26 October 2010 External T.I. 2010-0381521E5 - Income/capital treatment - commodity transactions

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.

Principal Issues: An individual will purchase a commodity. The individual intends to re-invest the gains and purchase additional commodities. Will these amounts be treated as income or capital?

Position: These transactions will generally be treated as income.

Reasons: While the determination of income or capital treatment is a question of fact, paragraph 3, 4 and 5 of IT-346R outline CRAs position with respect to commodities trading

XXXXXXXXXX
								2010-038152
								S. D'Angelo
								(613)952-5803
October 26, 2010

Dear XXXXXXXXXX :

Re: Commodity Transactions

This is in response to your e-mail dated September 24, 2010 inquiring about the tax treatment of commodity transactions.

Our understanding of your hypothetical situation is as follows:

• You will purchases emeralds for a fixed price from an arm's length Canadian corporation (Aco) and in exchange you will receive a certificate of purchase showing your ownership of the emeralds.
• Aco, upon receiving your purchase order, will purchase the emeralds directly from the mine in Colombia and will then cut and polish the emeralds.
• Upon receiving instructions from you, Aco will sell on your behalf the emeralds for which you have a certificate of ownership and upon your instructions will re-invest the proceeds realized on the sale with purchases of new emeralds.
• This process of Aco buying and selling emeralds on your behalf will be ongoing and the transactions will repeat themselves approximately every 9 - 12 months.
• At some point in the future, say five years, you will exchange your certificates of purchase for the accumulated funds held by Aco on your behalf.
• Aco will charge you a fee for its services.

You are inquiring as to the treatment of the amount of gain or loss from the sale of emeralds. Specifically you are inquiring whether this amount will be considered on account of income or capital.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax rulings request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Furthermore, paragraph 15(e) explains that we do not provide rulings when the major issue is whether a transaction should be viewed as being of an income nature or a capital nature. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

Based on the information provided, it would appear that Aco is acting as your agent and you are the owner of the emeralds for which you have a certificate of purchase. For the purpose of our comments below, we will assume that Aco purchases the emeralds from the mine in Colombia on its own account for resale to you, after cutting and polishing them.

When Aco undertakes a sale transaction of your emeralds on your behalf, any resulting gain or loss is yours and must be reported in your income tax return for the taxation year in which the transaction occurs. Even though Aco may hold the proceeds from the sale of your emeralds and the funds may be distributed to you in a year subsequent to the year in which the sale took place, you are still obligated to report the transaction when it occurs.

It is a question of fact whether or not a gain or a loss on the disposition of any property is on income account or capital account. However, as explained in paragraph 9 of Interpretation Bulletin IT-459, Adventure or Concern in the nature of Trade, where property (e.g., emeralds) acquired by a taxpayer is of such a nature or such magnitude that it could not produce income or personal enjoyment to its owner by virtue of its ownership and the only purpose of the acquisition was a subsequent sale of the property, the presumption is that the purchase and sale was an adventure or concern in the nature of trade, and accordingly, any gain or loss would be accorded income treatment. This would generally apply to commodities transactions.

The Canada Revenue Agency's position with respect to commodity transactions is outlined in Interpretation Bulletin IT-346R, Commodity Futures and Certain Commodities.

As indicated in paragraph 3 of IT-346R, the trading in commodities creates fully taxable profits or fully allowable losses (i.e., income treatment) when a taxpayer has transactions in commodities connected with the taxpayer's business as part of the business operations.

Also, as stated in paragraph 4 of IT-346R, accorded income treatment for tax purposes are transactions in commodities by taxpayers who have access to special (insider) information about the commodity which they use to their benefit in one or more such transactions.

If the activities of trading in commodities are conducted through a corporation whose primary or only activity is transacting in commodities, any resulting gains or losses would be subject to income treatment, as described in paragraph 5 of IT-346R.

However, as indicated in paragraph 6 of IT 346-R, if a taxpayer does not undertake transactions in commodities in circumstances described in paragraphs 3, 4 or 5 of IT-346R, the taxpayer may be considered a speculator. As a general rule, it is acceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses, provided such reporting is followed consistently from year to year, as described in paragraph 7 of IT-346R.

We would mention that, if Aco purchases the emeralds from the mine, cuts, polishes and resells them as your agent, any gain or loss from the sale of the emeralds would, in our view, constitute ordinary income or loss from business activities.

We trust our comments will be of assistance.

Yours truly

S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch