16 December 2004 External T.I. 2004-0081971E5 - Mutual Fund investing in Gold- Income or Capital

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.Where a mutual fund invests in gold & silver physical assets & ceritificates,- should the income treatment be income or capital?

Position: 1. Question of Fact-- however generally income treatment is accorded

Reasons: 2. gold & silver bought by mutual fund trust for reason of eventual resale- maintain previous position

XXXXXXXXXX 							2004-008197
L. Holloway, C.A.
Attention:  XXXXXXXXXX 

December 16, 2004

Dear XXXXXXXXXX:

Re: Mutual Fund Trust- Investment in Gold

This is in reply to your letter of June 17, 2004 in which you had requested a technical interpretation on a specific fact situation. In particular, your letter describes a mutual fund trust (the "Fund"), the units of which are held largely by registered plans, and which holds physical gold and silver and gold and silver certificates (collectively, the 'precious metals'). Your letter states that the precious metals are held by the Fund as an investment and not as a speculation. According to the Fund's manager the precious metals are being held to "provide a safe and lucrative investment for the Fund and, ultimately, its investors." In your opinion the Fund should be reporting gains and losses on any disposition of the precious metals on capital account.

The situation outlined in your letter appears to relate to an actual transaction. While written confirmation of the tax implications arising from particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request, IC-70-6R5 paragraph 15(e) explains that we do not provide rulings when the major issue is whether a transaction should be viewed as being of an income nature or of a capital nature. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office, however we are prepared to provide you with general comments which may be of assistance.

You cite a previous technical interpretation (document #9412945) that expressed the opinion that "generally" gains and losses resulting from transactions in commodities by mutual fund trusts are considered to be an adventure in the nature of trade. As the Fund in question deals in actual commodities as opposed to commodity futures, you were of the opinion that this interpretation would not apply to the Fund as transactions in commodities should be distinguished from commodity futures. In your opinion "transactions dealing with gold or silver futures are more likely to bear the badges of trade and hence, to constitute an adventure in the nature of trade." Please note that document number 9412945 did not distinguish between transactions in commodity futures versus transactions in actual commodities but rather was meant to apply to all commodity transactions undertaken by a mutual fund trust. Note also that the term "generally" was used in order to recognize that there may be some circumstances where this generalization would not apply. Your letter pointed out several factors that in your opinion indicate that the transactions in actual commodities undertaken by this mutual fund should not be considered to be "an adventure in the nature of trade". You claim that the primary indicators of an adventure as listed in paragraph 4 of IT-459 "Adventure or concern in the nature of trade" are not present in this situation, and you also comment that:

a) the Fund does not deal with the precious metals as a trader or dealer in commodities or commodity futures would, rather the precious metals are purchased and physically held in vaults of the Fund's custodian and are held with the expectation of long term appreciation;

b) there is nothing inherent to the precious metals which precludes the possibility they could be held as an investment; and

c) the intention of the Fund with respect to the purchase of gold and silver is not motivated by a desire to trade the precious metals, but rather it is motivated by a desire to hold the precious metals as an investment.

While it is a question of fact whether a gain or loss on the disposition of any property is on income account or capital account, the Canada Revenue Agency is still of the opinion that transactions in commodities or commodity related instruments should generally be treated for tax purposes as ordinary income. Where a mutual fund trust is not in the business of trading commodities, such transactions would, in our view, be adventures in the nature of trade. We also maintain that the election available to speculators in paragraph 7 of IT-346R is not available to mutual fund trusts.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch