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

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.

Principal Issues: Whether a negative repo spread is interest or an amount in lieu of interest under paragraph 212(1)(b).

Position: No.

Reasons: The agreements are purchase and sale agreements to which subsection 260(2) does not apply.

Author: XXXXXXXXXX

Section: 212(1)(b)

XXXXXXXXXX                                                                                                          2018-077638

XXXXXXXXXX, 2019

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
        XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an Advance Income Tax Ruling (the “Ruling”) on behalf of the above-named taxpayer. We also acknowledge the information provided in subsequent correspondence in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the Ruling request is:

(a)   in a previously filed tax return of the taxpayer or a related person;

(b)   being considered by the CRA in connection with such return of the taxpayer or a related person;

(c)   under objection by the taxpayer or a related person;

(d)   the subject of a current or completed court process involving the taxpayer or a related person; or

(e)   the subject of a Ruling previously considered by the Directorate.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

Our understanding of the facts, transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

Unless otherwise noted, the following terms have the meanings ascribed to them below:

“ACo” means XXXXXXXXXX;

“BCo” means XXXXXXXXXX;

“Bonds” means XXXXXXXXXX;

“CCo” means XXXXXXXXXX, a corporation incorporated and resident in XXXXXXXXXX for purposes of the Treaty;

“DCo” means XXXXXXXXXX, a corporation incorporated and resident in XXXXXXXXXX for purposes of the Treaty, the ordinary shares of which are primarily listed on the XXXXXXXXXX;

XXXXXXXXXX;

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter; and

“Treaty” means the XXXXXXXXXX.

FACTS

1.    ACo is XXXXXXXXXX.  ACo is a “taxable Canadian corporation” within the meaning of subsection 89(1) of the Act.

2.    The registered address of ACo is XXXXXXXXXX.  Its Taxation Centre is XXXXXXXXXX and its Tax Services Office is XXXXXXXXXX.  Its business number is XXXXXXXXXX.  ACo has a XXXXXXXXXX taxation year-end.

3.    BCo is a corporation incorporated in XXXXXXXXXX, resident in XXXXXXXXXX and generally entitled to the benefits of the Treaty.

4.    ACo is an indirect subsidiary of DCo and BCo is a direct wholly owned subsidiary of DCo.

5.    ACo and BCo are related within the meaning of subsection 251(2) of the Act and, accordingly, do not deal at arm’s length pursuant to paragraph 251(1)(a) of the Act.

6.    All of the voting common shares and preferred shares of ACo are owned by CCo.

7.    CCo is an indirect wholly owned subsidiary of DCo.

PROPOSED TRANSACTIONS

8.    ACo will enter into one or more “reverse repo” transactions with BCo, the terms of which are generally as follows:

(a)   At the outset of each such transaction, ACo will pay an amount in XXXXXXXXXX equal to the fair market value of the Bonds at that time to purchase the Bonds from BCo;

(b)   BCo will agree to repurchase the Bonds from ACo approximately three months later for a repurchase price to be paid by BCo in XXXXXXXXXX which will be equal to the original purchase price to be paid by ACo less a market‑based spread generally expected to be between XXXXXXXXXX basis points applied to the purchase price (the “negative repo spread”); and

(c)   ACo will be obligated to pay an amount equal to and as compensation for coupons, if any, paid on the Bonds (e.g., coupon payments) during the term of the arrangement.

9.    The XXXXXXXXXX required by ACo to pay BCo the purchase price for the Bonds described in paragraph 8 will have been obtained by ACo XXXXXXXXXX.  At the time of such purchase of XXXXXXXXXX, ACo will also XXXXXXXXXX.  The terms and pricing of XXXXXXXXXX will be on an arm’s length basis.  XXXXXXXXXX. 

10.   The negative repo spread reflects the negative interest rate that would be paid on short-term deposits of XXXXXXXXXX (i.e., the lender is required to compensate the borrower for taking the lender’s XXXXXXXXXX), which is consistent with commercial practice between arm’s length parties.

11.   Consistent with reverse repo transactions XXXXXXXXXX, no fee will be paid by ACo to BCo for use of the Bonds and no other payments will be made by either ACo or BCo to the other party in respect of the proposed transactions.

12.   The reverse repo transactions described above will all be governed by XXXXXXXXXX, the terms of which agreement will be consistent with agreements governing reverse repo transactions XXXXXXXXXX. The pricing and specific terms of each reverse repo transaction governed by such agreement will be set out in a confirm specific to that reverse repo transaction.

13.   ACo will not be permitted to resell or reregister the Bonds purchased from BCo during the term of a reverse repo other than in the event that BCo defaults under its obligations pursuant to such reverse repo transaction.

PURPOSE OF THE PROPOSED TRANSACTIONS

The proposed transactions provide ACo with the opportunity to earn an attractive pre-tax return as compared to the return that ACo could earn by entering into another transaction with a similar risk profile.  ACo will only enter into the transactions if it expects to earn a pre-tax profit, e.g., as between the particular reverse repo transaction and XXXXXXXXXX.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, transactions, and purpose of the proposed transactions, and provided further that the transactions were carried out as described above, our Ruling is as follows:

A.    The negative repo spread described in paragraph 8 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) of the Act.

COMMENTS

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or Proposed Transactions described herein.  For greater certainty, nothing in this letter should be construed as implying that we are ruling on any tax consequences other than those tax consequences specifically described in the ruling above and, without limiting the generality of the foregoing, the CRA is not ruling on:

(a)   the nature of the legal relationship entered into or contemplated by the entities and parties named above;

(b)   the residence in a country for any purpose of any person referred to herein;

(c)   the fair market value of any property;

(d)   the application of subsection 247(2), subsection 212(2) and subsection 245(2); or

(e)   whether the terms and conditions of the agreements and transactions as described in the Proposed Transactions are reasonable XXXXXXXXXX.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019 and are binding on the CRA provided that the Proposed Transactions are commenced on or before XXXXXXXXXX.  In addition, the above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

An invoice for our fees in connection with this ruling will be forwarded to you under separate cover.

Yours sincerely,

 

XXXXXXXXXX
for Director
XXXXXXXXXX
Reorganizations Division
Income Tax Rulings Directorate

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