15 November 1995 External T.I. 9521435 - SECURITIES LENDING ARRANGEMENT

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Compensation and lending fees deductible? Short sales and securities lending

Position:

Expenses deductible under section 9 - on income account

Reasons:

Par 18 of IT 479R

		952143
XXXXXXXXXX	C. Tremblay

Attention: XXXXXXXXXX

November 15, 1995

Dear Sirs:

Re: Securities Lending Arrangements

This is in reply to your letter of August 15, 1995, requesting our views on the deductibility by a short borrower of compensating payments and lending fees on a bond that is a qualified security within the meaning of section 260 of the Income Tax Act (the "Act") and the characterization of the profit or loss to the borrower on the completion of the short sale.

In our view, the situations described in your letter relates to specific proposed transactions. It is the practice of this Department to comment on such transactions only by way of advance ruling. However, we can provide you with the following general comments which we hope will be of assistance to you.

Section 260 of the Act sets out a number of rules applicable to securities lending arrangements. Subsection 260(2) states that a transfer or loan of security under a securities lending arrangement shall be deemed not to be a disposition of the security for the purposes of the Act. The phrase "securities lending arrangement" is defined in subsection 260(1) of the Act and includes an arm's length transfer or loan of a qualified security. Accordingly, an arrangement whereby the securities are borrowed so that the borrower can enter into a "short sale" disposing of the securities he does not own and undertaking to return identical securities to the lender, constitutes a securities lending arrangement within the meaning of section 260 of the Act.

As stated in paragraph 18 of Interpretation Bulletin IT-479R, a gain or loss on a short sale is considered to be on income account. Thus, in our view, compensation payments which are not deemed to be received as dividends by virtue of subsection 260(5) of the Act may be deductible to a payor as an outlay or expense incurred for the purpose of gaining or producing income from a business. Accordingly, such compensation payments or lending fees in respect of interest will be deductible to a payor under subsection 9(1) of the Act in the year the short sale transaction is completed, i.e. in the year of purchase.

The above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical examples given and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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