may make the subsection 39(4) election.

(b) The expression employed in the bulletin is "utilize". This word is to be given its ordinary, everyday meaning.

(c) Generally, any information that would bear materially upon the value of securities and to which the public does not have access will be considered to be "inside information" of a particular corporation or industry.

3. For the period of time that the taxpayer is considered to be a "trader or dealer in securities" he cannot make the subsection 39(4) election and an election previously made is during that interval negatived.

Income or Capital Account

4. Where a taxpayer does not or is unable to make the subsection 39(4) election, the normal tests for determining whether a transaction is on income or capital account are applicable. These are reviewed in paragraphs 10-13 of Interpretation Bulletin IT-479 . The Department presumes that a taxpayer transacting in securities with respect to which he has "insider information" does so on income account, however, the conditions canvassed in 2(a) above must be met and the presumption is therefore not conclusive and may be rebutted.

5. A taxpayer who disposes of shares he held prior to acquiring the inside information is not considered to be a trader or dealer in securities. The bulletin contemplates situations where e.g. a taxpayer sells short or acquires additional shares as a result of the inside information.

6. A taxpayer who is, or who is considered to be, a trader or dealer in securities is unable to make the subsection 39(4) election for the duration of the period throughout which he may be thus characterized. For this period, the determination whether his transactions are on income or capital account is made on the basis of the rules contained in paragraphs 10-13 of Interpretation Bulletin IT-479 .

B. Holding Company

1. The phrase "a corporation whose prime business activity is trading in securities", found in paragraph 15 of Interpretation Bulletin IT- 479, is intended to designate a corporation which is carrying on the business of trading or dealing in securities and not a corporation whose activity constitutes an adventure or concern in the nature of trade. Accordingly, a company incorporated to hold a portfolio of securities will not by reason of its corporate personality alone be treated as a trader or dealer in securities. We would point out in this regard however that regulation 6200 (Part LXII) includes in the definition of a prescribed security a share acquired by a taxpayer in a transaction in which he was not dealing at arm's length. It would appear therefore that shares rolled into a holding company pursuant to an estate freeze or other planning device will not qualify as "Canadian securities" for the purposes of the subsection 39(4) election.

2. A corporation carrying on the business of trading or dealing in securities will not be permitted to make the subsection 39(4) election.

3. There is no difference between "the prime business activity" of a corporation, referred to in paragraph 5 of Interpretation Bulletin IT- 47 and the "prime activity" of a corporation referred to in paragraph 15 of the same bulletin.

Sincerely,

for Director Non-Corporate Rulings Division