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: The characterization for income tax purposes of a hedge transaction which includes a short sale of shares.
Position: The short sale of shares is on account of income unless the taxpayer has elected pursuant to subsection 39(4) of the Act. Where an election under 39(4) has not been made, the characterization of a disposition of a security other than by short sale is a question fact.
Reasons: See IT-479R.
xxxxxxxxxx 991439
J. E. Grisé
September 9, 1999
Dear XXXXXXXXXX:
Re Hedge Transaction
This is in reply to your letter of May 24, 1999 requesting a technical interpretation as to the characterization, for income tax purposes, of a hedge transaction. We apologize for the delay.
For ease of explanation and understanding you have provided the following assumptions:
- The taxpayer, Mr. Z, is an individual.
- ABC Co. is a public corporation.
- On day 1, Mr. Z sells 1,000 shares of ABC Co. for $10,000. On day 60, Mr. Z acquires 1,000 shares of ABC Co. for $6,000.
- On day 1, Mr. Z also buys debentures of ABC Co. which are convertible into 1,000 shares of ABC Co. He pays $12,000 for the debentures. On day 60, Mr. Z sells the debentures of ABC Co. for $9,000 without converting them.
- Mr. Z is not a trader or dealer in securities. In the absence of the short sale of the ABC Co. shares, Mr. Z's sale of the debentures would be characterized as a capital loss.
For purposes of the election under subsection 39(4) of the Income Tax Act (the Act), it is the Department's position that a Canadian security includes the short sale of a security described in subsection 39(6) of the Act. Accordingly, if Mr. Z elects or has previous elected under subsection 39(4) of the Act, the gain from the short sale of the shares and the loss from the disposition of the debentures would be on account of capital.
If Mr. Z has not elected under subsection 39(4) of the Act, the profit from the short sale of the shares will be on account of income as stated in paragraph 18 of Interpretation Bulletin IT-479R, Transactions in securities. As stated in paragraph 9 of the same bulletin, it will be necessary to examine the facts of the specific case in order to determine whether the sale of the debentures is on account of income or capital. The tests that the Courts have applied in making such a determination are discussed in the bulletin.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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