18 March 1998 External T.I. 9804735 - SECURITIES LENDING

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:

partnership a person for purposes of section 260?

Position:

No

Reasons:

only a person for calculation of income

980473
XXXXXXXXXX S. Tevlin

Attention: XXXXXXXXXX

March 18, 1998

Dear Sirs:

Re: Section 260 of the Income Tax Act ( the “Act”)

We are writing in response to your letter dated February 16, 1998 wherein you requested our opinion regarding the operation of section 260 of the Act with respect to partnerships.

In particular you have asked that we verify that a securities loan transaction which otherwise satisfies the provisions of the definition of “securities lending arrangement” in subsection 260(1) of the Act will nevertheless not constitute a “securities lending arrangement” if either the lender or borrower of the securities is a partnership. In addition you have asked that we confirm that any “compensation” or “lending fee” payments made by a resident partnership, as a borrower of securities, to a non-resident lender of those securities would not be subject to withholding tax pursuant to subsection 260(8) of the Act for purposes of Part XIII of the Act.

In this regard we offer the following general comments.

Since a partnership, except in respect of a computation of income, is not generally considered to be a person or taxpayer we would confirm that a securities lending arrangement involving a partnership as either the lender or the borrower would not qualify for the treatment provided for in section 260 of the Act.

Therefore, in the normal course, a “lending fee” paid by a Canadian borrower to a non-Canadian lender in which either the lender or the borrower is a partnership would not be captured by the deeming provisions of paragraph 260(8)(b) of the Act. As a result, we do not feel that these amounts could ordinarily be properly classified as interest. However, for purposes of Part XIII, paragraphs 212(13.1)(a) and (b) of the Act provide that where a partnership pays or credits an amount to a non-resident, the partnership shall be deemed to be a person resident in Canada and where a person resident in Canada pays or credits an amount to a non-Canadian partnership that partnership shall be deemed to be a non-resident person. Thus a “lending fee” paid in the situation where the borrower is a Canadian partnership or where the lender is a non-resident partnership, would generally be considered to be for the use of property in Canada and as such would be subject to withholding tax pursuant to subparagraph 212(1)(d)(i) of the Act. To the extent the fees can reasonably be attributed to a business carried on by the partnership in Canada, those fees would be subject to tax under Part I of the Act.

It is also our opinion that the compensation payments made to a non-resident person (whether in respect of dividends or interest), that are not subject to subsection 260(5) of the Act, would generally be ordinary income to the non-resident. Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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