Commodity Trading

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Commodity trading has become very common in the farming industry. There are various terms that an advisor should be familiar with.

"Put” vs. “Call”
A “put” gives the holder the right to sell an asset at a specified price and within a specified time. A “call” gives the holder the right to buy an asset at a specified price and within a specified time.

“Hedger” vs. “Speculator”
A “hedger” is a person who deals in the actual commodity they are purchasing puts and/or calls for and is generally purchasing a futures contract (put or call) to protect their holdings. A “speculator” is a person who does not deal in the physical commodities and purchase futures contracts to try to take advantage of price fluctuations and make profits.

How do We Deal with Payments for Puts and Calls (Futures Contracts)?
Normally, the person must make a payment into a broker’s account to provide a margin for the puts or calls purchased. These payments are not tax deductible when made.

Futures contracts are usually closed out before the actual delivery date of the physical commodity. Less than two per cent of futures contracts actually result in physical delivery of the commodity. Normally, a profit or loss will result when a contract is closed out, at which point a deductible expense, capital loss, income or capital gain could result. Generally, no income or loss is recognized on a futures contract until it has been closed out.

Is the Gain or Loss on Income or Capital Account?
Interpretation Bulletin 346 outlines the Canada Revenue Agency’s position on this topic. Generally, if the person is hedging the commodity they deal in (e.g. a feedlot hedging in the cattle market), then the gain or loss is considered on income. Where the person was merely a speculator, the Bulletin allows the gain or loss to be treated on income or capital account. However, once a method is chosen, the treatment must be consistent from that point onward.
Consider a situation where a person trades in the futures market to an extent greater than that required to hedge production. Then, the tax treatment could be seen as income for the hedging portion and on capital account with respect to the speculation part of the transaction.

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For more information about the content of this document, contact Joel Bokenfohr.
This document is maintained by Marie Glover.
This information published to the web on July 21, 2014.