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: Whether a change in benchmark rate from an Interbank Offering Rate (IBOR) to a Risk-Free-Rate (RFR) in a financial instrument could result in a disposition under the Income Tax Act.
Position: The law. Factual determination. Generally, such change, in and of itself, would not result in a disposition. Whether a disposition occurs can be determined only after a review of the facts and circumstances and based on the law that governs a financial instrument.
Reasons: Whether changes to the terms of a financial product result in a disposition depends on the facts and circumstances and the law that governs the financial product.
December 16, 2019
Re: December 12, 2019 CRA/Financial Services Liaison Committee
We are writing in response to your question for the Financial Services Liaison Committee wherein you asked the following question:
Adjustment from the Interbank Offered Rate to alternative overnight risk-free rate
For decades, interbank offered rates (IBOR) have been at the core of the financial system’s plumbing, providing a reference for the pricing of a wide array of financial contracts affecting banks, asset managers, insurers and corporates. These include contracts for derivatives, loans and securities, etc. Benchmark transition has been on the global agenda since 2014, but in 2017, the UK’s Financial Conduct Authority (FCA) announced that by the end of 2021, it would no longer seek to compel or persuade panel banks to submit quotes for LIBOR, making clear that reliance on LIBOR (and similarly other IBORs) could no longer be assured beyond this date. Regulators globally have signaled that firms should transition away from the IBOR to alternative overnight risk-free rates (RFRs).
A number of jurisdictions, including Canada, have been working on developing alternative RFRs to replace current referenced rates (e.g. most used LIBOR currencies, other IBORs, etc.) in financial contracts. For example, the following rates have been recommended by working groups in their respective jurisdictions:
- In Canada, the Enhanced Canadian Overnight Repo Rate Average (CORRA) for CDOR
- In the US, the Secured Overnight Funding Rate (SOFR) will be the replacement rate for USD LIBOR
- In the UK, the Sterling Overnight Index Average (SONIA) will be the replacement rate for GBP LIBOR
- In Europe, the Euro Short-Term Rate (ESTER) as the RFR in Europe
Many financial institutions around the world (including Canada) are in the process of undertaking extensive IBOR transition programs as there are number of complex operational, financial, accounting, legal, etc. issues associated with the transition.
As CRA takes the position that alterations made in the rights, preferences, terms, conditions, restrictions or limitations attaching to shares, bonds, debentures, notes, certificates, mortgages, hypothecs, agreements of sale or similar obligations (hereafter referred to collectively as “property”) can in certain instances result in a disposition of the property.
The industry would like to know whether the modifications/alterations that may be required as a result of replacement of LIBOR or other IBORs with RFRs results in a “disposition” of the property at fair market value by the holder of such property resulting in potential gains/losses to be included in computing taxable income.
Is the CRA aware of these developments and considered whether any tax consequences are triggered by a transition from an Interbank Offered Rate (IBOR) to alternative overnight risk-free rates (RFRs)?
The CRA is aware of the developments regarding the change of IBORs (notably LIBOR) with alternative RFRs and the issue as to whether modifications/alternations that may be required as a result of the transition from IBORs to RFRs could result in a disposition resulting in gains or losses.
In general terms, the determination of whether an obligation has been disposed of for Canadian income tax purposes depends on whether these events are considered to result in the discharge of the obligation and the substitution of a new obligation under the law governing the former obligation, taking into account the facts and circumstances of each case.
Where the governing law is Canadian law, it is our view that making a RFR Amendment to an IBOR Instrument to accommodate the transition from IBOR to RFRs, in and of itself, would generally not constitute a disposition of the IBOR Instrument for Canadian income tax purposes.
Where foreign law governs an obligation, the determination of whether the obligation has been disposed of for Canadian income tax purposes depends, in part, on foreign legal principles. In other words, the legal effect of these events on such an obligation under the relevant foreign law must be considered in order to determine if the obligation has been disposed of for Canadian income tax purposes.
Partnerships and Corporate Financing Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2019
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2019