CRA rules that the negative repo spread on a reverse repo was not interest

In a traditional “reverse repo” (the term, as contrasted with “repo,” that is used where the transaction is viewed from the perspective of the purchaser rather than the seller), the securities such as bonds are purchased for $X in cash and agreed to be repurchased by the seller at a later date at a somewhat higher price. This positive spread represents what economically is interest that the purchaser is earning on its cash. But what if the reverse repo occurs in a negative interest rate environment, so that the bond is repurchased by the seller at a “negative repo spread” (i.e., the repurchase price is lower than $X)?

CRA ruled that “[t]he negative repo spread … will not be considered to be interest or an amount paid or credited as, on account or in lieu of, or in satisfaction of interest for the purposes of paragraph 212(1)(b).” In its (less than prolix) reasons provided in its summary, it stated that “the agreements are purchase and sale agreements to which subsection 260(2) does not apply.” The notion appears to be that the form of the transactions (a sale and repurchase) will not be recharacterized. CRA might also have said (but did not) that negative interest is not interest.

This ruling interested the parties because they were affiliates. In particular, the purchaser (presumably, a resident) might have been concerned that the negative interest that in effect was paid by it to its non-arm’s length and non-resident counterparty might be subject to Part XIII tax.

Neal Armstrong. Summary of 2019 Ruling 2018-0776381R3 under s. 212(1)(b).