Structured finance regulatory resources available

If you're looking for quick access to standard industry documentation, like IIROC's securities loan agreements or SIFMA's standard forms, make sure you bookmark our blog's Resources page. Links to provincial securities transfer legislation and other resources are also provided.

Many industry associations also maintain resource libraries. For example, CASLA's resources page provides information on such topics as IIROC regulatory updates, Dodd Frank developments and potential effect on the Canadian market, and insights from CASLA's recent roundtable held to discuss the effects of the eurozone crisis and regulatory trends.

Income tax amendments may make it harder to sell stripped coupons offshore

Jonathan Willson

The Department of Finance yesterday announced proposed amendments to the Income Tax Act and Income Tax Regulations as a legislative response to certain court decisions that were unfavourable to the Canada Revenue Agency. As is often the case with targeted legislative "fixes", the actual draft legislation appears to have the potential to be applied by the Canada Revenue Agency more broadly than is perhaps necessary to meet the objectives of the Department of Finance.

Two of the measures could be of particular interest to readers of this blog. The first will add an additional requirement to the existing interest withholding tax rules. Under the proposed rule, in order for interest to be paid free of Canadian withholding tax on a stripped coupon, the resident debtor must deal at arm's length with both the non-resident holder of the coupon and with the holder of the residual principal component (whereas the current rule generally only requires the relationship between the debtor and the holder of the coupon to be tested). As a result of this amendment, it may be more difficult to sell stripped coupons (of non-government issuers) to offshore investors - although some have already suggested that the amendment may have provided a road map for related party creditors to do exactly that.

The second will essentially require a taxpayer to defer the portion of a deduction (or other outlay) that represents a "contingent amount" until such amount is actually paid. Due in large measure to the new "contingent amount" definition - which does not require that a contingency exist at law - there may be scope for the Canada Revenue Agency to use this provision to restrict outlays and expenses claimed by taxpayers in certain structured finance transactions.

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My new year's wish list

P. Jason Kroft

It has long been a Kroft family tradition to spend a relatively significant amount of time discussing and documenting new year's resolutions (and it is also a long-standing tradition of discarding or ignoring the resolutions not long after January 2nd of each year). Each year at around this time I'll sit down to carefully draft my plans for the year in an attempt to chart out my year's goals, plans and objectives. The plans are, by design, ambitious, considered and comprehensive. As my final blog submission for the year, I thought I would share with our readers some of my own goals for next year in the hopes that they may entertain and potentially inspire.

In 2011, I would like to own a Bugatti sports car like Jay-Z, have one million Facebook friends and appear during an episode of HBO's 'Entourage'. I'd like to finally obtain that work/life balance that I've read about and find that the Loonie is well above par during my spring break trip to Miami. I'm hoping for sunny and dry summer months, peace and prosperity for my clients, contacts and friends and interesting and challenging work assignments. 

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U.S. legislation to add withholding tax to certain swap transactions

Jonathan Willson and Roanne C. Bratz

The Hiring Incentives to Restore Employment Act (or HIRE Act) has now come into effect in the United States and it will likely be relevant to Canadian participants in the OTC derivatives and securities lending areas. 

By way of background, the HIRE Act added a new U.S. withholding tax provision for certain equity-related swaps, sale-repurchase transactions and securities lending transactions. The HIRE Act applies to dividend equivalent payments made on or after September 14, 2010.  Dividend equivalent payments include payments that are contingent on, or determined by reference to, U.S.-source dividends in sale-repurchase and securities lending transactions, including certain equity swap transactions where a non-U.S. counterparty buys or sells the underlying U.S. security from or to its counterparty.  After March 18, 2012, cross-border dividend equivalent payments made under all equity swap transactions will be treated as U.S.-source dividend income, unless the U.S. Department of the Treasury issues regulations exempting any particular equity–related swap from its application.  As a result, any U.S. source dividend equivalent payment received or paid by Canadian parties, for example, generally will be subject to U.S. withholding tax even if there is no U.S. counterparty to the transaction.  The withholding tax is imposed on the “gross amount” of any dividend-equivalent payment used in computing any net amount paid to the non-U.S. counterparty in connection with the transaction.  The U.S. withholding tax generally will be imposed at a 30% rate, unless the applicable withholding rate is reduced under the terms of an income tax treaty and proper documentary evidence is timely provided to the appropriate counterparty.

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CRA responds to the new GST/HST legislative proposals on financial services

Alan Kenigsberg and Jean-Guillaume Shooner

On February 11, 2010, the Canada Revenue Agency (the "CRA") released GST/HST Notice No. 250 (the "CRA Notice") in response to the proposal to change the definition of "financial services" in the Excise Tax Act (the "Act") announced in a News Release and Backgrounder issued by the Department of Finance on December 14, 2009 (the "Backgrounder"). The Department of Finance stated that such proposal is intended to "clarify" and confirm the government's policy intent that certain services such as management, administration, marketing and promotional services do not constitute financial services and are therefore subject to GST/HST.

In the CRA Notice, the CRA states that the proposals to change the legislation "reaffirm the longstanding policy intent and provide certainty with respect to the application of GST/HST". Surprisingly, the CRA uses the CRA Notice to completely reverse a number of its own published positions with respect to what constitutes an exempt service of "arranging for" a financial service. Financial institutions and businesses dealing with financial institutions should carefully examine whether or not they are affected by these policy changes, and whether services previously considered exempt from GST/HST are now taxable.

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Canadian withholding tax on interest - Recent developments

Kevin Kelly

As reported in Stikeman Elliott's April 12, 2007 Structured Finance Update, it was announced in the March 2007 Federal Budget that an agreement in principle had been reached between Canada and the U.S. that would update the Canada-U.S. tax treaty with the effect of eliminating withholding tax on interest paid on arm's length cross-border financings between Canada and the U.S. It was also announced in the Federal Budget that the Income Tax Act would be amended to eliminate Canadian non-resident withholding tax on interest paid by Canadian residents to all arm's length foreign residents, regardless of their country of residence. The amendments to the Income Tax Act were intended to be conditional on the implementation of the changes to the Canada-U.S. tax treaty and were initially proposed to be effective once the arm's length exemption in the Canada-U.S. tax treaty came into effect. The measures announced in the Federal Budget were welcome news as the proposed changes with respect to Canadian non-resident withholding tax will facilitate a Canadian resident's access to foreign debt financing without the structural limitations currently imposed by the so-called "5/25 exemption" contained in the Income Tax Act.

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