CANADA CUSTOMS AND REVENUE AGENCY
INTERPRETATION BULLETIN NUMBER IT-479R
DATE: February 29, 1984
SUBJECT: INCOME TAX ACT
Transactions in securities
REFERENCE: Section 39 (also sections 9 and 49 and section 6200 of the
Regulations)
(NOTE: THE CROSS-REFERENCE TO IT114 IS CANCELLED BY ITD4 #(3) )
This bulletin replaces and cancels Interpretation Bulletin IT-479 dated June
22, 1981. Current revisions are designated by vertical lines.
- A gain or loss from the disposition of shares or a debt obligation such as
a bond, debenture, bill, note or hypothec will be taxed as either an income
gain or loss or as a capital gain or loss. In this bulletin transactions of
the former type will be referred to as being on “income account” and
transactions of the latter type as being on “capital account”.
GUARANTEED CAPITAL GAINS
- Where a taxpayer has disposed of a Canadian security (see 6 below) in a
taxation year, subsection 39(4) provides that the taxpayer may elect in the
return of income for that year that
(a) every Canadian security owned by the taxpayer in that year or any
subsequent year is deemed to be capital property owned in those years, and
(b) every disposition of every Canadian security owned by the taxpayer in
that and any subsequent year is deemed to be a disposition of a capital
property.
The effect of such an election is that all Canadian security dispositions in
the year of election and all subsequent years, subject to the comments in 3
and 4 below, must be given capital gain or loss treatment and the election
cannot be rescinded.
A special election form (T123) is available for use by the taxpayer when
making an election under subsection 39(4).
- Pursuant to subsection 39(5), the election under subsection 39(4) does not
apply to a disposition of a Canadian security by a taxpayer who, at the time
the security is disposed of, is
(a) a trader or dealer in securities,
(b) a bank to which the Bank Act or the Quebec Savings Bank Act applies,
© a corporation licensed or otherwise authorized under the laws of Canada
or a province to carry on in Canada the business of offering to the public
its services as trustee,
(d) a credit union within the meaning assigned by subsection 137(6),
(e) a non-resident, or, after November 12, 1981
(f) an insurance corporation,
(g) a corporation whose principal business is the lending of money or the
purchasing of debt obligations or a combination thereof, or any combination
thereof.
-
An election that has been made under subsection 39(4) does not apply to
any securities disposed of during the time that subsection 39(5) applies to a
taxpayer. During the time the election does not apply, the comments from 9 to
22 below are applicable in ascertaining whether a gain or loss is on income
or capital account. If subsection 39(5) ceases to apply, a previous election
under subsection 39(4) becomes reapplicable after that time.
-
For the purposes of subsection 39(5) the Department interprets the term
"trader or dealer in securities" 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. The term is not considered to include an
officer or employee of a firm or corporation that is engaged in the promotion
or underwriting of issues of shares, bonds or other securities nor an officer
or employee of a taxpayer who holds himself out to the public as a dealer in
shares, bonds or other securities, unless that officer or employee transacts
in securities as a result of the promoting or underwriting activities of this
employer. Any person who, as a result of special knowledge of a particular
corporation not available to the public, utilizes that knowledge to realize a
quick gain is considered by the Department to be a “trader or dealer in
securities” for those particular securities. Any corporation whose prime
business activity is trading in shares or debt obligations is also considered
to be a “trader or dealer” in securities, but this does not include a
corporation whose prime business is the holding of securities and which sells
such investments from time to time.
-
The election under subsection 39(4) is applicable only to “Canadian
securities”. This term is defined in subsection 39(6) as a security (other
than a prescribed security) that is a share of the capital stock of a
corporation resident in Canada, a unit of a mutual fund trust (applicable to
1979 and subsequent taxation years) or a bond, debenture, bill, note,
mortgage, hypothec or a similar obligation issued by a person resident in
Canada. A Canadian security includes such a security that is sold short. The
term “a prescribed security” is defined by section 6200 of the Regulations.
-
When determining the principal business of a corporation for purposes of
3(f) above, the comments in 5, 7 and 8 of IT-371 have relevance.
-
Where a taxpayer has not elected under subsection 39(4) or does not
qualify for the election, the taxpayer must determine whether the transaction
in securities is on income account or capital account. The determination of
whether a gain or loss is on income account or capital account is discussed
in 9 to 22 below.
DISPOSITION OF SECURITIES - INCOME OR CAPITAL
-
Some security transactions are clearly on income account and these types
of transactions are discussed in 15 to 21 below. For other security
transactions it will be necessary to examine the facts of the specific case
in order to determine whether a transaction is on income or capital account.
The tests that the Courts have applied in making such a determination are
those of “course of conduct” and “intention” and these tests are discussed in
10 to 13 below. The factors to be considered when determining whether the
gain or loss on the disposition of a bond, debenture, bill, note, mortgage,
hypothec or similar obligation (debt obligation) is on income account or
capital account are set out in IT-114, “Discounts, Premiums and Bonuses on
Debt Obligations”.
-
Where the whole course of conduct indicates that
(a) in security transactions the taxpayer is disposing of securities in a way
capable of producing gains and with that object in view, and
(b) the transactions are of the same kind and carried on in the same way as
those of a trader or dealer in securities. the proceeds of sale will normally
be considered to be income from a business and, therefore, on income account.
- Some of the factors to be considered in ascertaining whether the
taxpayer’s course of conduct indicates the carrying on of a business are as
follows:
(a) frequency of transactions - a history of extensive buying and selling of
securities or of a quick turnover of properties,
(b) period of ownership - securities are usually owned only for a short
period of time,
© knowledge of securities markets - the taxpayer has some knowledge of or
experience in the securities markets,
(d) security transactions form a part of a taxpayer’s ordinary business,
(e) time spent - a substantial part of the taxpayer’s time is spent studying
the securities markets and investigating potential purchases,
(f) financing - security purchases are financed primarily on margin or by
some other form of debt,
(g) advertising - the taxpayer has advertised or otherwise made it known that
he is willing to purchase securities, and
(h) in the case of shares, their nature - normally speculative in nature or
of a non-dividend type.
-
Although none of the individual factors in 11 above may be sufficient to
characterize the activities of a taxpayer as a business, the combination of a
number of those factors may well be sufficient for that purpose. Further,
subsection 248(1) defines the term “business” to include “an adventure or
concern in the nature of trade” and the courts have held that “an adventure
or concern in the nature of trade” can include an isolated transaction in
shares where the “course of conduct” and “intention” clearly indicate it to
be such.
-
A taxpayer’s intention to sell at a gain is not sufficient, by itself, to
establish that the taxpayer was involved in an adventure or concern in the
nature of trade. That intention is almost invariably present even when a true
investment has been acquired if circumstances should arise that would make it
financially more beneficial to sell the investment than to continue to hold
it. Where, however, one or other of the above tests clearly suggests an
adventure or concern in the nature of trade and, in addition, it can be
established or inferred that the taxpayer’s intention was to sell the
property at the first suitable opportunity, intention will be viewed as
corroborative evidence. On the other hand, inability to establish an
intention to sell does not preclude a transaction from being regarded as an
adventure or concern in the nature of trade if it can otherwise be so
regarded pursuant to one or more of the above tests.
-
The determination of whether security transactions made by financial
institutions, such as those listed in 3(b) to (f) above is on income account
or capital account is dependent on the nature of the account from which the
transaction emanates and the facts of the case.
