Short Sales

"... We would consider a short sale entered into in order to hedge a taxpayer's position with respect to identical shares held on capital account to be a short sale that is on capital account. Additionally, if a taxpayer is eligible to make an election under subsection 39(4) and does so, the gain or loss on a 'short sale' of shares that are Canadian securities would be on account of capital. If the shares sold in a short sale transaction are capital property subsection 47(1) would apply to determine the taxpayer's cost of the shares sold at both ends of a short sale transaction if the shares acquired by the taxpayer under the terms of the short sale are otherwise identical to previously acquired shares held by the taxpayer. As a result, a gain or loss may arise on the sale of the borrowed shares as well as on the sale of the shares acquired for re-delivery to the lender."

"We would consider a short sale entered into in order to hedge a taxpayer's position with respect to identical shares held on capital account to be a short sale that is on capital account."

A gain realized by a taxpayer under a short sale transaction that hedged its position with respect to an exchangeable share investment held on capital account would give rise to a capital gain or capital loss.