Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1. Whether the gains (losses) from a securities trading business will be on account of income or capital. 2. If on account of income, whether the gains (losses) will be active business income. 3. Whether dividends and interest will be active business income.
Position: While a question of fact: 1. Could be on account of income. 2. Likely, yes. 3. Likely, yes.
Reasons: The securities trading activities possess many of the characteristics of a business noted in IT-479. The business is unlikely to be a Specified Investment Business and, accordingly, gains (losses) and any income incident to that business (dividends and interest) will be active business income.
Author: Ross, Matthew
Section: 12(1)(j), 12(1)(k), 112(1), 125(1), 125(7), 129(4), 186(1)
Matthew Ross, CPA, CA
February 13, 2020
Re: Income from a securities trading business
This is in reply to your email of August 18, 2019, in which you requested our views on whether gains or losses from the trading of securities, such as speculative futures and options contracts on commodities, made by a corporation would be on account of income or capital. If on account of income, you would like to know whether these gains or losses, as well as other income earned from the securities, would be active business income.
In the situation you presented, a corporation carries on a business that trades securities and has one full-time employee. You indicate that the trading business will execute approximately 200 to 500 trades per year. You also provide that the trading business may receive a small amount of interest or dividend income from holding securities, but that the majority of its income will consist of gains or losses from the trading activity.
This technical interpretation provides general comments about the provisions of the Income Tax Act (“the Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate 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.
Generally, as indicated in paragraph 10 of IT-479R, Transactions in Securities, if a taxpayer’s course of conduct indicates that they are disposing of securities in a way capable of producing gains, with that object in view, and the transactions are of the same kind and carried out in the same fashion as a trader or dealer in securities, the proceeds of sale will normally be considered to be income from a business and, therefore, on income account. Some of the factors to be considered in ascertaining whether a taxpayer’s conduct indicates the carrying on of a business are listed in paragraph 11 of IT-479R and include the frequency of transactions, the period of ownership, and the time spent studying the securities market. Although no individual factor is determinative, the combination of a number of factors may be sufficient to characterize the corporation’s activities as a business.
In relation to a business carried on by a taxpayer resident in Canada, subsection 248(1) of the Act defines “active business” as any business carried on by the taxpayer other than a specified investment business or a personal services business. Similarly, for the purposes of the small business deduction, the expression “active business carried on by a corporation” is defined in subsection 125(7) of the Act, and means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure in the nature of trade. A “specified investment business” is defined, for the purposes of the Act, as a business the principal purpose of which is to derive income from property including such income as interest, dividends, rent and royalties.
It is a question of fact whether gains or losses from the disposition of securities would be on account of income or capital. If a taxpayer’s course of conduct indicates that they are carrying on a business in a similar manner as a trader or dealer in securities, in our view, the gains and losses would be part of the normal operation of such a trading business and would be on income account.
In such a situation, the “principal purpose” of the trading business would generally not be to derive income from property and it would not be considered to be a “specified investment business.” As a result, the trading business may be considered an “active business” and any gains or losses from the trading business, as well as any interest or dividend income pertaining to or incident to that business, may be considered “income of the corporation for the year from an active business” under subsection 125(7) of the Act. Accordingly, provided all the other criteria are met, the corporation could be entitled to the small business deduction. For more information, see Interpretation Bulletin, IT-73R6, The Small Business Deduction. It should be noted that the “principal purpose” of a corporation must be determined annually after all the facts relating to the business (or businesses) carried on by that corporation in that year have been considered and analyzed.
We trust our comments will be of assistance.
Pamela Burnley, CPA, CA
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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