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 AIM considered a “recognized stock exchange” as defined under subsection 248(1) of the Income Tax Act?
Position: yes
Reasons: AIM is a stock exchange located in the UK which is a member of the Organisation for Economic Co-operation and Development and that has a tax treaty with Canada as required by definition.
XXXXXXXXXX
2012-045574
W. Doiron
September 24, 2012
Dear XXXXXXXXXX:
Re: Alternative Investment Market of the London Stock Exchange
This letter is in response to your email in which you enquire whether the Alternative Investment Market (“AIM”) of the London Stock Exchange (“LSE”) is considered a “recognized stock exchange” as defined under subsection 248(1) of the Income Tax Act (“Act”).
Based on information obtained from the LSE website, AIM is owned and operated by the LSE as an international market for smaller, growing companies. AIM provides a separate market for listed companies that do not meet the listing standards for LSE’s Main Market.
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 the Act of that definition, AIM 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 and includes the LSE on that list. However, AIM is currently not included on this list. As stated on the LSE website:
“AIM is owned and operated by the London Stock Exchange in its capacity as a Recognised Investment Exchange under Part XVIII of the UK's Financial Services & Markets Act 2000 (FSMA 2000). AIM therefore falls within the definition of a Prescribed Market under FSMA 2000 and is subject to the UK market abuse regime. Under the directives that form the EU's Financial Services Action Plan, AIM is not a Regulated Market but instead falls within the classification of a Multilateral Trading Facility (MTF) as defined under the Markets in Financial Instruments Directive 2004 (MiFID).”
It is our view that AIM is an exchange-regulated market which would not qualify as a designated stock exchange for Canadian income tax purposes on the basis that such a market is not recognized as an official market under UK law and is not subject to stringent transparency requirements and investor protection regulations. Only official UK-regulated markets qualify as a designated stock exchange, provided that the exchange is included in the list published on the Department of Finance website. Since AIM does not meet the definition of “designated stock exchange” it also does not meet the definition of “recognized stock exchange” for the purposes of paragraph 248(1)(a).
In order to be a “recognized stock exchange” under paragraph 248(1)(b) of that definition, AIM would have to be 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 (“OECD”) and that has a tax treaty with Canada.
Given that AIM is located in the UK (a member of the OECD which has a tax treaty with Canada), the only remaining question is whether AIM 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 stated:
“… 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. …
The new system will lower tax barriers both for domestic investors in international markets and for international investors in Canadian companies. It will also expedite the recognition of new and reorganized stock exchanges (such as the Alternative Investment Market of the London Stock Exchange and NYSE Arca).”
Given that AIM is a market which allows for the organized purchase and sale of securities and it is considered to be a multilateral trading facility under UK law, it is our view that AIM would be considered a stock exchange for purposes of the Act and therefore a “recognized stock exchange” under paragraph 248(1)(b) of the Act.
We trust these comments will be of some 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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