CRA rules that substituting the index used in a monetization arrangement did not de-grandfather it from the synthetic disposition rules

A monetization arrangement that was grandfathered from application of the synthetic disposition rules for deferring gain on the shareholding of a holding company (“Holdco A”) in a public company entailed a secured loan from a financial institution (“FI”) to Holdco A and a cash-settlement forward agreement between Holdco A and FI. A reference index was used in determining both the interest rate under the loan and the reference price under the Forward Agreement.

As a result of the discontinuance of the reference index, it will be replaced for such purposes by a similar index.

The synthetic disposition rules apply to agreements and arrangements entered into after March 20, 2013, and to earlier agreements or arrangements whose terms are extended after that date. CRA ruled that the index substitution would not result in the application of s. 80.6 (i.e., no loss of the deferral) - and also provided a tentative opinion “that there is a reasonable argument that Holdco A could lose the benefit of the transitional relief to the extent that the assignment of the Monetization Agreement would have the effect of novating it.”

Neal Armstrong. Summary of 2021 Ruling 2021-0880641R3 F under s. 80.6.