5 November 2004 Internal T.I. 2004-0092211I7 - Securities lending arrangements

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.

Principal Issues: General discussion

Position: General discussion

Reasons: Sections 260 and 82 ITA

						November 5, 2004

SUDBURY TSO						HEADQUARTERS
Compliance Program Division 					Denise Dalphy, LL.B.
						Financial Industries Division
Attention:  Lise Leclair						(613) 941-1722

							2004-009221

XXXXXXXXXX
Securities Lending Arrangements/ Compensatory Dividends

This is in reply to your memorandum dated August 25, 2004 wherein you asked for our comments on the above-noted subject.

Our Comments

Where a taxpayer borrows shares, the terms of a securities lending arrangement ("SLA") may require the borrower to pay compensation to the lender for taxable dividends on borrowed shares. The main provisions in the Income Tax Act (the "Act") that deal with SLAs are paragraph 82(1)(a) of the Act and section 260 of the Act and they are the subject of proposed amendments which have complicated coming into force provisions that relate to the time when the SLA was entered into, when amounts were paid, and whether an election was made by the taxpayer.

Clause 82(1)(a)(ii)(B) of the Act provides that amounts included in a taxpayer's income pursuant to clause 82(1)(a)(ii)(A) of the Act, namely "amounts received by the taxpayer in the year from corporations resident in Canada as, on account of, in lieu of payment or in satisfaction of, taxable dividends..." are reduced, if the taxpayer is an individual, by amounts that the taxpayer paid and were deemed by subsection 260(5) of the Act to have been received by another person as a taxable dividend. The result is as stated in Canadian Tax Service - Stikeman Analysis:

"Where a resident individual borrows shares under an SLA and receives dividends during the term of the loan, clause 82(1)(a)(ii)(B) effectively excludes the amount of those dividends to the extent that they are deemed by subsection 260(5) to have been received by the lender as taxable dividends. This exclusion ensures that taxable dividends received on borrowed shares during the term of the loan are taxed only to the lender on the receipt of compensation payments. Where the borrower is a corporation, the deduction for intercorporate dividends in subsections 112(1) or (2) should provide the same result as the exclusion for resident individuals in clause 82(1)(a)(ii)(B)."

Accordingly, in order to determine whether the provisions of clause 82(1)(a)(ii)(B) of the Act will apply to XXXXXXXXXX in respect of his 2002 taxation year, it will be necessary to determine whether subsection 260(5) of the Act applied to the lender with respect to the compensatory dividends paid to the lender by XXXXXXXXXX.

We have enclosed for your reference a copy of Canadian Tax Service - Stikeman Analysis concerning section 260 of the Act and Securities Lending Arrangements and well as relevant portions of the Department of Finance's Explanatory Notes. We hope this opinion will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. 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 electronic library version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate