20 October 1999 External T.I. 9919345 - STOCK OPTION, SUPERFICIAL LOSS

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: 1) Will the Department's general position as set out in paragraph 18 of IT-479R apply if the taxpayer owns the particular property that is sold short?

2) Can the use of the proceeds of disposition result in a taxpayer being exempted from the superficial loss rules?

Position: 1) Yes 2) No

Reasons: 1) The general position applies to all short sales. 2) The law is clear and there is no exemption other than as detailed in the definition of superficial loss.

XXXXXXXXXX 991934
M. P. Sarazin
Attention: XXXXXXXXXX

October 20, 1999

Dear Sirs:

Re: Reporting Certain Securities Transactions

This is in reply to your letter dated July 6, 1999, wherein you requested our comments on the reporting of income related to security transactions involving short sales and superficial loss rules.

Comments

It appears that the opinions you seek relate to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. However, we can provide you with the following general comments.

The Department has provided its general views regarding security transactions in Interpretation Bulletin IT-479R titled "Transactions in Securities". As noted in paragraph 9 of IT-479R, the determination of whether a specific security transaction would be considered on account of income or on account of capital is a question of fact which can only be determined after a review of all of the relevant facts. Paragraph 18 of IT-479R states that a gain or loss on the short sale of shares is considered to be on income account. Consequently, the Department's view is very clear.

Where a taxpayer or a person affiliated with the taxpayer ("affiliated person") acquires or reacquires a property that is, or is identical to, a particular property that was disposed of by the taxpayer within the period beginning 30 days before and ending 30 days after its disposition, any capital loss resulting from the disposition would be a superficial loss within the meaning assigned by section 54 of the Income Tax Act (the "Act") and would be deemed to be nil under paragraph 40(2)(g) of the Act. As explained in paragraph 11 of IT-456, the amount of any loss which is forfeited in this manner would be added to the adjusted cost base of the substituted or reacquired property under paragraph 53(1)(f) of the Act. We note that there has to be an acquisition or reacquisition of the property (or identical property) and this property has to be owned 30 days after the disposition by the person who acquired the property or by an affiliated person. In your example, since shares of a company were acquired and immediately disposed of by the taxpayer and the taxpayer or an affiliated person did not own any shares 30 days after the taxpayer disposed of the shares, the superficial loss rules would not apply to any capital losses resulting on the disposition. We also note that there is no exception to the application of the superficial loss rules because the taxpayer used the proceeds from the disposition of the property for a specific purpose.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate