Principal Issues: Whether a disposition for tax purposes would occur at the time publicly traded shares are transferred to the Lender as collateral for a loan.
Position: Question of fact.
Reasons: Paragraph (j) in the definition of "disposition" under subsection 248(1) of the Act specifically excludes "any transfer of the property for the purpose only of securing a debt or a loan, or any transfer by a creditor for the purpose only of returning property that had been used as security for a debt or a loan" as being a disposition for tax purposes.
XXXXXXXXXX Income Tax Rulings Directorate Ryan Wallace, CPA
2023-098497
Sept 26, 2023
Dear XXXXXXXXXX:
Re: Disposition – Shares used as loan collateral
We are writing in response to your email of July 3, 2023, wherein you requested our views on whether transferring publicly traded shares to a lender, as collateral for a loan, would result in a disposition for tax purposes.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Pursuant to subsection 40(1) of the Act, a capital gain accrued on a capital property is triggered when there is a disposition of that property. The term “disposition” is defined in subsection 248(1) of the Act and specifically, under paragraph (j) of that definition, excludes “any transfer of the property for the purpose only of securing a debt or a loan, or any transfer by a creditor for the purpose only of returning property that had been used as security for a debt or a loan.”
In determining whether property is transferred for the purpose only as security for a debt or loan, the Tax Court of Canada, in 106443 Canada Inc v The Queen [94 DTC 1663], provided that:
“The transferor must not have the intention of absolutely giving up ownership to the property transferred. He must retain the power of recovery. It must be possible to infer from the circumstances of the transfer of ownership that the transferor's intention was not to give up the ownership of property and that he only gave it up temporarily and in order to provide security for a loan.
[…]
The intention of the transferee also must not be to absolutely acquire the property…”
It is a question of fact whether property is transferred for the purpose only of securing a debt or a loan, or for the purpose only of returning property that had been used as security for a debt or a loan. A key factor in determining whether property (such as shares of a publicly traded corporation) is transferred for the purposes only as security for a debt or loan includes whether the transferor intended not to give up (and the transferee not to acquire) absolute ownership (i.e., beneficial ownership) of the property.
Therefore, generally speaking, a disposition would not occur when publicly traded shares owned by a taxpayer are transferred to another person for the purpose only of securing a debt or loan.
We trust our comments will be of assistance.
Yours truly,
Pamela Burnley, CPA, CA
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch