31 October 1988 Income Tax Severed Letter 7-3237 - [Tax Treatment of Silver Certificates on Becoming a Resident of Canada]

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.

Oct 31 1988

Small Business and General Division W.P. Guglich (613) 957-2102

SUBJECT: Tax Treatment of Silver Certificates on Becoming a Resident of Canada

This is in reply to your memorandum of September 1, 1988 concerning the tax treatment to be accorded XXXX silver certificates.

The facts as we understand them are as follows:

XXXX

Your Views

It is your view that XXXX is not in the business of selling silver certificates. Therefore, the silver certificates will be capital property and not inventory. As a result when XXXX re-entered Canada and became a Canadian resident again the provisions of subsection 48(3) would apply to deem him to have acquired at that time the silver certificates at a cost equal to the fair market value at that time.

Our Views

Nature of Silver Certificates

We have preciously determined that a silver or gold certificate is an obligation stating the issuer's liability to deliver upon demand the bullion in exchange for the certificate. Accordingly, the holder possesses merely personal rights, (rights in personam), enforceable against the issuer, rather than real rights (rights in rem) in the commodity itself. However, for purposes of subsection 47(1) and paragraph 54(i) of the Act and subsection 26(8) of the ITAR the Department adopted an administrative position that bullion and certificates of the same precious metal would be considered by the Department to be identical properties. IT-346R

Jurisprudence has established that transactions in commodities or commodity related instruments such as future contracts, or certificates is an adventure in the nature of trade. Consequently, all commodity transactions would technically be treated for tax purposes as ordinary income. However, IT-346R sets out an administrative position which allows a speculator to report for tax purposes if he so chooses his commodity transactions as capital gains or capital losses. Therefore, commodity transactions are subject to ordinary income treatment unless the taxpayer chooses capital treatment. Therefore, if XXXX does not choose the capital treatment his silver certificates would be considered inventory. The comments in IT-479R do not apply to commodity related instruments such as silver certificates.

Becoming Canadian Resident

When XXXX became a Canadian resident on or about July 1, 1984 the certificates he owned at that time would be considered inventory since he had not chosen the capital treatment. We agree with Audit Review that subsection 48(3) of the Act does not apply in respect of inventory, since its application is restricted to subdivision C of Division B of Part I (capital gains).

3% Inventory Allowance

Subparagraph 20(1)(gg) of the Act requires that the inventory be "held for sale". As stated in paragraph 15(c) of IT-435R in order to be considered to be "held for sale" the inventory must be offered for sale. This condition is not met in XXXX case.

A second basis for disallowing the deduction is that XXXX silver certificate activities though a business by definition would not constitute a "business carried on" which is a requirement of paragraph 20(1)(gg). Although an "adventure or concern in the nature" of trade is included in the definition of "business" in subsection 248(1) of the Act and the courts have held that a simple isolated transaction can constitute an "adventure or concern in the nature of trade" it does not necessarily mean that a taxpayer who is engaged in an adventure or concern in the nature of trade has "carried on a business". Please refer to the comments in paragraph 3 of IT-459 .

We trust this will be of assistance to you.

ORIGINAL SIGNED BY

Wm. R. McColm

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch