22 April 1985 Income Tax Severed Letter

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.

DATE April 22, 1985

To - TORONTO DISTRICT OFFICE

FROM - HEAD OFFICE Corporate Rulings Division J.F. Oulton 995-1787

ATTENTION: B. B. Brown Basic Files Section 142-8-1

RE: Gains on Long-Term Securities held for Short Periods Prior to Maturity

This is in reply to your memorandum dated March 18, 1985, regarding our memorandum (R.C. Shultis) dated July 16, 1981, wherein we advised that the practice set out in the Letter from the Deputy Minister Number 66-24 and subsequently incorporated into section 4-122 of the Assessing Guide, was no longer in effect. Of particular concern was the practice of treating a security that is disposed of within a year or two of its maturity as "short-term" (the 2 year rule), with the result that any gain made by any corporation (other than those which are clearly dealers or banks) as a result of acquiring such securities at a discount, forms part of its income.

You asked us:

(a) to confirm the date this practice was rescinded;

(b) whether the rescission date coincided with the release of Interpretation Bulletin IT-114 ; and

(c) whether there were any steps taken to inform all District Offices and the public.

We know of no formal date which rescinded the above assessing practice. However, insofar as the taxpayers are concerned, this practice was never published in an external publication on which they could rely to our knowledge, even though this practice may have continued and been relied on widely by the public. It is possible that the date of the release of IT-114 may logically be regarded as the rescission date for this assessing practice. In any event, it seems to be the first date that the public was made aware of any formal . interpretive guidelines for "traders or dealers", since we are unaware of any other formal instructions in connection with this issue. Furthermore, it became generally known in the early 1970's that the Assessing Guide was being phased out and that the Interpretation Bulletins would be the replaced authority for our interpretations.

Problem:

Your present problem is that the corporation which was the subject of our 1981 memorandum, followed the "2 year rule" until 1981 when it was informed that this no longer reflected Departmental practice. No adjustments were made up to the 1978 taxation year to reflect IT-114 . Losses which arose subsequently and before the date you informed the taxpayer of our practice in 1981, were fully deducted with reliance on the "2 year rule". You are of the view that these losses are capital in nature under the guidelines in IT-114 . However, the taxpayer is resisting your proposals on the basis that it was not informed until 1981 of the change in our assessing practice, and hence that no adjustments should be made regarding transactions occurring before that time.

Comments:

Notwithstanding the fact that the losses arose prior to the date we informed the taxpayer that the "2 year rule" was not applicable, if they are capital in nature under the guidelines of IT-114 , it is our opinion that you have adequate authority to raise a reassessment. However, since you did accept the "2 year rule" for the particular taxpayer for a number of years after IT-114 was published, we would probably be inclined to extend leniency in allowing the "2 year rule" and in applying the guidelines of IT-114 up to the time when our position was clarified in 1981, unless the "2 year rule" was not followed either by the taxpayer or on assessment or reassessment for 1978, 1979 and/or 1980.

We hope that the foregoing comments will assist you in making a final decision.

Chief Services, Public Utilities & Exempt Corporations Section Corporate Rulings Division Corporate Rulings Directorate Legislation Branch