29 July 1982 Income Tax Severed Letter 7-1987 - [ IT-346R, paragraph 13 - Commodity Futures]

REVENU CANADA TAXATION     MEMORANDUM     REVENU CANADA IMPÔT

DATE JUL 29 1982 JUIL

TO/Â VANCOUVER DISTRICT OFFICE

FROM/DE HEAD OFFICE
        Corporate Rulings Division
        D. Lanos
        (613) 995-1787
        Ref: 7-1987

ATTENTION I.A. Mathews
          Basis Files Section
          142-51

RE: IT-346R , paragraph 13 - Commodity Futures ----------------------

This is in reply to your memorandum of June 22, 1982 concerning the rationale behind the statement in the above Interpretation Bulletin that interest expense incurred by a taxapayer on borrowings used to finance futures or commodity transactions that are given capital treatment for income tax purposes is not included in computing the adjusted cost base of the capital property involved (i.e. the futures contract) and is also not deductible in computing the taxpayer's income.

The deduction for interest expense provided by paragraph 20(1)(c) of the Income Tax Act (the "Act") is only permitted in computing a taxpayer's income for a taxation year from a business or property. Subsection 9(3) of the Act provides that, for purposes of the Act, income from a property does not include any capital gain therefrom and loss from a property does not include any capital loss therefrom. Accordingly, those taxpayers who choose to accept capital treatment of their commodity futures transactions have, in respect of such transactions, neither business income nor income from property against which any related interest expenses can be deducted within the provisions of paragraph 20(1)(c) of the Act.

As to the adjusted cost base of commodity futures, there is simply no specific provision for a bump under subsection 53(1) of the Act in respect of related interest expense.

It is also our view that since taxpayers accorded the above capital treatment do not have income from a business in respect of their commodity futures transactions, the interest expense related to such tradings does not qualify as an eligible capital expenditure as defined by paragraph 14(5)(b) of the Act and therefore no amount is deductible under paragraph 20(1)(b) in respect of it.

for Director Corporate Rulings Division Legislation Branch