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 hedging in commodities or commodity futures would be an investment business as defined in subsection 95(1).
Position:
Question of fact - if facts show that hedging activity is incidental to the active business and thus not a separate business then the income from the hedging activities would be active business income.
Reasons: Law, intent.
964161
XXXXXXXXXX J. Stalker
Attention: XXXXXXXXXX
September 22, 1997
Dear Sirs:
Re: Investment property as defined in subsection 95(1) of the Income Tax Act (the "Act")
We are writing in response to your letter of December 12, 1996 in respect of the definition of investment property in subsection 95(1) of the Act.
You have presented a situation where a foreign affiliate of a Canadian corporation is in the business of buying and selling natural gas. The foreign affiliate hedges any uncovered exposure on its contracts for the purchase and sale of natural gas through transactions in natural gas on a commodities or commodities futures exchange. You have asked if income generated by the foreign affiliate on these hedging activities would be "profits from the disposition of investment property" for the purpose of the definition of investment business in subsection 95(1) of the Act.
It would appear that your query involves a factual situation involving completed and ongoing transactions. Issues involving completed transactions should be addressed by the appropriate Taxation Services Office of Revenue Canada. However, we can offer the following comments which we hope will be of assistance to you.
We emphasize that the definition of "investment property" in subsection 95(1) is an inclusive definition, and a property which is not specifically listed there may be an investment property. Accordingly, the key to determining the answer to your question is not whether a certain property is a commodity but whether the hedging activities are part of the active business of the foreign affiliate.
As stated by a representative of the Department of Finance at the 1995 Canadian Tax Foundation Conference (Question 11, page 40:6):
The definition of investment property is relevant only for the purposes of the investment business definition. The investment business definition is meant to capture business income derived from activities and sources that are considered for this purpose to be passive in nature. The objective is to prevent the avoidance of Canadian tax on income where that income is not active business income.
Whether transactions in commodities or commodity futures are an integral part of an active business, or a passive activity that constitutes a separate business that may be an investment business, is a question of fact. If an examination of the facts of a particular case showed that the hedging activities were incidental to the business of buying and selling of natural gas and thus not a separate activity, then the income from such hedging activities would be active business income.
The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997
Email this Content