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: Whether the CRA's general position set out in a technical interpretation letter (document # 2001-0087365), in regards to the determination of the gain or loss, as the case may be, to the borrower upon the termination of the short sale lending arrangement to which section 260 of the Act does not apply, would be relevant to an equivalent securities lending arrangement to which section 260 of the Act does apply.
Position: Generally, yes.
Reasons: The provisions of section 260 of the Act apply solely to the lenders of qualifying securities under circumstances described in the said section. Thus, the determination as to whether an obligation of the securities borrower is settled or extinguished is a question of the law of contract and commercial law notwithstanding the provisions of section 260 of the Act and its application to a securities lender.
XXXXXXXXXX 2005-012417
P. Diguer, CGA
April 11, 2005
Dear XXXXXXXXXX:
Re: Securities lending arrangements
We are writing in response to your facsimile dated April 01, 2005 (the "Follow-up Request") which is in response to our letter dated March 02, 2005 (document No. 2004-008489) (the "Response") which was in reply to your facsimile dated July 08, 2004 (the "Initial Request"). In the Follow-up Request you seek our views on the application of section 260 of the Income Tax Act (Canada) (the "Act") in circumstances where the borrowing transaction satisfies the definition "securities lending arrangement" (the "Definition") in paragraph 260(1)(c) of the Act.
In particular, you ask whether the CRA's general position set out in a technical interpretation letter (document # 2001-0087365) (the "Technical Interpretation), in regards to the determination of the gain or loss, as the case may be, to the borrower upon the termination of the lending arrangement to which section 260 of the Act does not apply, would be relevant to an equivalent securities lending arrangement to which section 260 of the Act does apply.
As indicated in our Response, it is our understanding that the situation described in your Initial Request, and the circumstances described in the Follow-up Request appear to relate to either a series of proposed or completed transactions. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R5 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your Follow-up Request, we have set out some general comments which we hope are of assistance to you. However, written opinions are not advance tax rulings and, accordingly not binding on the Canada Revenue Agency.
Our response below does not take into consideration the consequences, if any, of draft legislation including legislative proposals dated February 27, 2004, issued by the Department of Finance.
As indicated in your Initial Request, our views in regards to a lending arrangement under a short sale agreement to which section 260 of the Act does not apply are set out in the Technical Interpretation. In this regard, the Technical Interpretation states the following:
It is the Agency's position that the transfer of the securities by the lender to the borrower, under a short sale arrangement to which section 260 of the Act does not apply, generally results in a disposition of the securities by the lender at fair market value and an acquisition by the borrower at fair market value on the date the securities are transferred to the borrower. The consideration paid by the borrower is in the form of a right provided to the lender to reacquire an equal number of identical securities for no consideration other than the extinguishment of the right. The value to the borrower of the obligation to honor the right would equal the fair market value of the securities acquired. The disposition of the borrowed securities by the borrower to a third party immediately after they are borrowed would generally produce no gain or loss since the value of the borrowed securities will not have changed in the interim. When the right to acquire securities given by the borrower to the lender is settled, the borrower will purchase from a third party the number of securities it originally borrowed (the "new securities") and dispose of them to the lender in consideration for the settlement of its obligation under the right. As a result, the borrower will realize a gain or loss on the disposition of the new securities to the lender equal to the change in the value of the borrowed securities during the term of the arrangement.
As indicated in our Response, our general views as set out in the Technical Interpretation and reproduced above remain unchanged.
Turning to the issue described in your Follow-up Request. It is our view that our general position in regards to whether the determination of the gain or loss, as the case may be, to the borrower upon the termination of the short sale lending arrangement to which section 260 of the Act does not apply, as described in the Technical Interpretation, would be relevant to an equivalent securities lending arrangement (i.e. a short sale arrangement) to which section 260 of the Act does apply. However, this is a general position and as such it might not apply to the terms and circumstances of a particular lending arrangement.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency.
Yours truly,
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005
Email this Content