Principal Issues: Whether gains from dispositions in a portfolio which a TP has segregated into two parts - one that is used for day trading and the other for long-term investment - can be treated partly on income account and partly on capital account.
Position: Generally no.
Reasons: The CRA's initial presumption is that a TP's gains from dispositions of securities are either all on income account or all on capital account, as the case may be. However, the CRA recognizes that, although rare, occasionally a TP may legitimately hold some securities on capital account and some securities on income account.
XXXXXXXXXX 2006-018504 J. Gibbons, CGA November 30, 2006
Dear XXXXXXXXXX:
Re: Trading in Securities
We are replying to your email dated May 4, 2006, concerning the income tax treatment of gains or losses from trading in securities. In particular, you wish to know whether your portfolio can be considered partly on capital account and partly on income account if it is segregated into two separate brokerage accounts, one for the purpose of earning a steady investment income and the other for "day trading." The term "day trading" generally refers to the practice of buying and selling securities within a single trading day, attempting to capitalize on small price movements in highly liquid stocks or currencies.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.
The characterization of a securities transaction as being on income or capital account cannot be determined in advance unless a taxpayer has elected under subsection 39(4) of the Income Tax Act (the "Act"), in which case all of the taxpayer's transactions in "Canadian securities" (a defined term under subsection 39(6) of the Act) will be deemed to be on account of capital. In any other case, the determination of whether a securities transaction is on income or capital account is a question of fact. Some of the relevant factors in making such a determination, as well as the definition of a Canadian security, are discussed in Interpretation Bulletin IT-479R, Transactions in Securities, which is available on the Canada Revenue Agency's (the "CRA's") website at www.cra.gc.ca. Based on the frequent transactions and short period of ownership associated with day trading, gains or losses from such practice would generally be considered on income account.
Paragraph 33 of Interpretation Bulletin IT-479R discusses the possibility of a taxpayer not reporting all securities transactions on the same basis. This paragraph indicates that occasionally a taxpayer, other than one who has elected under subsection 39(4) of the Act, may legitimately hold some securities as an investment (i.e., on capital account) and other securities on income account. However, as stated in paragraph 33, such situations are rare and the CRA's initial presumption is that gains or losses made or incurred by a particular taxpayer on transactions in securities are either all of a capital nature or are all of an income nature, as the case may be. In order to establish otherwise, a taxpayer must be able to demonstrate clearly that he or she has two distinct pools of securities and has acted in such a manner so as to produce gains or losses on income account with respect to one pool and on capital account with respect to the other pool.
We trust that the above information is helpful.
Yours truly,
Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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