7-910242
Subject: Short Sales and Hedged Convertible Debentures
This is in reply to your Round trip Memorandum dated January 18, 1991 concerning a short sale by a trust governed by a registered retirement savings plan (an "RRSP" trust) and "hedged convertible debentures".
As mentioned during our (Holmes/Delorey) telephone conversation on February 14, we are not able to provide a definitive response to your enquiry given the limited information available. The following comments are therefore of a general nature.
Where a debenture is one described in subparagraph 146(1)(g)(ii) of the Act or paragraph 4900(1)(i) of the Regulations, it will represent a qualified investment for an RRSP trust, notwithstanding that it has a conversion feature.
Where an RRSP trust sells shares short, it leaves itself open to the possible application of subsection 146(4) of the Act as, given the speculative nature of the transaction, we generally consider short sales to be indicative that the trust is carrying on a business.
Perhaps the taxpayer is referring to a transaction in which the RRSP trust simultaneously acquires, at the time it makes the short sale, an option to purchase debentures convertible into a number of shares sufficient to cover the short sale. Except where the option is a right described in paragraph 4900(1)(e) of the Regulations, the implications of such a transaction would generally be that
(a) subsection 146(4) could apply such that the trust would be taxable on any gain arising out of the completed transaction,
(b) subsection 146(10) would apply when the option to purchase the convertible debenture is acquired,
(c) subsection 146(6) would apply when the option is disposed of.
Where the option is a right described in paragraph 4900(1)(e) of the Regulations, the comments in (b) and (c) above would not apply.
We trust our comments are of assistance. Please feel free to contact the writer should you require further assistance in this regard.
for DirectorFinancial Industries DivisionRulings Directorate