Share repurchase programs under private agreements (SRPs) for shares eligible under a normal-course issuer bid (p. 9)
[I]n January 2018, six Canadian FIs participated in five SRPs as either an issuer or a seller. These SRPs involved Canadian FIs repurchasing their own shares from other Canadian FIs…for aggregate redemption proceeds of about $1.5 billion.
Example of generation of artificial tax loss in reliance on s. double-counting rule in s. 248(28), s. 112(5.2) stop-loss rule, s. 112(1) deduction, and low PUC and cost (pp. 9-10)
Assume that (1) the market price (and the mark-to-market cost) of the issuer’s shares is $100, (2) their PUC is $15, (3) their original cost is $40, and (4) the discount is $5 (that is, the redemption proceeds are $95). The issuer would pay $100 to buy back its shares from the public in the normal course under an NCIB. Under an SRP, the issuer buys back those shares for $95. The seller would have previously realized $60 of aggregate mark-to-market gains on the issuer shares, generally offset by a corresponding loss on any hedge….
A dividend of $80 is deemed received by the seller (subsection 84(3)) and an intercorporate dividend deduction of $80 is generally available (subsection 112(1)). Proceeds of disposition are reduced by the amount of the deemed dividend—from $95 to $15—consistent with subsection 248(28) and a 1998 CRA technical interpretation [980394]…. The dividend stop-loss rule in subsection 112(5.2) requires the increase of the proceeds of $15 by the lesser of the loss otherwise determined (using the original cost, not the mark-to-market cost) and the amount of any dividends deducted under section 112. The loss otherwise determined is $25 ($15 proceeds less $40 original cost). The deductible dividends are $80. The lesser amount ($25) is added to the proceeds otherwise determined ($15); adjusted proceeds are $40. Because the mark-to-market cost is $100, the seller’s tax loss realized from the SRP is $60, equal to the mark-to-market gain previously included in income, but that gain was generally offset by a corresponding hedge loss. The amount of this tax loss is deducted twice….
S. 112(5.2) announcement (resulting in cancellation of outstanding SRPs) (p. 10)
The proposed amendment to subsection 112(5.2) denies this additional tax loss because it requires the proceeds’ increase by the deemed dividend amount. In the example, the adjusted proceeds would be $95…
An investment dealer holds a share of an issuer with a paid-up capital of $15, an original cost to it of $40 and a fair market value of $100. It previously realized $60 of aggregate mark-to-market gains on the share, offset by a $60 loss on a hedge. Under a private agreement with the issuer, it sells its share to the issuer for $95.
In reliance on 980394, its proceeds of disposition exclude its deemed dividend of $80. Old s. 112(5.2) only required these proceeds to be increased to its original cost of $40. Hence, it realized a loss of $60 for ITA purposes. The new s. 112(5.2) instead increases its proceeds by the full deemed dividend amount of $80; hence, no loss.
In January 2018, six financial institutions purchased $1.5B of their own shares held by other financial institutions pursuant to “share repurchase programs” ( “SRPs”) that permitted such private sales to occur for securities law purposes where a normal course issuer bid was in play. Following the February Budget announcement of the new s. 112(5.2) rule, the issuers of outstanding SRPs issued press releases announcing their cancellation.
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