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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: What is the tax treatment with respect to the writing of put options.
Position: The tax treatment depends on whether the taxpayer treats the transactions on account of income or capital
Reasons: See IT-479R.
October 15, 1999
Mr. Michel Paisible HEADQUARTERS
Client Services Jacques E. Grisé
Ottawa Tax Services Office 957-2059
992545
Sale of Put Options
This is in reply to your round trip memorandum of September 13, 1999, requesting our assistance in replying to a letter you received from XXXXXXXXXX on the sale of put options.
Basically, XXXXXXXXXX has agreed, for a premium of $XXXXXXXXXX to purchase from the payer of the premium, xxxxxxxxxx In such a transaction, XXXXXXXXXX is usually described as a "writer" of a put option and the person who paid the $XXXXXXXXXX is described as the "holder" of the put option.
The income tax consequence to the writer of a put option will depend on whether the transaction is on income account or capital account. Generally, it is a question of fact whether the gains or losses on share option transactions are on income account or capital account. In this respect, please refer to paragraph 25 of Interpretation Bulletin IT-479R, Transactions in securities.
Where the writer of a put option treats gains and losses as being on income account and the option is exercised by the holder, the premium received for the option by the writer ($XXXXXXXXXX in XXXXXXXXXX situation) is deducted from the cost of the shares the writer is required to purchase. If the option is not exercised by the holder, the premium is brought into income when the option expires. Where the writer treats gains and losses as being on capital, subsection 49(1) of the Income Tax Act (the Act) deems that the writer has disposed of a property the adjusted cost base of which is nil. The writer would normally have a gain equal to the amount by which the proceeds of the option ($XXXXXXXXXX in XXXXXXXXXX case) exceeds costs of disposition, if any. Where the holder exercises the option, subsection 49(3) of the Act would apply to the writer only if the writer is also reporting gains and losses from the shares purchased on capital account. In such a case, the effects of subsection 49(1) of the Act are nullified and the proceeds from the option is instead deducted in computing the cost of the shares acquired as a result of the option being exercised.
In response to XXXXXXXXXX specific question, a capital loss could only occur when the shares acquired as a result of the option are disposed of.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. A copy will be sent to you for delivery to the client.
We hope our comments are helpful
John Oulton
Manager
Business, Property and Employment
Income Section III
Income Tax Rulings and
Interpretations Directorate
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