19 October 1999 External T.I. 9925055 - GAINS & LOSSES ON OPTIONS

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:

General enquiry concerning the effect, if any, on an election under subsection 39(4) of the Act of certain transactions in options.

Position TAKEN:

General comments provided

Reasons FOR POSITION TAKEN:

General comment.

XXXXXXXXXX 5-992505
P. Diguer CGA
Attention: XXXXXXXXXX

October 19, 1999

Dear Sir:

Re: Subsection 39(4) of the Income Tax Act (Canada)

This is in reply to your letter dated September 15, 1999, in which you request our views on the effect, if any, on an election under subsection 39(4) of the Income Tax Act (Canada) (the "Act") of certain transactions in securities as set out in your letter. Assuming that the taxpayer mentioned in the examples set out in your letter is not a taxpayer described in subsection 39(5) of the Act, you ask:

(i) If a taxpayer reports the gain or loss on a naked share option as an income gain ("on income account") will this affect his or her eligibility for the election in respect of a disposition of Canadian securities under subsection 39(4) of the Act (the "Capital Gains Election"). The expression "Canadian securities" as referred to here and subsequently has the meaning assigned by subsection 39(6) of the Act.;

(ii) Would reporting the gain or loss on a naked share option on income account as described in paragraph (i) above affect a taxpayer's determination of whether a gain or loss on a disposition of other Canadian securities is on income account or capital gain or loss ("on capital account"), if his or her course of conduct and intention (as discussed in paragraphs 10 to 13 and 25 of IT-479R) indicate that the proceeds of disposition of the other Canadian securities be considered to be on capital account;

(iii) Would a stock call written outside a registered retirement savings plan trust ("RRSP")

a) in order to hedge a stock inside an RRSP; or

b) where the same or similar call is held inside an RRSP (i.e. different month or strike price)

be considered as a separate security so that the stock call would constitute a naked option.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996 ("IC-70-6R3"). However, advance income tax rulings are not given where the major issue is whether a transaction should be viewed as being of an income or capital nature. Where the particular transactions are complete, the enquiry should be addressed to the relevant tax services office. The Directorate also provides technical interpretations of the various provisions of the Act but we do not provide tax planning advice.

As stated in paragraph 23 of IT-479R, a share option is not a Canadian security within the definition in subsection 39(6) of the Act. As a result, share option transactions cannot qualify for the Capital Gains Election. It follows that a Capital Gains Election by a taxpayer will not be affected by that taxpayer's participation in share option transactions unless subsection 39(5) applies to the taxpayer. The Department presumes, as stated in paragraph 25(c) of IT-479R, that the gain or loss realized by a writer of a naked option, who is not a taxpayer described in subsection 39(5) of the Act, is normally on income account. However, as stated in this same paragraph, the Department will accept reporting of gains and losses on capital account provided this practice is followed consistently from year to year.

With respect to (ii) above, the determination of whether a 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 include the course of conduct and the intention of the taxpayer at the time of the acquisition of the particular property. The reporting of a gain or loss on a naked share option as being on income account may colour the taxpayer's determination of whether a gain or loss on a disposition of other Canadian securities is on income account or capital gain or loss ("on capital account"),

Retirement savings plans are defined in subsection 146(1) of the Act and subparagraph 146(1)(b)(i) therein describes it as "an arrangement... in trust". The trust in such an arrangement is a separate person for income tax purposes and therefore a stock call written outside an RRSP in situations described in paragraphs (iii)(a) and (b) above would constitute a naked option.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

??