ACo will enter into “reverse repo” transactions with BCo (a sister corporation) under which: at the outset, ACo will pay an amount equalling the Bonds’ then fair market value for their purchase; BCo will agree to repurchase the Bonds from ACo approximately three months later for a repurchase price equaling the original purchase price minus a negative spread of X basis points applied to the purchase price (the “negative repo spread”); and 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.
The negative repo spread reflects the negative interest rate that would be paid on short-term deposits at the time of the transaction consistently with arm’s length commercial practice. ACo enters into these transactions because it expects to earn a positive spread by entering into related transactions in which it sells or is short bonds.
Ruling:
The 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 summary, CRA stated its Reasons that:
The agreements are purchase and sale agreements to which subsection 260(2) does not apply.