28 November 1995 Internal T.I. 9530420 - 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.

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:

Who is securities lender

Position:

Trust

Reasons:

Scheme of the act

Revenue Canada Round Table
TAX EXECUTIVE INSTITUTE
November 1995

IV. SECURITIES LENDING ARRANGEMENTS

Section 260(1) of the Income Tax Act ("the Act") defines a "securities lending arrangement" ("SLA") and sets forth the proper tax treatment for certain receipts and disbursements under such an arrangement. Paragraph 260(1)(a) of the Act requires that the "lender" and the "borrower" deal with one another at arm's length. Subparagraph 212(1)(b)(xii) exempts from withholding tax interest paid on money provided to a Canadian lender by a non-resident person as collateral or as consideration for the security lent provided, inter alia, that the lender is a financial institution meeting the requirements of clause 212(1)(b)(iii)(D) (i.e.,the financial institution is a member of the Canadian Payments Association or is a provincially licensed securities trader).

Question 1

Where a trust company acting in its capacity as trustee lends securities that constitute trust property, will the trustee or the trust beneficiary be considered the security lender for purposes of subsection 260(1) of the Act and the withholding exemption in subparagraph 212(1)(b)(xii) of the Act?

Answer

In our view, where the trust company, acting in its capacity as trustee, lends securities that constitute trust property, it is neither the trustee nor the trust beneficiary but rather the trust that will be considered to be the securities lender. Accordingly, the requirements of subparagraph 212(1)(b)(xii) of the Act will not be met.

Question 2

In the event that Revenue Canada considers the trustee in such case to be the securities lender and the trustee lends the securities to a related corporation on a commercial "arm's-length-terms", could the trust company as trustee (as distinct from its other activities) be considered to be at arm's length with the securities borrower for purposes of the paragraph 260(1)(a) definition of an SLA? (For example, a bank-owned trustee may lend securities on behalf of its trust clients to a broker that is also owned by the bank.)

Answer

As stated in answer to the prior question, in situations where the trust company is acting in its capacity as a trustee, it is the trust that is considered to be the securities lender and accordingly the requirements of subparagraph 212(1)(b)(xii) will not be met.

In situations where the trust company is acting as principal in the lending of securities, the transaction described above would not be at arm's length and therefore would not be an SLA as defined in subsection 260(1) of the Act.

Question 3

Trust companies often borrow securities held in clients' custodial accounts and on-lend such securities under SLA's in which the trust company acts as principal to the subsequent transaction. Would Revenue Canada confirm that under such back-to-back arrangements the trust company will be regarded as a securities lender for purposes of subsection 260(1) of the Act and the withholding tax exemption in subparagraph 212(1)(b)(xii) of the Act?

Answer

Where it is clear from the evidence that the trust company is acting as principal in the lending of securities, we would expect that the fact the trust company itself borrowed the securities would not, in and by itself, deny the application of the withholding tax exemption in subparagraph 212(1)(b)(xii) of the Act to the transaction, provided that the other requirements of that subparagraph are met.

Question 4

In the case where a Canadian resident corporation borrows securities from a related non-resident corporation (the related non-resident corporation may be acting as either agent or principal), will there be Canadian withholding tax on the compensation payments made to the non-resident corporation? Specifically, will the compensation payments be viewed by Revenue Canada as either "any payment for the use of or for the right to use in Canada any property" (under subparagraph 212(1)(d)(i) or "any payment that was dependent on the use of or production from property in Canada" (under subparagraph 212(1)(d)(v))?

Answer

Where the borrower pays the non-resident lender a fee ("lending fee" or "borrowing fee") for entering into the arrangement, it is our view that the fee would generally be considered to be for the use of or the right to use property in Canada and as such would be subject to withholding tax pursuant to subparagraph 212(1)(d)(i) of the Act. It is a question of fact as to what provisions of Part XIII would be applicable to amounts that the borrower pays to the non-resident as compensation for any interest or dividends that the lender would have received had the securities not been lent ("compensation payments"). We in the Rulings Directorate have not had an actual arrangement referred to us for our views.

Author:	Claude Tremblay
File:		953042
Date:		December 4, 1995