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:
Whether investment in futures by mutual fund trust is income earned on account of capital or income?
Position TAKEN:
While determination is a question of fact, gain would probably be on income account.
Reasons FOR POSITION TAKEN: A mutual fund trust or corporation 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.
5-941404
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
August 4, 1994
Dear Sir:
Re: Investment in Financial Futures and Other Derivatives by a Mutual Fund Trust
We are writing in reply to your letter of May 25, 1994 wherein you requested we review an opinion provided to you by this Directorate on March 31, 1994.
More specifically, you ask whether, in light of the additional information you have provided, the trading in futures by your mutual fund will give rise to capital gains, as opposed to fully taxable income.
As we indicated in our previous letter, the determination of whether any particular gain or loss is on account of capital is always a question of fact to be resolved having regard to all the circumstances surrounding the transaction. It is your view that, since securities legislation requires mutual funds to use financial futures in a conservative fashion, any gains realized on the futures should be treated as gains on account of capital.
In our view, the conditions imposed by securities legislation on mutual funds which invest in futures do not alter the nature of the transactions in futures. In the circumstances you describe, the holding of financial futures 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 Income Tax Act.
Furthermore, although Interpretation Bulletin IT-346R allows speculators to report their transactions on capital account, a "speculator", as defined in the Bulletin, is, essentially, anyone other than an active and knowledgeable investor. Generally, those whose business involves trading in the underlying instruments and those who trade futures contracts are not considered to be speculators and report their transactions on income account. In our view, a mutual fund trust or corporation would not be considered to be a "speculator" within the meaning ascribed to that term in the Bulletin.
Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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