22 March 2010 Internal T.I. 2010-0352971I7 - Gold - maintenance costs and interest expenses

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: Whether or not paragraph 13 of IT 346R is correct in stating that interest expense incurred to finance the purchase of commodities (and although not commented on the bulletin, maintenance costs to store the commodities) is not added to the ACB of the commodities or deductible in computing the taxpayer's income.

Position: yes

Reasons: IT 346R is still applicable. A speculator may either choose to report the transaction on account of income and deduct reasonable interest and maintenance costs, or report the transaction on account of capital but not be allowed to deduct in computing income or add to the ACB the interest and maintenance costs.

									March 22, 2010

Edmonton Tax Services Office					HEADQUARTERS
Appeals Division							Income Tax Rulings
			   							Directorate
Attention: Brian MacArthur, Technical Advisor		S. Kim
									(613)952-1506

									2010-035297

Commodities - Deductibility of maintenance costs and interest expenses

This is in response to your correspondence on December 21, 2009, concerning the deductibility of interest expense and maintenance costs incurred subsequent to the acquisition of commodities.

As we understand it, you have a situation where a taxpayer purchased gold commodities with the intent of realizing a gain on the eventual sale; the taxpayer incurred maintenance costs and interest expense after the acquisition; the taxpayer accorded capital treatment to the gains realized on the sale of the commodities and the tax services office (TSO) has accepted such treatment.

At issue is the taxpayer's eligibility to reduce the capital gains by the maintenance costs and interest expense. The Canada Revenue Agency's position regarding the deductibility of interest expense in respect of commodity transactions is discussed in IT 346R - Commodity Futures and Certain Commodities. You are concerned that IT 346R - Commodity Futures and Certain Commodities may be out of date with respect to the deductibility of interest expense and wish to confirm that paragraph 13 of the bulletin still reflects the CRA's position. Paragraph 13 of the bulletin states:

"To the extent that a taxpayer' s borrowings are used to finance futures or commodity transactions that are given capital treatment, interest in respect thereof is not included in computing the taxpayer's adjusted cost base for the purposes of Subdivision c of the Act and is also not deductible under Subdivision b in computing the taxpayer's income."

You feel that, contrary to the bulletin's position, interest expense, and by analogy maintenance costs, should be allowed to reduce capital gains realized on the sale of the commodities.

Our Response

While it is a question of fact whether or not a gain or a loss on the disposition of any property is on income account or capital account, as explained in paragraph 9 of IT-459, Adventure or Concern in the Nature of Trade, where property acquired by a taxpayer is of such a nature or of such magnitude that it could not produce income or personal enjoyment to its owner by virtue of its ownership and the only purpose of the acquisition was a subsequent sale of the property, the presumption is that the purchase and sale was an adventure or concern in the nature of trade, and accordingly, any gain would be accorded income treatment. This would generally apply to commodities transactions.

However, as indicated in IT-346R, Commodity Futures and Certain Commodities, an individual that meets the definition of "speculator" (discussed in paragraph 6) may avail himself or herself of the position provided in paragraphs 7 and 8 of the bulletin. This means that a speculator could choose to report his or her activities on account of income or capital, irrespective of whether the level of activity implies that the commodity trading is a business or adventures in the nature of trade. Once the speculator has chosen his or her method of reporting the transaction as either income or capital, it must subsequently be followed on a consistent basis.

If a speculator chooses to report the transaction on account of income under subsection 9(1) of the Income Tax Act (Act), then he or she would generally be allowed to deduct reasonable maintenance and interest expenses incurred to earn income for tax purposes, unless the type of expense is specifically addressed in the Act.

However, if a speculator chooses to report the transaction on account of capital, the speculator's gain on the disposition is determined under subsection 40(1) of the Act as the proceeds of disposition minus the aggregate of adjusted cost base ("ACB") immediately before the disposition, and any outlays or expenses to the extent that they were made or incurred by the taxpayer for the purposes of making the disposition.

As defined in paragraph (b) of section 54 of the Act, the ACB of non-depreciable capital property (e.g., gold commodities) is equal to the cost to the taxpayer as adjusted by subsections 53(1) and 53(2) of the Act. The term, "cost" is not defined in the Act. However, in Queen v. Stirling (FCA), 85 D.T.C. 5199, the court commented on the meaning of the word "cost" as follows:

"As we understand it, the word "cost" in those sections means the price that the taxpayer gave up in order to get the asset; it does not include any expense that he may have incurred in order to put himself in a position to pay that price or to keep the property afterwards. [See: R. v. Canadian Pacific Ltd., [1978] 2 F.C. DTC 5383 (C.A.); Birmingham Corporation v. Barnes, [1935] A.C. 292 (H.L.); R. v. Consumers' Gas Company Ltd., [1984] 1 F.C. 779; 84 DTC 6058 (C.A.)]."

This meaning, which has been adopted in other court cases such as Eskandari v. The Queen, 2007 D.T.C. 1406, and Gaston Cellard Inc. c. R., 2005 D.T.C. 699, would preclude any cost incurred to keep a capital property after acquisition (e.g. maintenance costs and interest expense) from being added to the cost of the capital property.

In addition, we would mention that subsections 53(1) and (2) of the Act do not include, as adjustments to ACB, maintenance costs and interest expenses for gold commodities. Furthermore, in our view, maintenance and interest expenses cannot be regarded as falling within the wording "any outlays or expenses to the extent that they were made or incurred by the taxpayer for the purposes of making the disposition" in subparagraph 40(1)(a)(i), and therefore they cannot be subtracted in calculating the capital gain at the time of disposition.

Lastly, we note that a capital gain is not regarded, pursuant subsection 9(3) of the Act, as income from property (or business, under proposed legislation) and therefore the interest expense in the scenario you described is not deductible in computing income by virtue of paragraph 20(1)(c) of the Act.

In conclusion, we confirm that the comments relating to interest expense in paragraph 13 of IT 346R are still applicable for speculators for the purposes of calculating capital gains.

We trust our comments will be of assistance.

Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch