Section 260

Subsection 260(1) - Definitions

Securities Lending Arrangement

See Also

Barnes v. Revenue and Customs Commissioners, [2014] BTC 5, [2014] EWCA Civ 31

no realistic possibility of different securities being returned/arrangement requirement broader than contractual requirement

A tax avoidance scheme under which the taxpayer was targeted to receive a double deduction for accrued interest on gilts transferred to him depended on the transfer not qualifying as a "stock lending transaction," which was defined as

so much of any arrangements between two persons ("the borrower" and "the lender") as are arrangements under which – (a) the lender transfers securities to the borrower otherwise than by way of a sale; and (b) a requirement is imposed on the borrower to transfer those securities back to the lender otherwise than by way of sale".

Vos LJ rejected a submission that the transaction did not come within this definition as the taxpayer had the right to transfer back securities in different quantities and with a different nominal value from those which he had borrowed. First, "the defined 'stock lending arrangement' refers only to so much of the arrangement as relates to the transfer of the loaned securities and retransfer of the loaned securities or securities of the same description" (para. 23). Second, "there was 'no realistic possibility that the gilt loan could be unwound other than by the redelivery of the exact securities borrowed'" (para. 27). He stated (at para. 24):

The word 'requirement' need not refer only to the black letter wording of the Stock Lending Agreement. It must be intended to refer to a requirement being imposed on the borrower...taking all the circumstances of the transactional arrangements into account.

Words and Phrases

Newton v. Commissioner of Taxation of the Commonwealth of Australia, [1958] A.C. 450 (PC)


Before finding that dividend stripping transactions were void for taxation purposes by virtue of s. 260 of the Commonwealth Income Tax and Social Services Contribution Assessment Act, 1936-1951 (Australia) Lord Denning stated (p. 465):

"Their Lordships are of opinion that the word 'arrangement' is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial plan but also all the transactions by which it is carried into effect - all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else."

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) 51

Administrative Policy

5 June 2001 Internal T.I. 2000-0053047 - REVERSE REPURCHASE TRANSACTION

Before going on to indicate that cash transferred by a bank to a customer in exchange for shares transferred to it pursuant to the standard-form of repo agreement did not constitute a loan for purposes of Regulation 404(1)(b), the Agency indicated that the transfer of a qualified security under the terms of the standard agreement would be considered to be an acquisition by the buyer (borrower) for purposes of the Act regardless of the results, for tax purposes, to the seller (lender) as a consequence of the application to it of s. 260. However, "if the agreement is structured in a manner that the incidents of beneficial ownership of the securities remain with the lender the transaction may not be a sale and the cash consideration paid to the lender could in such case be considered a loan made by the borrower to the lender".

26 November 1996 External T.I. 9638145 - SECURITIES LENDING

"A partnership is not considered to be a 'person' or a 'taxpayer' for the purposes of section 260 ... and its partners would not be accorded the treatment provided for in section 260 ... ."

18 November 1996 External T.I. 9637095 - sla

For purposes of paragraph 260(1)(a) of the definition of SLA, it is only necessary that the parties to the arrangement be at arm's length at the particular time that the qualified security is lent or transferred."

23 April 1992 Memorandum 921211 (September 1992 Access Letter, p. 39)

A situation in which a securities dealer would borrow a share on which either a cash dividend, or a stock dividend valued at a 5% discount from the market price, was payable, elect to receive the stock dividend, sell the stock dividend upon receipt and pay a dividend compensation amount and a portion of the profit on the transaction to the lender of the share, would be considered a securities lending arrangement, and might also be considered a dividend rental arrangement.


William W. Chip, "Are Repos Really Loans?", Tax Notes International, 27 May 2002, p. 1011.

Brown, "How to Spot the Difference Between Repos and Stock Loans", International Financial Law Review, June 1996, p. 51.

Subsection 260(2) - Non-disposition

Administrative Policy

2019 Ruling 2018-0776381R3 - Part XIII tax under a reverse repo agreement

reverse repo not recharacterized as securities loan

In a reverse repo, ACo, a resident, purchases bonds for $X in cash from an affiliated non-resident (BCo) and it is agreed that the bonds will repurchased by BCo, around three months later, at a lower price, representing a “negative repo spread” (to reflect the current negative interest rate environment.)

CRA ruled that “[t]he negative repo spread … will not be considered to be interest or an amount paid or credited as, on account or in lieu of, or in satisfaction of interest for the purposes of paragraph 212(1)(b).” In its reasons provided in its summary, it stated that “the agreements are purchase and sale agreements to which subsection 260(2) does not apply.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) the negative repo spread on a reverse repo was not interest 231

24 April 1995 External T.I. 9427715 - SECURITIES LENDING

Notwithstanding that the lender is deemed not to have disposed of the securities, the borrower is not deemed not to have acquired the securities.


Morrow, "Repo, Reverse Repo and Securities Lending Markets in Canada", Bank of Canada Review, Winter 1994-1995, p. 61.

Barnes, Spector, "Cross-Border Securities Lending Payments: Income and Search of a Character", [Tax Management International], p. 295

A U.S. perspective.

Malach, "Securities Lending and Dividend Rental Arrangements and Preferred Share Financing - An Update", Tax Profile, October 1990, p. 33.

Hayos, "Security Lending and Dividend Rentals: What They Are and the Tax Implications", 1989 Conference Report, c. 25.

Subsection 260(8) - Non-resident withholding tax

Administrative Policy


A mutual fund trust invests its U.S. cash by entering into repo transactions with non-resident counterparties. "The Fund will not be able to resell or reregister the Repo Securities and, therefore, will not pay a fee to the counterparty for the use of the Repo Securities."

In an opinion, CCRA stated that:

"Under a securities lending arrangement, where a buyer of securities is effectively investing its short-term cash with a security lender in a manner that is commercially equivalent to a fully secured loan and under the agreement, the borrower of the securities cannot resell or reregister the securities during the period when the Repo Securities are owned by the borrower (other than in the event of default of the lender), and the identical securities have to be resold to the securities lender, it is our view that it may be reasonable to conclude that for purposes of paragraph 260(8)(b) of the Act, a reasonable fee for the use of the Repo Securities is a nil amount."

9 June 1994 TI HCW 1083-6

RC generally will accept that the bid-offer spread (which would normally be determinable by comparing the interest rate differential an intermediary broker pays versus what it receives on the cash collateral with its respective counterparties) represents a reasonable fee, and that in remitting tax with the applicable rate on the spread, IDA members and their non-resident counterparties will be in compliance with the requirements of s. 260(8)(b).

4 August 1999 External T.I. 9908885 - TOTAL RETURN SWAPS

"You have inquired how, in order to fulfill the requirement of that provision that the borrower must 'be entitled to enjoy ... the benefits of all or substantially all the income derived from ... the money ...' such a requirement will be measured and satisfied in the absence of the foreign lender disclosing to the borrower the actual use of and the income derived from the collateral. We would generally agree with your suggestion that such a measurement could be satisfied by reference to a market determined rate of interest which is the equivalent to the rate which could be earned by the Canadian borrower on a deposit of similar quantum as the cash collateral and similar duration of the security lending arrangement."

With respect to the calculation of a deemed fee under of s. 260(8)(b) in circumstances where the security lending arrangement is transacted in a foreign currency, RC indicated that a constant exchange rate could be used in order to avoid adverse effects of foreign currency fluctuations.

24 April 1995 External T.I. 9427715 - SECURITIES LENDING

A lending fee involving non-arm's length parties would not be deemed by s. 260(8)(b) to be interest. Instead the lending fee either would be subject to tax under s. 212(1)(d)(i), or would be considered to be business profits in accordance with Article V and VII of the Canada-U.S. Convention, assuming the lender is a U.S. resident.


Philip D. Morrison, "Stock Lending Transactions and U.S. Withholding Tax", Tax Management International Journal, Vol. 42, No. 6, June 14, 2013, p. 361

At the article's beginning, Morrison discusses the US situation before 1997, when final regulations were published providing that substitute dividend payments would be treated as dividends subject to withholding tax (this discussion is provided for comparative interest only):

About 20 years ago, the IRS and Treasury started paying attention to the avoidance of U.S. withholding tax on dividends via lending transactions. The classic transaction in those days was quite simple: an owner of U.S. stock who could not obtain an exemption from withholding tax under a treaty would "loan" his stock to a U.S. or foreign person over a dividend payment date in exchange for a payment that would replicate the dividend (and also get a payment to reflect the time value of money on the value of the "loaned" stock). If the borrower was the beneficial owner of the dividend payment and was a U.S. person, no withholding tax would be due on the dividend. And the substitute dividend payment would not be characterized as a dividend under the code [fn 2: Rev. Rul. 60-177, 1960-1 C.B. 9. See also Rev. Rul. 80-135, 1980-1 C.B. 18 (finding that substitute interest payments with respect to municipal bond loans were not treated as interest)] or treaties. [fn 3: see, e.g., 1975 U.S.-United Kingdom Income Tax Treaty, Article 10(3) (stating, "The term 'dividends' for … United States tax purposes includes any item which under the law of the United States is treated as a distribution out of earnings and profits" (emphasis added)).]

Although U.S. guidance did not provide a specific characterization of substitute dividend payments, under common industry practices that emerged, cross-border substitute dividend payments might have qualified under a domestic exemption or treaty exemption for interest or "other income." if the borrower was a foreign person in a favorable treaty jurisdiction, the withholding tax on the dividend payment could be reduced to 15% and the substitute payment, assuming it was foreign-source, would be exempt from U.S. withholding tax. More complex transactions using swaps could avoid even the 15% withholding tax where the borrower was a foreign person.

Subsection 260(11) - Corporate members of partnerships

Paragraph 260(11)(c)

Administrative Policy

24 March 2014 External T.I. 2013-0495461E5 - Paragraph 260(11)(c) of the Income Tax Act

dividend refund for partnership dividend compensation payments

How does s. 260(11)(c) apply to a professional corporation that is a member of a partnership respecting a dividend refund claim for dividend compensation payments paid by the partnership? CRA stated:

[A] private corporation that is a member of a partnership is deemed, for the purposes of applying the dividend refund rules…to have paid its specified proportion [as defined in s. 248(1)] of the dividend compensation payments made by the partnership.