22 January 2020 External T.I. 2014-0559281E5 F - T5008
Principal Issues: 1. Which amount must be included in box 20 (cost) of T5008 in the situations described in questions 2 to 5 (sales of naked options, followed by (i) expiration of option, (ii) exercise of option, (iii) closing out by the acquisition of an offsetting option on the market)? 2. Which amount must be included in box 20 of T5008 when there is a short sale of shares in the situations described in questions 6 (identical shares purchased by the short seller and delivered to the lender in the same taxation year as the short sale) and 7 (transfer of shares by the short seller to the lender is made after the taxation year of the short sale)?
Position: 1. Zero or leave box blank. 2. Cost of the shares borrowed.
Reasons: 1. Subsection 49(1), options issued have no cost. 2. Previous CRA positions.
XXXXXXXXXX 2014-055928 R. Gagnon
January 22, 2020
Dear Madam,
Subject: Prescribed Form T5008 Statement of Securities Transactions
This responds to your emails dated November 18, 2014 (XXXXXXXXXX) and March 24, 2016 (XXXXXXXXXX) in which XXXXXXXX asked questions regarding the filing of the prescribed Form T5008 Statement of Securities Transactions ("T5008 slip") in respect of option writing and selling, and the short selling of shares. This also follows a telephone conversation (between Ms. Sophie Larochelle of the CRA and XXXXXXXXXX of XXXXXXXXXX) in which additional information was provided to us.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Regulations (the "Regulations").
Your Questions
Our understanding of your questions is as follows.
Options
1. Must all option sales transactions (including stock options and options on futures) effected on an exchange be reported on the T5008 slip in the calendar year in which the sales are made, regardless of whether the option is granted by the writer of the option (i.e., the person who granted the option and who has an obligation to perform the transaction agreed to in the option contract if the purchaser of the option determines to exercise its rights) or an option that was previously acquired in the market by the seller of the option (i.e., the writer of the option is not the seller of the option)?
2. Is the amount to enter in Box 20 of the T5008 slip the cost of buying back a call option where a naked call option (also known as an uncovered option, i.e., a call option contract for which the writer of the call option does not hold the securities covered by the call option) that is sold on an exchange in a calendar year by the writer of the call option is bought back by it on the exchange in the same year?
3. Should Box 20 of the T5008 slip be left blank if an naked call option sold on an exchange during a calendar year by the writer of the call option and the call option is still outstanding (the call option has not expired, has not been exercised by the holder, and has not been repurchased by the writer during the year) at the end of the year (December 31)?
4. Is Box 20 of the T5008 slip to be left blank, or filled in with zero, if a naked call option was written on an exchange in a calendar year by the seller of a call option and the call option was exercised and assigned to the seller in the same or a subsequent year?
5. Should Box 20 of the T5008 slip be left blank, or filled in with zero, if a naked call option was sold on a stock exchange in a calendar year by the writer of the call option and the call option expired out-of-the-money (i.e., unexercised) in the year or a subsequent year?
Short Sales of Shares
6. Is the amount to be entered in Box 20 of the T5008 slip the cost of an identical share where a public corporation share was sold short (i.e., the sale of a share borrowed under a securities lending agreement) in the market by a person in a calendar year and the identical share was purchased by that person in the same year and given to the lender to cover the short position?
7. Should Box 20 of the T5008 slip be left blank if a public corporation share was sold short (sale of a share borrowed under a securities lending agreement) in the market by a person during a calendar year and no identical share was purchased by the person at the end of the year (December 31) to cover the short position?
Please note that for the purposes of our comments, we have assumed that your questions relate to the filing of T5008 slips by a "trader or dealer in securities" as defined in subsection 230(1) in respect of transactions made by a trader or dealer in securities as an agent on behalf of its clients. The definition provides that a "trader or dealer in securities" includes:
(a) a person who is registered or licensed under the laws of a province to trade in securities, or
(b) a person who in the ordinary course of business makes sales of securities as agent on behalf of others.
We also assumed that the options referenced in the questions did not include warrants on securities to be issued by the writer of the warrants or options issued to employees within the meaning of section 7 of the Income Tax Act (the "Act").
Our Comments
This technical interpretation provides general comments on provisions contained in the Regulations. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. Our Directorate only confirms the tax treatment of particular transactions in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Section 230
Subsection 230(2) provides, among other things, that every "trader or dealer in securities" who, in a calendar year, sells a "security" as agent is required to complete, in prescribed form, an information return for the year in respect of the sale. In addition, subsection 230(6) provides, among other things, that a person who, acting as nominee or agent, makes a sale referred to in subsection 230(2) in their own name and receives the proceeds of the sale must complete, in prescribed form, an information return in respect of the sale.
The prescribed form information return includes the T5008 slip and the T5008 Summary.
A sale (as defined in subsection 230(1)) for the purposes of section 230 (including subsection 230(2)) includes the granting of an option and a short sale.
The following properties are "securities" (as defined in subsection 230(1)) for the purposes of section 230:
(a) a publicly traded share of the capital stock of a corporation,
(b) a publicly traded debt obligation,
(c) a debt obligation of or guaranteed by(i) the Government of Canada,
(ii) the government of a province or an agent thereof,
(iii) a municipality in Canada,
(iv) a municipal or public body performing a function of government in Canada, or
(v) the government of a foreign country or of a political subdivision of a foreign country or a local authority of such a government,(c.1) a debt obligation that is, at any time, described in paragraph 7000(1)(d),
(d) a publicly traded interest in a trust,
(e) a publicly traded interest in a partnership,
(f) an option or contract in respect of any property described in any of paragraphs (a) to (e), or
(g) a publicly traded option or contract in respect of any property including any commodity, financial futures, foreign currency or precious metal or in respect of any index relating to any property;
[Our emphasis]
As defined in subsection 230(1), "publicly traded" means, with respect to any security:
(a) a security that is listed or posted for trading on a stock exchange, commodity exchange, futures exchange or any other exchange, or
(b) a security in respect of the sale and distribution of which a prospectus, registration statement or similar document has been filed with a public authority
For certain transactions/exceptions set out in subsection 230(7), T5008 slips are not required to be filed. These exceptions include, but are not limited to:
(a) a purchase of a security by a trader or dealer in securities from another trader or dealer in securities other than a non-resident trader or dealer in securities;
[…and]
(d) a sale of securities by a trader or dealer in securities on behalf of a person who is exempt from tax under Part I of the Act.
Question 1
Transaction of the sale of "publicly traded" options (as defined in subsection 230(1)) on property that are effected by a trader or dealer in securities as agent for its clients (other than persons exempt from tax under Part I of the Act), must be reported on the T5008 slip by the trader or dealer in securities in the calendar year in which the sales are made, regardless of whether the option is granted by the writer of the option or whether it was previously acquired in the market by the seller of the option.
In particular, “publicly traded” option sales transactions (as defined in subsection 230 (1)) involving stocks or futures contracts that are carried out by a trader or dealer in securities as an agent for its clients (other than persons exempt from the tax provided for in Part I of the Act), must be declared on the T5008 slip by the trader or dealer in securities in the calendar year during which sales are made.
Question 2
The legal nature of the repurchase transaction is unclear. We sent an email to XXXXXXXX in this regard, but have not received a response.
This would appear to be a transaction whereby the writer and seller of a particular call option purchases another call option traded in the market that has the same characteristics as the particular option, in order to terminate its obligations (as the writer) under the particular call option.
In such a situation, it appears to us that the purchase of the call option constitutes a separate transaction for the purposes of section 230. The cost of purchasing the option should not be treated as the cost of the option at the time the option is granted or sold. The purchase constitutes a transaction subsequent to the sale of the call option by the writer.
In the case of the sale of the option by the writer, it would appear that the cost of the call option sold by the writer is usually nil. Where the cost of the seller's written call option is nil, "0" should be entered in Box 20 of the T5008 slip or the Box should be left blank.
In addition, it should be noted that where an option is capital property (as defined in section 54 of the Act) or is treated as capital property, subsection 49(1) of the Act provides (subject to the application of subsections 49(3) and 49(3.1) of the Act, and the exceptions in paragraphs 49(1)(a) to (c) of the Act) that the granting of an option is equivalent to a disposition of property having an adjusted cost base of nil. Where the adjusted cost base is deemed to be nil for the purposes of subsection 49(1) of the Act, there is no need to allocate cost to the option.
The CRA's position is that expenses incurred in connection with the granting of an option may be deducted from the proceeds of disposition when calculating a taxpayer's gain.
Questions 3 to 5
In the case of the sale of an option by the writer, it appears to us that the cost of the call option sold by the writer is usually nil. Where the cost of the call option sold by the writer is nil, "0" should be entered in Box 20 of the T5008 slip or the Box should be left blank. The expiry or exercise of a call option has no impact in this regard.
If an option to acquire securities is exercised and tendered to the writer, the writer may then have to sell, to the holder of the call option, the subject securities at the price agreed upon under the terms of the option. There will then be a "sale" for the purposes of subsection 230(2) and if a securities dealer sells the securities as agent for the seller of the securities, another T5008 information return will have to be completed by the dealer showing in Box 20 the cost of the securities to be sold by the seller. The sale is then a separate transaction for the purposes of filing the T5008 information return.
Questions 6 and 7
Note that short sales of "publicly traded" shares (as defined in subsection 230(1)), which are made by a trader or dealer in securities as agent for its clients (other than persons exempt from tax under Part I of the Act), must also be reported on the T5008 slip by the trader or dealer in securities in the calendar year in which the sales are made.
The CRA's position is that a short seller generally acquires the securities when it borrows shares under a "securities lending arrangement" (as defined in subsection 260(1) of the Act). The cost of the borrowed securities to the short seller generally includes the fair market value of the shares at the time of their transfer. Where the securities sold by the short seller are the same as the borrowed securities, the cost of the borrowed securities should be reported in Box 20 of the T5008 slip. In practice, the determination of the cost of the borrowed securities can only be made after a review of all relevant facts (including applicable documents and contracts).
The amount to be entered in Box 20 of the T5008 slip for a short sale of shares is not the cost of the identical shares that are acquired by the short seller and transferred to the lender to cover the short position.
We hope that our comments are of assistance. We apologize for the delay in responding to your request.
Urszula Chalupa, LL.B, M. Fisc.
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch