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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Short Sales
This is in reply to your letter of November 12, 1992, and recent telephone conversations (Brake/XXXXXXXXXX) relating to the timing of recognition of a gain or loss in respect of a short sale in circumstances where the shares to be acquired for delivery have been delisted, or where the company has become insolvent or bankrupt, and it is not possible to close the short position.
You also asked whether the Department would consider section 260 of the Income Tax Act (the "Act"), dealing with securities lending arrangements ("SLA"), to be applicable to deny the deduction of dividend repayments in ordinary short sale transactions conducted by individuals, partnerships or corporations.
The situation you describe is different from those covered by subsection 50(1) of the Act, where the taxpayer holds a security and it becomes worthless. The problem being that the short seller has nothing to sell. In many situations it is the broker who loaned the shares so the long purchaser, who buys from the short seller, can have the share together with title and ownership thereof. The short seller is required to deposit specified amounts of cash with his broker as security for the sale. The amount of cash in the short seller's account must always exceed the market value of the stock sold short by stipulated percentages. There is no limit on the duration of a short position as long as the short seller's broker can borrow an equivalent quantity of securities sold short and the seller maintains sufficient coverage in his short selling account.
In normal situations, where the short seller continues to have a financial obligation to bear the cost of replacing the borrowed shares, realization of income is considered to occur at the time the short position is closed and the obligation has been met, thus, permitting the calculation of the amount of the income from the completed transaction. In a situation such as where the issuer of the borrowed share becomes bankrupt and the short seller no longer has any financial obligation relating to the transaction, it would be our position that realization occurred at the time the obligation ceased to exist. An appeal of the decision in Friedberg v. The Queen, 1989 DTC 5115 relating to commodity trading in gold futures is presently before the courts. The outcome of this case could have a bearing on our position.
In response to your second question regarding SLA, it is our view that section 260 of the Act is applicable if both the SLA and the securities fall within the definitions of SLA and Qualified Securities as defined in subsection 260(1) of the Act.
We trust that you will find our comments helpful.
Yours truly,
R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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