XXXX
S.E. Adams 613-593-6937
December 3, 1981
Dear XXXX
This is in reply to your letter of October 21, 1981 in which you asked for clarification of the Department's position regarding the concept of a trader or dealer in securities as described in paragraph 5 of IT-479 for purposes of the application of subsections 39(4) and 39(5) of the Income Tax Act (the Act).
You have described the following situation:
The taxpayer is a venture capital corporation dealing primarily in the acquisition of control of other corporations. After acquisition of control of a corporation, the taxpayer attempts to improve overall profitability of the acquired corporation. The long-term objective of the taxpayer is the resale of the corporation. It is your view that such a venture capital corporation does not appear to fall into the interpretation of the term "a trader or dealer in securities" as outlined in paragraph 5 of IT-479 .
You have asked for this Department's views on this question.
It is generally a question of fact, at a particular time, whether or not a taxpayer is a trader or dealer in securities. In the case of a venture capital corporation as described above, or a "prescribed venture capital corporation" as defined in the Income Tax Regulations, Part LXVII, it is our opinion, based on our general understanding of the operations of such corporations, that such a corporation would not in the initial presumption be considered to be a trader or dealer in securities for purposes of subsection 39(5) of the Act. However, the actual activity of a given venture capital corporation may be such that the above general statement may not apply.
An election under subsection 39(4) of the Act may only be made in respect of the disposition of a Canadian security which is defined in subsection 39(6). If the venture capital corporation acquires control of a second corporation, as you have described, the shares of this corporation would be prescribed securities as defined in the Income Tax Regulations, Part LXII, and thus not be eligible as Canadian securities. As a result, the ability of the corporation to make the election may, for the most part, be academic.
We trust the above comments have been of some assistance to you.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch