Principal Issues: [TaxInterpretations translation] (1) Can the election under subsection 39(4) apply to U.S. securities? (2) How is it determined whether a taxpayer is carrying on business when trading in securities? (3) Can a taxpayer choose between accrual and cash basis in determining the accounting for securities transactions?
Position: (1) No. (2) General comments. (3) Accrual accounting is generally the method of accounting for business income.
Reasons: (1) Wording of subsection 39(4). (2) Question of fact. (3) The jurisprudence indicates that a method of computation must be adopted that is consistent with the Act, other established law and well-recognized principles of current business practice, and that fairly reflects the taxpayer's income for the taxation year in question.
XXXXXXXXXX 2009-030885
Mélanie Beaulieu
March 25, 2010
Dear Sir,
Subject: Securities transactions
This is further to your letter of January 12, 2009, requesting clarification regarding Interpretation Bulletin IT-479R, Transactions in Securities. In particular, your letter posed the following questions:
1. Why does paragraph 6 of IT-479R indicate that the subsection 39(4) election applies only to Canadian securities?
2. How are the factors in paragraph 11 of IT-479R interpreted?
3. Can the taxpayer make the election in accounting for securities transactions?
4. Does the Form T123 election also apply to U.S. securities?
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, available on our internet site at http ://www.cra-arc.gc.ca/E/pub/tp/ic70-6r5/ic70-6r5-e.html , it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should forward all relevant facts and documents to the appropriate Tax Services Office for its views. However, we are prepared to provide the following general comments that may be helpful to you.
Our Comments
The Canada Revenue Agency ("CRA") issues Interpretation Bulletins to provide technical interpretations and to make known the CRA's positions on certain provisions of the Act. The comments in a particular paragraph of an Interpretation Bulletin should not be construed as replacing the Act. In other words, the CRA interprets the Act as written and a reader of an Interpretation Bulletin should consider the comments in the Bulletin in conjunction with the corresponding legislation that applies to the particular taxation year.
With respect to your first question, the statement in paragraph 6 of IT-479R that the election under subsection 39(4) is applicable only to Canadian securities is consistent with the wording of subsection 39(4), which states that an election may be made, except as provided in subsection (5), where a Canadian security has been disposed of by a taxpayer in a taxation year. Note that subsection 39(6) defines "Canadian security" for the purposes of section 39.
As for your second question, as discussed in paragraph 9 of IT-479R, the question of whether a taxpayer is carrying on a business is a question of fact that can only be resolved after a review of all the relevant facts. Paragraphs 10 to 13 of the Bulletin elaborate on the factors generally relied upon by the courts in determining whether a particular transaction is on income or capital account. As stated in ¶12 of the Bulletin, none of the factors stated in ¶11 may be sufficient, on their own, to determine whether a taxpayer's activities are those of a business, but a combination of those factors may be sufficient. The fact that a taxpayer generates a given number of transactions annually is not, in and of itself, a determining factor. Similarly, the fact that a taxpayer reports a large loss in the first year in which the election is made is also not a determinative factor. However, these factors could be indicators of the presence of any of the factors mentioned in ¶11. The presence of a combination of these factors may lead to the conclusion that the taxpayer's activities are those of a business.
In response to your third question, the jurisprudence establishes that in determining a taxpayer's profit from a business or property, it is necessary to adopt a method of calculation that is consistent with the Act, other established rules of law and well-recognized principles of current business practice, and that fairly reflects the taxpayer's income for the taxation year in question.
As a general rule, accrual accounting gives a more accurate picture of a company's financial position.
Finally, as indicated in paragraph 2 of IT-479R, Form T123 allows a taxpayer to make an election under subsection 39(4). Such an election may be made only in respect of Canadian securities.
We hope that our comments will be of assistance.
Best regards,
Ghislain Martineau
Manager, Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.