XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Securities Lending Arrangements
We are writing in response to your letter of June 29, 1993 in which you requested our opinion as to whether certain payments made pursuant to security lending arrangements and repurchase agreements by a Canadian borrower to a non-resident lender would be subject to withholding tax.
We agree that Section 260 of the Income Tax Act Canada (the "Act") would not apply to transactions between parties that are not at arm's length. Whether participants are not at arm's length is a question of fact. In addition, if the securities being transferred or loaned are not qualified securities as defined in subsection 260(1) of the Act, the provisions of section 260 of the Act will not apply to the transactions.
We would agree that in the normal course, a "lending fee" involving non-arm's length participants would not be captured by the deeming provisions of paragraph 260(8)(b) of the Act. As a result we do not feel that these amounts could be properly classified as interest. Instead, the lending fee would either be subject to tax pursuant to subparagraph 212(1)(d)(i) of the Act for the use of property in Canada or will be considered business profits in accordance with the provisions of Article V and VII of the Canada-United States Tax Convention (1980).
Generally, we would agree that the compensation payments made to the non-resident (whether in respect of dividends or interest), that are not subject to subsection 260(5) of the Act, would be ordinary income to the non-resident transferor.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch