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:
Whether the cash transferred by the bank to a customer in exchange for shares under the terms of a Repurchase/Reverse Repurchase Transaction Agreement ("Standard Agreement") constitutes a loan for purposes of paragraph 404(1)(b) and subsection 404(2) of the Regulations.
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
The transfer of a qualified security under the terms of the Standard Agreement would be considered an acquisition by the Buyer (borrower) for purposes of the Act regardless of the results, for tax purposes, to the Seller (lender) as a consequence of the application of subsection 260 of the Act
June 5, 2001
TORONTO NORTH TSO HEADQUARTERS
Industry Specialist Services P. Diguer
(613) 957-8953
Attention: Doug W. Mitchell
2000-005304
Subsection 404(2) of the Income Tax Regulations (the "Regulations")
This is in reply to your memorandum dated October 24, 2000 in which you request our views on whether, given the particular facts of the case, a reverse repo would represent a loan to a chartered bank for the purposes of determining, under subsection 404(2) of the Regulations, the taxable income earned in a Province.
In particular you explain that you require this information in order to respond to a request that you received from XXXXXXXXXX.
In this respect, you have provided us with various documents. The documents examined are as follows:
(a) A copy of the letter dated December 22, 1999, from the XXXXXXXXXX.
(b) A copy of extracts (material on repos and reverse repos) from an article published (winter 1994/1995) by the Bank of Canada.
(c) Repurchase/Reverse Repurchase Transaction Agreement which is a standard agreement XXXXXXXXXX that is widely used for repo and reverse repo transactions (a "Standard Agreement").
(d) Standard agreement XXXXXXXXXX that is widely used for cross border repo and reverse repo transactions.
(e) Regulator's rules for reverse repos.
(f) Journal entries on a reverse repo (letter from a bank).
(g) Copies of two opinions issued by the Rulings Directorate dated October 5, 1992 (file # 9221565) and April 24, 1995 (file # 9427715).
In our view the matter at issue is whether the cash transferred by the bank to a customer in exchange for securities under the terms of a Standard Agreement constitutes a loan for purposes of paragraph 404(1)(b) and subsection 404(2) of the Regulations.
It continues to be our view (see file # 9427715) that the transfer of a qualified security under the terms of the Standard Agreement would be considered an acquisition by the Buyer (borrower) for purposes of the Act regardless of the results, for tax purposes, to the Seller (lender) as a consequence of the application of subsection 260 of the Act. Accordingly, the cash transferred by the borrower to the lender in exchange for the securities under the terms of the Standard Agreement described in your submission would not, in our view, generally constitute a "loan" by the borrower for purposes of paragraph 404(2) of the Regulations.
However, we note that the Province has, in their letter dated December 22, 1999, described the Standard Agreement to include a requirement that the securities lender must pay interest on the cash consideration it receives from the securities borrower in consideration for the securities. There does not appear to be a provision in the Standard Agreement that would require this type of payment by the securities lender. It follows that our reply may be different if the securities lending arrangement is undertaken under the terms of an agreement other than the Standard Agreement. In preparing a reply in such a situation our review would include an examination of the agreement.
Moreover, paragraph 7.1 of the Standard Agreement provides that the lender may retain possession of the securities loaned and that the parties may negotiate terms whereby the borrower may be restricted from selling the securities borrowed. If the agreement is structured in a manner that the incidents of beneficial ownership of the securities remains with the lender the transaction may not be a sale and the cash consideration paid to the lender could in such case be considered a loan made by the borrower to the lender.
Accordingly, if the securities lending arrangement described by the Province was not undertaken under the terms of a Standard Agreement (e.g. if the agreement is a modified Standard Agreement or other form) our views as stated above on the transfer of a qualified security under the terms of the Standard Agreement for purposes of paragraph 404(2) of the Regulations may be different. We would be willing to consider this matter further should it be determined that the agreement at issue is not a Standard Agreement.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.
If you have any questions concerning this matter please feel free to contact us.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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