13 December 2004 External T.I. 2004-0071451E5 - mutual fund writing covered call

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: 1. Will income from writing covered be considered to be derived from the underlying security for the puposes of 108(2)(b)(iv)?

Position: 1.Yes

Reasons: 1. Unit trust must own the underlying security to write a covered call, therefore premium can be considered to be derived from underlying securities; also OSA allows the writing of covered calls as a permitted investment.

XXXXXXXXXX 							2004-007145
								Lena Holloway
Attention:  XXXXXXXXXX 

December 13, 2004

Dear XXXXXXXXXX:

Re: Technical Interpretation - Premiums on Covered Call Options

This is in reply to your facsimile transmission of April 14, 2004 concerning the interpretation of subparagraph 108(2)(b)(iv) of the Income Tax Act. All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"). We apologize for the delay in our response.

You have asked if premiums received by a closed end unit trust as a writer of covered call options would be considered "derived from" those marketable securities as required by subparagraph 108(2)(b)(iv).

In the context of covered call options, the trust must own the underlying security and it could not earn income from the writing of covered calls otherwise. Hence, it is your opinion that premiums earned from writing covered calls constitute income derived from the underlying security for the purposes of subparagraph 108(2)(b)(iv) of the Act. We agree with this view.

We trust that these comments will assist you.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch