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.
1. Is a Bearer Deposit Receipt (BDR) considered a security for subsection7(7) of the Act?
2. Would the BDR satisfy the requirements in section 6204 of the Regulations?
1. No, the BDR is not considered to be a share.
2. No, as it is not considered to be a share.
1. Based on the facts presented the employee may not have beneficial ownership in the underlying shares.
2. It is not a share.
M. P. Baldwin, CA
March 6, 2002
Re: Bearer Depository Receipts
This is in reply to your letter of August 20, 2001 requesting a technical interpretation on whether Bearer Depository Receipts ("BDRs") that are used in stock option plans of corporations based in the Netherlands would be considered a "security" for the purpose of subsection 7(7) of the Income Tax Act (the "Act") and whether the BDR would satisfy the requirements in section 6204 of the Income Tax Regulations (the "Regulations") to be a "prescribed share".
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of assistance.
Pursuant to subsection 7(7) of the Act a security is defined as follows:
"security" of a qualifying person means:
(a) if the person is a corporation, a share of the capital stock of the corporation;
In your analysis and back up, you state that in your opinion BDRs are similar to American Depository Receipts ("ADRs"). We have looked at ADRs in the context of qualified investments for a registered retirement savings plan ("RRSP") and have previously opined that 'generally, an RRSP can invest in shares of a corporation if the shares are listed on a prescribed stock exchange in Canada or in a country other than Canada. It is our understanding that an ADR is a certificate of a depositary (bank, trust company, etc.) certifying that it holds for the account of the named person, the number and class of shares specified in the ADR and that such person is entitled on presentation of the ADR to take delivery of the shares. In this situation, ownership of the ADR represents ownership of the underlying shares, provided that the relationship between the RRSP and the depositary does not constitute a trust.'
We have also taken the position that ADRs will be considered shares for purpose of section 7.
It is our understanding that in general, a deposit receipt represents an agency relationship between the custodian and the shareholder of the deposit receipt and that the deposit agreement does not represent a trust under the Act. It is also our understanding that beneficial ownership of the shares remains with the shareholder and not the custodian.
As noted in paragraph 3 of IT-437R, "the term "beneficial ownership" is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. A person who has beneficial ownership rights but not legal ownership can enforce those rights against the holder of the legal title."
Consequently, in our view, if the BDR is to represent ownership in the underlying shares, the BDR would have to represent beneficial ownership by the employee in the underlying shares indicating all incidents of ownership of the shares, including the right to receive dividends and the right to vote, provided the relationship between the depositary and the employee does not constitute a trust.
As the BDRs in your situation are not transferable and the holders do not have any voting rights on the underlying shares, it is our view that the BDR would not represent ownership in the underlying shares and consequently would not be considered a security for the purposes of subsection 7(7) of the Act nor a prescribed share under section 6204 of the Regulations.
We trust that our comments will be of assistance to you.
Roberta Albert, CA
Financial Industries Division
Income Tax Rulings Directorate
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