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:
1. Are swap agreements with foreign counterparties foreign property?
2. If so, does the "cost amount" for purposes of Part XI include the collateral amount posted from time to time?
Position:
1. Yes.
2. No.
Reasons:
1. The swap agreement is an intangible property situated outside of Canada.
2. The collateral is security only and payment thereof is conditional on default of the original agreement.
XXXXXXXXXX 2002-015906
G. Kauppinen
January 7, 2003
Dear XXXXXXXXXX:
Re: Foreign Swap Contracts
This is in reply to your facsimile transmission dated August 21, 2002 regarding foreign swap contracts.
You ask our opinion as to whether the rights of a Canadian registered pension fund under a swap agreement are foreign property for the purposes of Part XI of the Income Tax Act (the "Act") under the following assumptions.
A registered Canadian pension fund proposes to enter into a cross-border multi-currency "master swap agreement" with a major foreign based financial institution. A U.K. affiliate of the financial institution (the "U.K. company") will be the counterparty on the swap agreement. The U.K. company will not be incorporated in Canada and will not have any office in Canada.
The swap agreement would be on the standard International Swap Dealers Association ("ISDA") form and would act as the master agreement for a variety of swap or option transactions or trades. The swaps or option transactions could be based on currency fluctuations, short and long term interest rates or fluctuations in the value of securities or indices. Each transaction would be evidenced by a brief term sheet that incorporates the master swap agreement.
The pension fund will be required to post collateral as a condition of entering into the contract. The obligation to post collateral is governed be a standard form agreement called an "ISDA Credit Support Annex". The collateral will secure the pension fund's contingent obligations under the contract. The value of the collateral will be adjusted from time to time based on fluctuations in the value of the various transactions that are made pursuant to the swap agreement. The pension fund would have a contractual entitlement to receive settlement payments at the end of each successful trade. The U.K. company would be the entity making the payment.
You also ask, if the swap contracts are foreign property, will the value of the collateral that is posted from time to time form part of the cost amount of the foreign property to the registered pension plan?
Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance income tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002, issued by the Canada Customs and Revenue Agency. Consequently, we can only provide you with the following general comments.
Where the counterparty is a non-resident of Canada and the swap agreement is entered into and remains situated outside Canada, the swap agreement will be a foreign property as described in paragraph (c) of the definition of foreign property in subsection 206(1) of the Act.
For the purposes of Part XI of the Act, the cost amount of each swap agreement will be the aggregate of any brokerage or similar fees incidental to entering into the swap agreement and such costs will not include the value of the collateral that is posted from time to time.
We trust our comments will be of assistance to you.
Yours truly,
Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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