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Income Tax Interpretation Bulletin
Stock Exchange Transactions Date of Disposition of Shares
NO: IT-133
DATE: November 30, 1973
SUBJECT: INCOME TAX ACT
Stock Exchange Transactions Date of Disposition of Shares
REFERENCE: Subparagraph 54(c)(i)
1. Late in December 1972, the Department issued a press release concerning the trade date-settlement date question, which stated that a study would be made to determine the date of disposition of a security traded on a stock exchange. As the question could not be resolved before the end of the year, the press release contained the following statement: "To remove the difficulties this uncertainty may cause, the Department will for 1971 and 1972 act on the assumption that the "trade date" is the date of disposition for income tax purposes. Should the outcome of the legal study indicate that this was wrong, anyone who prefers to have the legal date used in respect of his own transactions may so elect and his returns will be assessed or adjusted accordingly."
2. The Department's study of the trade date-settlement date question has now been completed. For the usual transactions on a Stock Exchange there is a disposition and acquisition of shares traded on a Stock Exchange, by the vendor and purchaser, respectively, on the settlement date which is the time designated by the Stock Exchange, usually two or three days subsequent to the trade date, on or before which the vendor is required to deliver the share certificates and the purchaser is required to make payment therefore.
3. The basis for this determination is that "disposition" is defined generally in the Income Tax Act as "any transaction or event entitling a taxpayer to proceeds of disposition of property" (subparagraph 54(c)(i)) and thus, for purposes of the Act, a disposition does not take place until the vendor is entitled to the proceeds from the disposition, i.e., on the settlement date.
4. A necessary ramification of the restricted meaning of the word "disposition" for Income Tax purposes is that a disposition and acquisition becomes concurrent events. Until the purchaser is required to turn over the purchase money on the date fixed for entitlement, the vendor will not be taken to have disposed of the property and the purchaser cannot acquire the property.
5. An exception to the main rule in paragraph 2 is a "cash sale" in which the sale is completed on the same day that the trade goes through the exchange, and there is both a delivery of, and a payment for, the share certificates on the same day of the contract for sale, i.e., the trade date. In effect, the trade date and settlement date are one and the same in such a transaction.
6. In those cases where arrangements are made between vendor, purchaser and their brokers for a further delay prior to delivery and payment, the disposition and acquisition will be at a date subsequent to "settlement date", namely the date on which delivery and payment are effected.
7. A broker may actually pay the vendor before settlement date but in that case the broker is in effect merely advancing money to his client to be offset when the broker is paid by the purchaser's broker.
8. The general rule does not apply to transactions not conducted through an Exchange and the treatment of these transactions will depend on the facts of the particular case.
1972 Returns
9. As indicated in the press release, taxpayers may ask to have their 1972 returns adjusted from the "trade date" to the "settlement date" basis. Requests for adjustments should be made by letter, duly signed by the taxpayer and addressed to his District Taxation Office, requesting the re-assessment and disclosing all necessary details in support of the change. Note that this will require reclassifying those transactions occurring over the 1971-1972 taxation year-end as well as those occurring over the 1972-1973 taxation year-end. The Department will consider all such requests received on or before April 30, 1974. Election forms will not be provided by the Department for this purpose.
10. Not withstanding the press release, some taxpayers have filed their 1972 returns on the basis of settlement date. They will be considered to have requested an adjustment under paragraph 9 above and no further action is required on their part.
1973 and subsequent returns
11. The following guidelines are offered in regard to the filing of returns for 1973 and subsequent taxation years:
(a) Transactions where the trade date fell in the 1972 taxation year and the settlement date in the 1973 taxation year will be considered to be 1972 transactions if the 1972 return is assessed on the trade date and the 1973 transactions if the 1972 return is assessed on the settlement date basis. Taxpayers should guard against duplication.
(b) Transactions where the trade date falls in the 1973 taxation year and the settlement date in the 1974 taxation year will be considered to be 1974 transactions for all taxpayers.
(c) Taxpayers who file their 1973 returns prior to April 30, 1974 are asked to make every effort to prepare them on the basis of settlement date. Those unable to do so should nevertheless file their returns by their usual due date and should submit any additional information necessary to ensure assessment on the basis of settlement date by letter to their District Taxation Office no later than April 30, 1974.
(d) Returns for 1974 and subsequent taxation years must be prepared on the basis of settlement date whereas 1973 returns must be prepared on the basis of (a) and (b) above, which in some cases will require the beginning of the year on the trade date basis and the year-end settlement date basis.
