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.”