31 March 1994 Administrative Letter 9337012 - MUTUAL FUND TRUST INVESTING IN FUTURES - INCOME ACCOUNT

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.

Principal Issues:

investment in futures by mutual fund trust - income earned on account of capital or income?

Position TAKEN:

while determination is a question of fact including intention of t/p at the time of investment, it our view that income earned is on income account

Reasons FOR POSITION TAKEN:

a mutual fund trust or corp. which invests primarily in futures is engaged in transactions considered to be "adventures in the nature of trade" such that related gains and losses are on income account

			933701

XXXXXXXXXX Sandra Short

Attention: XXXXXXXXXX

March 31, 1994

Dear Sir,

Re: Investment in financial futures and other derivatives by a Mutual Fund Trust

This is in reply to your letter of December 17, 1993 wherein you ask whether a mutual fund trust that invests primarily in derivatives, futures or like investments would be permitted to flow profits and losses derived therefrom to individual unitholders as capital gains and losses.

It is your opinion, based on the comments found in Interpretation Bulletin IT-346R "Commodity Futures and Certain Commodities", that the mutual fund trust should be able to treat the transactions of the trust as on account of capital because the comments in paragraphs 3, 4 and 5 of the Interpretation Bulletin do not apply in the circumstances. Further, you have stated that mutual funds, insofar as capital gains are concerned, are conduits and that gains are flowed through to the shareholders or unitholders in the trust. In your view, the unitholders would be able to treat the income earned from these activities as on account of capital were they to invest directly in the type of assets that the fund will invest in.

In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act 1970-71-72, c. 63 as amended consolidated to June 10, 1993 (the "Act").

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. Such circumstances would include the intention of the taxpayer at the time of the acquisition of the particular property. Interpretation Bulletin IT-479R effectively excludes capital treatment to those considered to be "traders or dealers in securities" or those engaging in transactions considered to be "adventures in the nature of trade". Paragraph 15 of that Interpretation Bulletin states that,

"...gains and losses made by a corporation whose prime activity is trading in securities will be considered to be on income account, notwithstanding that the corporation does not hold itself out to the public as a trader or dealer in securities."

Also, as cited by you, Interpretation Bulletin IT-346R entitled "Commodity Futures and Certain Commodities" states at paragraph 5 thereof,

"(C)orporate taxpayers whose prime or only business activity is trading in items to which the comments in this bulletin apply are subject to the income treatment."

The Department considers that these comments are equally applicable to other taxpayers such as mutual fund trusts or corporations.

Paragraph 132(6)(b) of the Act requires that the only undertaking of a mutual fund trust be the investing of funds of the trust. Transactions with respect to commodity futures contracts by a mutual fund trust are considered as investing for purposes of paragraph 132(6)(b). It does not necessarily follow, however, that the resultant gains or losses would be on account of capital. Generally, it is the opinion of the Department that a mutual fund trust or corporation which invests primarily in futures would be engaged in transactions considered to be "adventures in the nature of trade" such that the related gains and losses would be on income account.

We trust that the above comments are of assistance to you.

Yours truly,

P.D. Fuoco
For Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch