12 November 2008 External T.I. 2007-0259241E5 - Income Tax Consequences of a Loan Securitization

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 amount of the deferred purchase price is to be taken into account in determining vendor's income at the time of the sale of receivables?

Position: Deferred amount represents a separate property and the fair market value should be included in income at the time the receivables are transferred to the collateralized security entity.

Reasons: Section 9 of the Act.

XXXXXXXXXX 								2007-025924
S. Bernards
November 12, 2008

Dear XXXXXXXXXX :

Re: Technical Interpretation - Income tax consequences of a loan securitization

This is in response to your e-mail submission of November 13, 2007 in which you requested our comments on income tax consequences of a loan securitization. In particular, you have asked our views on whether the deferred purchase price amount is to be taken into account in determining the vendor's income at the time of the sale of receivables. We apologize for our delay in responding.

Our Comments

The situation outlined in your letter appears to relate to a factual one. It is not this Directorate's practice to comment on proposed transactions other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

In our response to round table question 31 at the 1999 Annual Conference of Quebec Region Technical Advisors, we stated that "securitization is the creation of marketable securities, which are guaranteed by various types of assets, including accounts receivable. In the typical securitization of the sale and purchase of accounts receivable, the business sells its accounts receivable to a collateralized security entity that finances the acquisition by issuing marketable securities on capital markets. The vendor immediately receives the proceeds of the sale less a discount and a deduction from the selling price. The deduction from the selling price is paid to the vendor based on the losses on the accounts receivable and must be part of the selling price. Consequently, the deduction from the selling price should not usually create a tax loss at the time when the accounts receivable are sold."

Generally, when the purchase price in a securitization consists of upfront cash payments plus amounts received as a deferred purchase price, in our view, the fair market value of the deferred purchase price is to be included in the vendor's income on date of the sale of receivables. The amount of the deferred purchase price would be considered as a separate property and any further recovery or loss would be recognized when amounts were received from the collateralized security entity.

We trust the above comments are of assistance.

R. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch