Principal Issues
Position
Where a taxpayer reports commodity transactions on account of income, reasonable interest and maintenance expenses may be deductible.
Where a taxpayer reports commodity transactions on account of capital, interest and maintenance costs are not deductible and are not added to the adjusted cost base of the commodities.
Reasons
The determination of whether a gain or loss from the disposition of property is on income account or capital account is a question of fact.
As indicated in IT-346R, Commodity Futures and Certain Commodities, a taxpayer who qualifies as a “speculator” may elect to report transactions on either income or capital account, provided such treatment is applied consistently.
Where a taxpayer reports transactions on account of income pursuant to subsection 9(1) of the Income Tax Act (the “Act”), reasonable expenses incurred for the purpose of earning income, including interest and maintenance costs, are generally deductible unless otherwise restricted.
Where a taxpayer reports transactions on account of capital, the gain is determined under subsection 40(1) of the Act as the proceeds of disposition less the adjusted cost base and any outlays or expenses incurred for the purpose of making the disposition.
The adjusted cost base of capital property is defined in section 54 of the Act as the cost of the property adjusted by subsections 53(1) and 53(2).
Judicial interpretation has established that “cost” refers to the price paid to acquire the property and does not include expenses incurred to maintain or hold the property after acquisition.
Accordingly, maintenance costs and interest expenses incurred subsequent to acquisition do not form part of the adjusted cost base.
Furthermore, such expenses do not qualify as outlays or expenses incurred for the purpose of making the disposition and therefore cannot be deducted in computing capital gains.
In addition, a capital gain is not considered income from property pursuant to subsection 9(3) of the Act. As a result, interest expenses are not deductible in computing income under paragraph 20(1)(c) where the transaction is treated on capital account.
Where documentation supporting cost is unavailable, the CRA may accept a reasonable estimate in limited circumstances, provided such estimate reflects the facts and is supportable.
Limitations
The determination of whether a transaction is on income account or capital account, and the deductibility of related expenses, is dependent on the specific facts and circumstances of each case.
Written confirmation of tax consequences is provided only in the context of an advance income tax ruling request submitted in accordance with CRA administrative procedures.
