7 March 1994 External T.I. 9326225 - GAINS AND LOSSES ON STOCK INDEX FUTURES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

Opinion

Principal Issues:

Mutual fund investing in stock index futures - capital or income

Position TAKEN:

Presumption of income

Reasons FOR POSITION TAKEN:

LEGAL:

n/a

FINANCE OPINION:

n/a

JURISPRUDENCE:

	various - 	Geddes 76 DTC 1338 - Ladin 77 DTC 317-
				Stringam Farms 78 DTC 1007

RCT PUBLICATIONS:

IT 479R, IT 346R

HAA NUMBER:

HAA 6954 - 1

		932622
XXXXXXXXXX	J.P. Dunn

Attention: XXXXXXXXXX

March 7, 1994

Dear Sirs:

Re: Gains and Losses on Stock Index Futures Contracts

We are writing in response to your correspondence of September 14, 1993 wherein you had requested the views of the Department regarding the classification of gains or losses realized on stock index futures contracts as being on account of income or capital. We apologize for the lengthy delay in responding to your request.

The particular situation described in your letter is that of a proposed mutual fund which would replicate the performance of an investment in certain publicly traded stocks which are tracked by a recognized stock index. This would be accomplished through a combination of an investment in Canadian dollar denominated treasury bills issued by Canadian governments together with the purchase of publicly traded futures contracts representing the aforementioned stock index.

The treasury bills would, under normal circumstances, be held until maturity and the income realized thereon would clearly be considered to be interest for the purposes of the Income Tax Act (the "Act"). The futures contracts would, however, always be disposed of prior to the contracted date of settlement thereby precipitating a gain or loss to the extent that the proceeds of disposition are greater or less than the cost of the contract as the particular case may be. It is this gain or loss upon which you have requested our comments.

As noted in your letter and in our various telephone conversations, 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 the transaction. As noted in your letter, such circumstances would include the intention of the taxpayer at the time of the acquisition of the particular property. It is your view that in the type of case at hand, there can be a general presumption that, because of the whole conduct of the taxpayer in entering into a "synthetic" composite instrument designed to replicate the holding of the actual stocks which are tracked by the stock index, any gains realized thereon should be treated as gains on account of capital, similar to the treatment accorded a passive investor holding the actual stocks.

While there may well be such a presumption in circumstances in which the actual stocks are held by a mutual fund, the characterization of the gains and losses is, nevertheless, a determination that must be made on the facts of each particular case. In the circumstances that you describe, it is our view that the holding of a stock index future would be more indicative of an adventure in the nature of trade and would, consequently, fall within the ambit of a "business" as that term is defined in subsection 248(1) of the Act. Again, although we would not unequivocally dismiss the view that any gains or losses on such instruments could, in certain circumstances, be considered to be on account of capital, we would believe that there would be an presumption that such would be viewed as being derived from an adventure in the nature of trade.

Although we trust that our comments are of assistance, we caution that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch