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: Is NEX considered a “recognized stock exchange” as defined under subsection 248(1) of the Income Tax Act?
Position: yes
Reasons: NEX is a stock exchange located in Canada as required by definition.
September 11, 2012
CPB – Speciality Audit Division Lita Krantz
Claudio DiRienzio IT Rulings Directorate
112 Kent Street, (905) 721-5091
Place de Ville Bldg,
Tower B, 19th Floor
2012-045432
NEX of the TSX Venture Exchange
This is in reply to your email in which you enquire whether NEX would be included in the definition of “recognized stock exchange” as defined under subsection 248(1) of the Income Tax Act.
NEX is a unique and separate board of TSX Venture Exchange (“TSXVE”). It provides a unique trading forum for listed companies that have fallen below TSXVE’s ongoing listing standards for Tier 1 and Tier 2.
Prior to December 14, 2007, a prescribed stock exchange was an exchange that was listed in sections 3200 (domestic stock exchanges) or 3201 (foreign stock exchanges) of the Regulations. To better serve the different policy needs and to respond quicker to the ever changing financial markets, Parliament moved to a three tier regime on December 14, 2007 with the creation of the designated stock exchange, recognized stock exchange and stock exchange.
The definition of “recognized stock exchange” under subsection 248(1) of the Income Tax Act (“Act”) states as follows:
“ ‘recognized stock exchange’ means
(a) a designated stock exchange, and
(b) any other stock exchange, if that other stock exchange is located in Canada or in a country that is a member of the Organisation for Economic Co-operation and Development and that has a tax treaty with Canada;”
In order to be a “recognized stock exchange” under paragraph 248(1)(a) of that definition, NEX would have to be considered a “designated stock exchange”. “Designated stock exchange” under subsection 248(1) is defined as follows:
“ “designated stock exchange” means a stock exchange, or that part of a stock exchange, for which a designation by the Minister of Finance under section 262 is in effect;”
Subsection 262(1) of the Act states as follows:
“Authority to designate stock exchange — The Minister of Finance may designate a stock exchange, or a part of a stock exchange, for the purposes of this Act.”
As required by subsection 262(4) of the Act, the Department of Finance provides an internet link, http://www.fin.gc.ca/act/fim-imf/dse-bvd-eng.asp., which lists the designated stock exchanges. While NEX is part of the TSXVE, it is not part of Tier 1 or Tier 2 and therefore does not meet the definition of “designated stock exchange” and as a result does not meet the definition of “recognized stock exchange” under paragraph 248(1)(a).
In order to be a “recognized stock exchange” under paragraph 248(1)(b) of that definition, NEX would have to considered a stock exchange that is located in Canada, or located in a country that is a member of the Organisation for Economic Co-operation and Development and that has a tax treaty with Canada.
NEX is located in Canada; therefore, the only remaining question is whether NEX is considered to be a ‘stock exchange’. The term ‘stock exchange’ is not defined in the Act. In relation to the creation of the new definition of “recognized stock exchange”, the 2007 Budget supplementary information states:
“… there will be no process by which an entity is formally identified as a "stock exchange". Instead, it is intended that the general legal and commercial meaning of the term will govern.”
It is stated on the NEX website that NEX is a unique and separate board of the TSXVE that provides a unique trading forum for listed companies that have fallen below TSXVE's ongoing listing standards. (See the following link http://www.tmx.com/en/nex/aboutUs/about.html)
The term “trading” is defined in Black’s law dictionary, 8th edition as:
“The business of buying and selling, esp. of commodities and securities.”
The terms “stock exchange” and “securities exchange” are defined in Black’s law dictionary, 8th edition as:
“1. A marketplace or facility for the organized purchase and sale of securities, esp. stocks. 2. A group of people who organize themselves to create such a marketplace;”
Based on these definitions, NEX would be considered a “stock exchange” under the general legal meaning.
We also looked at whether NEX is considered a stock exchange under Canadian securities legislation. The 10 provinces and 3 territories in Canada are responsible for securities regulations. Securities regulators from each province and territory have teamed up to form the Canadian Securities Administrators (“CSA”). The CSA is primarily responsible for developing a harmonized approach to securities regulation across the country.
TSXVE including NEX is recognized in Alberta and British Columbia as a stock exchange. Based on this, NEX would also be considered a “stock exchange” from a commercial point of view.
CONCLUSION
It is our opinion that NEX is considered a stock exchange that is located in Canada and therefore is a “recognized stock exchange” under paragraph 248(1)(b) of the Act.
We trust that these comments will be of assistance.
Yours truly,
Lita Krantz
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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