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.
July 16, 1981
HEAD OFFICE Corporate Rulings Directorate R.C. Shultis 593-6937
Gains on Long-Tern Securities Held for Short Periods Prior to Maturity
We are writing in reply to your memorandum of February 25, 1981 to advise you that the practice set out in the Deputy Minister Letter No. 66-24 and subsequently incorporated into section 4-122 of the Assessing Guide is no longer in affect. To determine the tax treatment of the realization of discounts on long-term securities held for short periods prior to maturity by manufacturing and merchandising corporations consideration must be given to the application of subsection 39(4) of the Act and to the comments contained in IT-114 entitled "Discounts, Premiums and Bonuses on Debt Obligations."
A subsection 39(4) election can be made by a taxpayer to guarantee capital gains treatment on all dispositions of Canadian securities provided the taxpayer is not precluded from making such election by subsection 39(5). It seems that the corporations in question would not be taxpayers described in subsection 39(5) unless they could be considered traders or dealers in securities. In this respect, in IT- 479 entitled "Transactions in Securities," a narrow interpretation of the term trader or dealer was taken for the purposes of subsection 39(5) to mean a taxpayer who participates in the promotion or underwriting of a particular issue of shares, bonds, or other securities or a taxpayer who holds himself out to the public as a dealer in shares, bonds, or other securities.
Where a taxpayer is excluded from making an election under 39(4) or chooses not to make such election, it is necessary to examine the facts of the specific case in order to determine whether a transaction is on account of income or capital. Paragraphs 11 to 16 of 1T-114 state the Department's position with respect to making such a determination for discounts on dispositions of debt securities and sets out various criteria to be taken into account.
The above comments are based on the assumption that the securities are in fact issued at a discount and are of a long-term variety but are hold only for a short period. If in fact the securities are short-term trade paper or other discount obligations, the discount may in fact be interest as outlined in IT-114 .
Should you require further detail with respect to the foregoing
comments, please contact us. We regret the delay in responding to your memorandum, but due to our heavy workload, it was unavoidable.
Original Signed by
Director General Corporate Rulings Directorate Legislation Branch
RCS/ jw
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