Principal Issues: Are future personal investment transactions on account of income or capital if the taxpayer was previously an agent for an investment dealer?
Position: Question of fact.
Reasons: While not determinative in and of itself, a taxpayer's knowledge of the securities market (which could have been gained from previous employment) will be considered in ascertaining whether the taxpayer's conduct is indicative of the carrying on of a business
XXXXXXXXXX 2010-037111 P. Waugh July 9, 2010
Dear XXXXXXXXXX :
Re: Sale of Future Investments
I am writing in reply to your letter of May 23, 2010 concerning the income tax treatment of future investment transactions for a taxpayer who was previously an agent representative for an investment dealer. More specifically, you have enquired whether previous employment with an investment dealer would impact on the capital tax treatment of future personal investment transactions.
In the situation you described, prior to XXXXXXXXXX , the taxpayer was an agent representative employee for an investment dealer. In XXXXXXXXXX , due to health issues, the taxpayer ceased employment with the investment dealer and began collecting disability payments. Since XXXXXXXXXX , the taxpayer has not been associated with any investment dealer, nor will he be in the future. Future investment purchases are for his personal portfolio only and future transactions will have the same frequency as an average person managing their personal investments. The taxpayer's intention with respect to purchasing future investments is for long term growth and dividend income. Future time spent studying the market will be no different from an average person who is managing their personal portfolio.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
The tax treatment of gains and losses from trading in securities are discussed in Interpretation Bulletin IT-479R, Transactions in securities. Whether the gains or losses are on account of income or capital is a determination of fact. The tests that the courts have applied in making such a determination are those of "course of conduct" and "intention" which are noted in the bulletin.
As noted in paragraph 10 of IT-479R, if an individual's course of conduct indicates that in securities transactions, the individual is disposing of securities in a way capable of producing gains, with that object in view, and the transactions are of the same kind and carried on in the same fashion as a trader or dealer or dealer in securities, the individual would generally be considered to be carrying on a business with respect to his or her securities transactions, such that the transactions would be on account of income. In addition, as explained in paragraph 12 of this bulletin, the term "business" includes "an adventure or concern in the nature of trade", which the courts have held can include an isolated transaction in shares where the "course of conduct" and "intention" clearly indicate it to be such. Some of the factors to be considered in ascertaining whether a taxpayer's conduct indicates the carrying on of a business are listed in paragraph 11 of IT-479R and are as follows:
- frequency of transactions - a history of extensive buying and selling of securities or a quick turnover,
- period of ownership - securities are usually owned for only a short period of time,
- knowledge of the securities market - the taxpayer has some knowledge of or experience in the securities markets,
- security transactions form a part of the taxpayer's ordinary business,
- time spent - a substantial part of the taxpayer's time is spent studying the securities market and investigating potential purchases,
- financing - security purchases are financed primarily on margin or some form of debt,
- advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
- in the case of shares, their nature - normally speculative in nature or of a non-dividend type.
In the situation described, we are not able to comment on whether future investment transactions would be on account of income or capital. Such a determination is a question of fact having regard to all of the relevant facts and circumstances at the time the investments are purchased and/or sold. While not determinative in and of itself, as noted above a taxpayer's knowledge of the securities market (which could have been gained from previous employment) will be considered in ascertaining whether the taxpayer's conduct is indicative of the carrying on of a business. In this respect, we would refer you to Interpretation Bulletin IT-479R for further information.
We trust these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch