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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether the transfer of an obligation under the short sale is a taxable event.
Position: Yes
Reasons: The short position is closed out in respect of the transferor. A gain or loss may be recognized on the transfer of the obligation.
XXXXXXXXXX 2001 - 009208
David van Voorst
September 19, 2001
Dear XXXXXXXXXX:
Re: Technical Interpretation - the transfer of an obligation under a short position
This is in your reply to your letter of July 9, 2001 in which you requested our comments concerning the treatment to be given to a hypothetical transaction involving the short selling of securities and the assumption of the related obligation to the "short lender" by a corporation controlled by the "short seller".
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its views. However, we are prepared to offer the following general comments which may be of assistance.
The facts submitted by you, as we understand them, are as follows:
? An individual wishes to transfer a portfolio of investments to a corporation
? The company will assume an obligation to deliver certain stock that arose as a result of a short sale of the stock.
? It is the objective of the individual to transfer the obligation under the short sale such that the gain (or loss) is deferred and recognized by the corporation on the eventual settlement of the liability.
In your view, the assumption of the obligation at its "face amount" (i.e. the fair market value of the stock at the time the stock was sold short and the related liability incurred) is analogous to a transfer of stock with accrued gains to a corporation, the latter transfer entitled to rollover treatment provided the conditions of section 85 are met. You note that in the case of the short position, there is not a transfer of property, but rather an assumption of an obligation; therefore, section 85 cannot apply to defer the gain on the transfer. You have requested our comments on whether the individual's position with respect to the short sale is effectively closed out at the time the obligation is transferred.
In your hypothetical example, it is our view that where a person transfers an obligation in respect to a short sale, the person has closed out his position with respect to the short sale of the security. Consequently, he will recognize a gain (or loss) for tax purposes equal to the amount that the value, at the time of the transfer, of the securities required to be delivered to the "short lender" is less than (exceeds) the "face amount" of the loan. In your example, the corporation will assume a liability to deliver the stock to the "short lender" for an amount equal to the value of the stock at the time it assumes the obligation. The corporation will have a gain (loss) at the time the liability is settled equal to the amount by which the value of the securities required to be delivered is less than (exceeds) the value of the securities at the time the liability was assumed by the corporation.
The above comments represent our general view with respect to the subject matter and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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