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:
If a trust which owns mortgages described in subparagraph 204.4(2)(a)(ii) enters into a swap agreement to hedge the income from those assets, can it be said that the income from the swap could be considered to be derived from those mortgages for the purpose of determining whether the trust "derives" 95% of its income from qualified investments for the purpose of 204.4(2)(a)(v)?
Position: No.
Reasons:
The swap is an asset separate from the mortgages the income stream from which it may be designed to hedge. Accordingly, any income or expense from the swap would not be considered to be derived from the associated hedged assets or the stream of income therefrom.
XXXXXXXXXX 2000-004288
J. P. Dunn
Attention: XXXXXXXXXX
September 13, 2000
Dear Sirs:
Re: Subparagraph 204.4(2)(a)(v) of the Income Tax Act
We are writing in response to your correspondence of August 16, 2000 in which you had requested the views of Canada Customs and Revenue Agency concerning certain aspects of subparagraph 204.4(2)(a)(v) of the Income Tax Act (the "Act").
More specifically, you had requested whether the Agency would consider that income earned by a trust from a swap arrangement could be considered to be income derived from investments of the trust that are mortgages as described in subparagraph 204.4(2)(a)(ii) of the Act when the swap is entered into by the trust as a hedge of the income earned from those mortgages.
It is the view of the Agency that a derivative agreement such as a swap is a contractual arrangement which is separate from any associated asset or liability for which it may be designed to hedge. It is also our view that any income earned or expense incurred from the swap would not be considered to be derived from the associated assets for which it may be designed to hedge. Accordingly, for the purpose of subparagraph 204.4(2)a)(v) of the Act, the income from the swap would not be considered to be derived from the associated assets.
We trust that this is the information which you require
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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