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:
Does paragraph (b) in the definition of dividend rental arrangement apply to the facts as presented?
Position TAKEN:
It can be said that the situation described seems to fit paragraph (b) of the definition of dividend rental arrangement.
Reasons FOR POSITION TAKEN:
Since identical share is to be put back to lender it can be said that another person bears the risk of loss with respect to the share. Paragraph (a) of the definition stands on its own.(Question of fact).
951115
XXXXXXXXXX S.J. Tevlin
Attention: XXXXXXXXXX
October 18, 1995
Dear Sirs:
Re: Dividend Rental Arrangement
We are writing with respect to your letter of April 20, 1995 in which you requested a technical interpretation with respect to the term "dividend rental arrangement" as defined in subsection 248(1) of the Income Tax Act (the "Act"). In particular you have asked whether we would consider the following hypothetical situation to be a dividend rental arrangement for purposes of the Act.
1.Pursuant to a securities lending agreement ("SLA"), a taxable Canadian corporation carrying on business on Canada ("Borrower") borrows from an arm's length person ("Lender") shares of a non-resident corporation which are listed on a prescribed stock exchange (as defined in Part XXXII of the Income Tax Regulations)(the "Borrowed Shares").
2.Simultaneously, Borrower also acquires an equivalent number of shares of a taxable Canadian corporation which are listed on a prescribed stock exchange (the "Canadian Shares").
3.The Canadian Shares pay an equivalent dividend to that paid on the Borrowed Shares and are exchangeable into shares that are identical to the Borrowed Shares.
4.Immediately thereafter, Borrower disposes of the Borrowed Shares to an arm's length third party.
5.As required by the securities lending agreement, Borrower makes dividend compensation payments to Lender with respect to the Borrowed Shares, using for this purpose the dividends received on the Canadian Shares.
6.When the term of the securities lending agreement expires, Borrower delivers shares identical to the Borrowed Shares to Lender either by purchasing shares identical to the Borrowed Shares in the market or by simply exchanging its Canadian Shares for identical Borrowed Shares.
If the situation described in your letter relates to a factual situation, it should be the subject of a request for an advance income tax ruling in accordance with the procedures set forth in Information Circular 70-6R2 dated September 28, 1990.
However, we are prepared to provide the following general comments with respect to your request.
Since paragraph (a) of the definition of dividend rental arrangement is a main reason test, it becomes a question of fact that can only be determined after a review of all the facts of the transaction, pursuant to a request for an advance income tax ruling or a referral from a District Tax Services Office.
With respect to paragraph (b) it is our position that where a borrower of shares is required to return identical shares to the lender the requirement that "under the arrangement someone other than that person bears the risk of loss or enjoys the opportunity for gain or profit with respect to the share in any material respect" seems to be met.
We apologize for the delay in responding to your request.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of IC-70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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