XXXXXXXXXX
5-932585
Attention: XXXXXXXXXX
January 11, 1994
Dear Sirs:
RE: Interpretation Bulletin IT-346R
We are writing in reply to your letter of September 3, 1993 wherein you requested our comments on the application of the above-captioned Interpretation Bulletin in a situation where the commodity futures position taken by a taxpayer is offset by a spot or long position.
More particularly, the situation you describe is that of a taxpayer who purchases gold on the spot market and simultaneously sells it forward for an amount which exceeds his cost, thus locking in a gain. You ask whether, in light of Interpretation Bulletin IT-346R, the taxpayer can report such gains as capital gains as opposed to income. In your view, a taxpayer who both owns a commodity and sells it forward for profit qualifies as a "speculator" within the meaning of paragraph 6 of the above-mentioned Interpretation Bulletin.
Our Comments:
The administrative position taken by the Department in paragraphs 6 to 10 of Interpretation Bulletin IT-346R is premised on the assumption that a "speculator" is a person who assumes a risk by buying or selling commodity futures or certain commodities with the expectation of profiting from market fluctuations. In the situation you describe, the taxpayer would not be considered a "speculator", as that term is defined by the Department for purposes of the aforementioned Interpretation Bulletin, as the taxpayer would not be assuming any risk on the proposed transactions. The taxpayer would presumably only proceed with the transactions if the spread between the spot price and the forward price was at least equal to a predetermined minimum amount, thus insuring a predetermined gain.
It is therefore our view that the purchase of spot gold combined with its forward sale will give rise to fully taxable income.
We trust that these comments will be of assistance.
Yours truly,
Murray Brakefor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch