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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Securities Lending Arrangement. Taxpayer seeking certainty on:
1. whether repo security arrangement meets the definition of "securities lending arrangement" in subsection 260(1) of the Income Tax Act;
2. whether the exception in paragraph 260(8)(b) applies with respect to withholding tax paid on compensation payments; and
3. whether we will rule that it is reasonable that, in the context of the facts of the ruling, that a reasonable fee paid for the use of the securities is nil.
Position:
1. Favourable ruling given.
2. Favourable ruling given.
3. Whether a fee is reasonable is a question of fact and in accordance with IC-70-6R5, we cannot rule on a subjective matter that is a question of fact. However, we have provided the taxpayer with our opinion on this subject.
Reasons: See summary sheet.
XXXXXXXXXX 2002-015220
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our meeting XXXXXXXXXX.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein are:
(i) dealt with in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
DEFINITIONS
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "Fund" means XXXXXXXXXX;
(c) "X Co" means XXXXXXXXXX, the manager and trustee of the Fund.
(d) "Counterparty" means one or more entities resident in the United States;
(e) "Declaration" means the Declaration of Trust for the Fund.
(f) "Agreement" means the Master Repurchase Agreement between the Fund and the Counterparty.
STATEMENT OF FACTS
1. The Fund is a "unit trust as defined in paragraph 108(2)(a) of the Act, and is expected to qualify as a "mutual fund trust" as defined in subsection 132(6) of the Act effective from the date of its creation and at all times thereafter.
2. The Fund's investment objective is to obtain exposure to U.S. equities.
3. It is expected that the Fund will daily need to invest U.S. dollar denominated cash on an overnight basis while awaiting suitable investments to become available for purchase and while awaiting settlement of securities transactions.
4. X Co's tax affairs are administered by the XXXXXXXXXX Taxation Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Its Business Number is XXXXXXXXXX.
5. Other than those identified in this letter, there will be no agreements between the parties to those proposed transactions described herein that could reasonably be expected to impact on the rulings given in this letter.
PROPOSED TRANSACTIONS
6. The Fund proposes to invest its cash by way of repurchase transactions ("Repos") entered into with the Counterparty with which the Fund deals at arm's length. The Repos will take the form of those described in the Agreement as more generally described below.
7. The Fund will purchase securities ("Repo Securities") from the Counterparty in accordance with the terms set out in the Agreement.
8. The Repo Securities purchased under the Agreement will each be a "qualified security" as defined in subsection 260(1) of the Act.
9. As required by Canadian securities law rules, the market value of the Repo Securities purchased must always be equal to or greater than 102% of the cash amount paid by the Fund to the Counterparty. Throughout the term of the Agreement, the Fund will provide the Counterparty under the Agreement with money in an amount of at least 95 per cent of the fair market value of the Repo securities.
10. The Counterparty will agree to repurchase the Repo Securities from the Fund on a specified date (usually the business day following the date of purchase by the Fund) for an amount greater than the original purchase price paid to the Counterparty by the Fund (the difference between the original purchase price and the repurchase price is called the "Repo Spread").
11. During the period when the Repo Securities are owned by the Fund, as set out in XXXXXXXXXX the Agreement, the Fund may not resell or reregister the Repo Securities unless the Counterparty has defaulted on certain obligations in the Agreement. The seller events of default are described in XXXXXXXXXX the Agreement.
12. During the period when the Repo Securities are owned by the Fund, as described in XXXXXXXXXX the Agreement, the Fund is required to compensate the Counterparty for any principal, interest, or other sums paid by, or on behalf of, the issuer in respect of the Repo Securities.
13. The Counterparty, at its option, may substitute the Repo Securities with other securities of sufficient value, subject to certain conditions. Such substituted securities then become the Repo Securities.
14. On the repurchase date the Fund is required to deliver the exact Repo Securities back to the Counterparty, rather than simply delivering securities equivalent to the Repo Securities.
15. The Fund will not be able to resell or reregister the Repo Securities and, therefore, will not pay a fee to the Counterparty for the use of the Repo Securities.
16. The Fund will include the Repo Spread in its income as ordinary income, and not as a capital gain.
PURPOSE OF PROPOSED TRANSACTIONS
17. The purpose of the proposed transactions is to allow the Fund to invest its U.S. dollar denominated cash in a fully secured transaction that is the commercial equivalent of a fully secured loan. Pursuant to Canadian securities law rules, the Fund is not permitted to lend its short-term cash, even where the loan would be fully secured. However, the Fund is permitted to enter into repurchase agreement arrangements that qualify as "securities lending arrangements" under the Act. By entering into the proposed transactions, the Fund will be able to effectively invest its short-term cash with the Counterparty in a manner that is commercially equivalent to a fully secured loan.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. The transactions proposed above, as described in the Agreement, will constitute a "securities lending arrangement" as that term is defined under subsection 260(1) of the Act.
B. For the purposes of paragraph 260(8)(a) of the Act, on the condition that the Fund will, throughout the term of the Agreement, (A) provide the Counterparty, under the Agreement, with money in the amount of at least 95% of the fair market value of the Repo Securities; and (B) the Fund will be entitled to enjoy, directly or indirectly, the benefits of all or substantially all income derived from, and opportunity for gain with respect to the cash paid by the Fund to the Counterparty for the Repo Securities, then:
(i) any amount paid or credited under the Agreement by or on behalf of the Fund to the Counterparty shall, to the extent of the amount of the interest or dividend paid in respect of the Repo Securities, be deemed to be a payment made by the Fund to the Counterparty of interest or a dividend, as the case may be, payable on the security;
(ii) any amount paid or credited under the Agreement by or on behalf of the Fund to the Counterparty shall, to the extent of the amount of the interest, if any, paid in respect of the Repo Securities, be deemed for the purpose of subparagraph 212(1)(b)(vii) of the Act to have been payable by the issuer of the security; and
(iii) the Repo Securities shall be deemed to be a security described in subparagraph 212(1)(b)(ii) of the Act if it is a security described in paragraph (c) of the definition "qualified security" in subsection 260(1) of the Act.
To the extent that the Repo Spread in the Agreement is paid, then the condition in (B) above will be met.
CAVEAT
These rulings are provided subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Customs & Revenue Agency (the "Agency") on May 17, 2002, and are binding provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Income Tax Act and Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Nothing in these rulings should be construed as confirmation, express or implied, that the Agency has agreed to any other tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
OPINION
You have asked for a ruling that, for purposes of paragraph 260(8)(b) of the Act, a reasonable fee for the use of the Repo Securities under the Agreement will be nil. As we advised you, we cannot provide this ruling. However, we are prepared to offer the following general comments.
Paragraph 260(8)(b) provides that where the borrower of securities has provided the lender with money, either as collateral or as consideration for the securities, and the borrower does not pay or credit a reasonable amount to the lender as a fee for the use of the securities, an amount calculated under that paragraph is deemed to be an amount paid under the arrangement by the borrower to the lender as a fee for the use of the securities. The amount calculated under paragraph 260(8)(b) of the Act is deemed to be paid at the time that an identical security is or can reasonably be expected to be transferred or returned to the lender. Under a securities lending arrangement, where a buyer of securities is effectively investing its short-term cash with a security lender in a manner that is commercially equivalent to a fully secured loan and under the agreement, the borrower of the securities cannot resell or reregister the securities during the period when the repo securities are owned by the borrower (other than in the event of default of the lender), and the identical securities have to be resold to the security lender, it is our view that it may be reasonable to conclude that for purposes of paragraph 260(8)(b) of the Act, a reasonable fee for the use of the repo securities is a nil amount.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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