Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Marginal note:Definitions

• 260 (1) In this section

  dealer compensation payment

  dealer compensation payment means an amount received by a taxpayer as compensation, for an underlying payment,

  • (a) from a registered securities dealer resident in Canada who paid the amount in the ordinary course of a business of trading in securities, or

  • (b) in the ordinary course of the taxpayer’s business of trading in securities, where the taxpayer is a registered securities dealer resident in Canada; (paiement compensatoire (courtier))

  qualified security

  qualified security means

  • (a) a share of a class of the capital stock of a corporation that is listed on a stock exchange or of a class of the capital stock of a corporation that is a public corporation by reason of the designation of the class by the corporation in an election made under subparagraph (b)(i) of the definition public corporation in subsection 89(1) or by the Minister in a notice to the corporation under subparagraph (b)(ii) of that definition,

  • (b) a bond, debenture, note or similar obligation of a corporation described in paragraph (a) or of a corporation that is controlled by such a corporation,

  • (c) a bond, debenture, note or similar obligation of or guaranteed by the government of any country, province, state, municipality or other political subdivision, or a corporation, commission, agency or association controlled by any such person,

  • (d) a warrant, right, option or similar instrument with respect to a share described in paragraph (a), or

  • (e) a qualified trust unit; (titre admissible)

  qualified trust unit

  qualified trust unit means an interest, as a beneficiary under a trust, that is listed on a stock exchange; (unité de fiducie déterminée)

  securities lending arrangement

  securities lending arrangement means an arrangement under which

  • (a) a person (in this section referred to as the “lender”) transfers or lends at any particular time a qualified security to another person (in this section referred to as the “borrower”),

  • (b) it may reasonably be expected, at the particular time, that the borrower will transfer or return after the particular time to the lender a security (in this section referred to as an “identical security”) that is identical to the security so transferred or lent,

  • (c) the borrower is obligated to pay to the lender amounts equal to and as compensation for all amounts, if any, paid on the security that would have been received by the borrower if the borrower had held the security throughout the period that begins after the particular time and that ends at the time an identical security is transferred or returned to the lender,

  • (d) the lender’s risk of loss or opportunity for gain or profit with respect to the security is not changed in any material respect, and

  • (e) if the lender and the borrower do not deal with each other at arm’s length, it is intended that neither the arrangement nor any series of securities lending arrangements, loans or other transactions of which the arrangement is a part be in effect for more than 270 days,

  but does not include an arrangement one of the main purposes of which may reasonably be considered to be to avoid or defer the inclusion in income of any gain or profit with respect to the security. (mécanisme de prêt de valeurs mobilières)

  security distribution

  security distribution means an amount that is

  • (a) an underlying payment, or

  • (b) an SLA compensation payment, or a dealer compensation payment, that is deemed by subsection (5.1) to be an amount received as an amount described by any of paragraphs (5.1)(a) to (c); (paiement de titre)

  SLA compensation payment

  SLA compensation payment means an amount paid pursuant to

  • (a) a securities lending arrangement as compensation for an underlying payment; or

  • (b) a specified securities lending arrangement as compensation for an underlying payment, including, if the property transferred or lent is described in subparagraph (a)(ii) of the definition specified securities lending arrangement, as compensation for a taxable dividend paid on a share described in subparagraph (a)(i) of that definition; (paiement compensatoire (MPVM))

  specified securities lending arrangement

  specified securities lending arrangement means an arrangement, other than a securities lending arrangement, under which

  • (a) a particular person (referred to in this definition as a “transferor”) transfers or lends at any particular time a property to another person (referred to in this definition as a “transferee”) and the property is

    • (i) a particular share described in paragraph (a) of the definition qualified security, or

    • (ii) a property in respect of which the following conditions are met:

      • (A) the property is

        • (I) an interest in a partnership, or

        • (II) an interest as a beneficiary under a trust, and

      • (B) all or any part of the fair market value of the property, immediately before the particular time, is derived, directly or indirectly, from a share described in subparagraph (i),

  • (b) it may reasonably be expected, at the particular time, that the transferee — or a person that does not deal at arm’s length with, or is affiliated with, the transferee — will transfer or return after the particular time to the transferor — or a person that does not deal at arm’s length with, or is affiliated with, the transferor (referred to in this definition as a “substitute transferor”) — a property that is identical or substantially identical to the property so transferred or lent, and

  • (c) the transferor’s (together with any substitute transferor’s) risk of loss or opportunity for gain or profit with respect to the particular property is not changed in any material respect; (mécanisme de prêt de valeurs mobilières déterminé)

  underlying payment

  underlying payment means an amount paid on a qualified security by the issuer of the security. (paiement sous-jacent)

• Marginal note:Eligible dividend

  (1.1) This subsection applies to an amount if the amount is received by a person who is resident in Canada, the amount is deemed under subsection (5.1) to be a taxable dividend, and the amount is either

  • (a) received as compensation for an eligible dividend, within the meaning assigned by subsection 89(1); or

  • (b) received as compensation for a taxable dividend (other than an eligible dividend) paid by a corporation to a non-resident shareholder in circumstances where it is reasonable to consider that the corporation would, if that shareholder were resident in Canada, have designated the dividend to be an eligible dividend under subsection 89(14).

• Marginal note:References — borrower and lender

  (1.2) For the purposes of subsections (8), (8.1), (8.2), (8.3) and (9.1) and 212(2.1) and (3), in respect of a specified securities lending arrangement,

  • (a) a reference to a borrower includes a transferee; and

  • (b) a reference to a lender includes a transferor.

• Marginal note:Non-disposition

  (2) Subject to subsections 260(3) and 260(4), for the purposes of this Act, any transfer or loan by a lender of a security under a securities lending arrangement shall be deemed not to be a disposition of the security and the security shall be deemed to continue to be property of the lender and, for the purposes of this subsection, a security shall be deemed to include an identical security that has been transferred or returned to the lender under the arrangement.

• Marginal note:Disposition of right

  (3) Where, at any time, a lender receives property (other than an identical security or an amount deemed by subsection 260(4) to have been received as proceeds of disposition) in satisfaction of or in exchange for the lender’s right under a securities lending arrangement to receive the transfer or return of an identical security, for the purposes of this Act the lender shall be deemed to have disposed at that time of the security that was transferred or lent for proceeds of disposition equal to the fair market value of the property received for the disposition of the right (other than any portion thereof that is deemed to have been received by the lender as a taxable dividend), except that section 51, 85.1, 86 or 87, as the case may be, shall apply in computing the income of the lender with respect to any such disposition as if the security transferred or lent had continued to be the lender’s property and the lender had received the property directly.

• Marginal note:Idem

  (4) Where, at any time, it may reasonably be considered that a lender would have received proceeds of disposition for a security that was transferred or lent under a securities lending arrangement, if the security had not been transferred or lent, the lender shall be deemed to have disposed of the security at that time for those proceeds of disposition.

• Marginal note:Where subsection (5.1) applies

  (5) Subsection (5.1) applies to a taxpayer for a taxation year in respect of a particular amount (other than an amount received as proceeds of disposition or an amount received by a person under an arrangement where it may reasonably be considered that one of the main reasons for the person entering into the arrangement was to enable the person to receive an SLA compensation payment pursuant to a securities lending arrangement, or a dealer compensation payment, that would be deductible in computing the taxable income, or not included in computing the income, for any taxation year of the person) received by the taxpayer in the taxation year

  • (a) as an SLA compensation payment,

    • (i) from a person resident in Canada, or

    • (ii) from a non-resident person who paid the particular amount in the course of carrying on business in Canada through a permanent establishment as defined by regulation; or

  • (b) as a dealer compensation payment.

• Marginal note:Deemed character of compensation payments

  (5.1) If this subsection applies in respect of a particular amount received by a taxpayer in a taxation year as an SLA compensation payment or as a dealer compensation payment, the particular amount is deemed, to the extent of the underlying payment to which the amount relates, to have been received by the taxpayer in the taxation year as,

  • (a) where the underlying payment is a taxable dividend paid on a share of the capital stock of a public corporation (other than an underlying payment to which paragraph (b) applies), a taxable dividend on the share and, if subsection (1.1) applies to the particular amount, an eligible dividend on the share;

  • (b) where the underlying payment is paid by a trust on a qualified trust unit issued by the trust,

    • (i) an amount of the trust’s income that was, to the extent that subsection 104(13) applied to the underlying payment,

      • (A) paid by the trust to the taxpayer as a beneficiary under the trust, and

      • (B) designated by the trust in respect of the taxpayer to the extent of a valid designation, if any, by the trust under this Act in respect of the recipient of the underlying payment, and

    • (ii) to the extent that the underlying payment is a distribution of a property from the trust, a distribution of that property from the trust; or

  • (c) in any other case, interest.

• Marginal note:Deductibility

  (6) In computing the income of a taxpayer under Part I from a business or property for a taxation year, there may be deducted a particular amount, paid by the taxpayer in the year as an SLA compensation payment or as a dealer compensation payment, that is equal to

  • (a) if the taxpayer is a registered securities dealer and the particular amount is deemed by subsection (5.1) to have been received as a taxable dividend, no more than 2/3 of the particular amount (unless, for greater certainty, the particular amount is an amount for which a deduction in computing income may be claimed under subsection (6.1) or (6.2) by the taxpayer); or

  • (b) if the particular amount is in respect of an amount other than an amount that is, or is deemed by subsection (5.1) to have been, received as a taxable dividend,

    • (i) where the taxpayer disposes of the borrowed security and includes the gain or loss, if any, from the disposition in computing its income from a business, the particular amount, or

    • (ii) in any other case, the lesser of

      • (A) the particular amount, and

      • (B) the amount, if any, in respect of the security distribution to which the SLA compensation payment or dealer compensation payment relates that is included in computing the income, and not deducted in computing the taxable income, for any taxation year of the taxpayer or of any person to whom the taxpayer is related.

• Marginal note:Deductible amount

  (6.1) There may be deducted in computing a corporation’s income under Part I from a business or property for a taxation year an amount equal to the lesser of

  • (a) the total of all amounts each of which is an amount that the corporation becomes obligated in the taxation year to pay to another person under an arrangement described in paragraph (b) of the definition dividend rental arrangement in subsection 248(1) that, if paid, would be deemed by subsection (5.1) to have been received by another person as a taxable dividend, and

  • (b) the amount of the dividends received by the corporation under the arrangement that were identified in its return of income under Part I for the year as an amount in respect of which no amount was deductible because of subsection 112(2.3) in computing the taxpayer’s taxable income or taxable income earned in Canada.

• Marginal note:Deductible amount for registered securities dealer

  (6.2) If a registered securities dealer enters into a specified hedging transaction in respect of a DRA share of the registered securities dealer or a person that does not deal at arm’s length with, or is affiliated with, the registered securities dealer, there may be deducted in computing the income of the registered securities dealer under Part I from a business or property for a taxation year an amount (other than any portion of the amount for which a deduction in computing income may be claimed under subsection (6.1) by the registered securities dealer) equal to the lesser of

  • (a) the total of all amounts each of which is an amount that the registered securities dealer becomes obligated in the taxation year to pay to another person as compensation for a dividend under the specified hedging transaction that, if paid, would be deemed by subsection (5.1) to have been received by another person as a taxable dividend, and

  • (b) the amount of the dividends that were received in respect of the DRA share by the registered securities dealer or the person that does not deal at arm’s length with, or is affiliated with, the registered securities dealer (as the case may be, referred to as the “dividend recipient” in this paragraph) and that were identified in the dividend recipient’s return of income under Part I for the year as an amount in respect of which no amount was deductible because of subsection 112(2.3) in computing the dividend recipient’s taxable income or taxable income earned in Canada.

• Marginal note:Subsections 112(2.01) and (2.3) — ordering

  (6.3) For the purposes of paragraphs (6.1)(b) and (6.2)(b), the amount of any dividends received by a corporation in respect of which no amount was deductible because of subsection 112(2.3) includes an amount that was not deductible under both subsections 112(2.01) and (2.3).

• Marginal note:Dividend refund

  (7) For the purpose of section 129, if a corporation pays an amount for which no deduction in computing the corporation’s income may be claimed under subsection (6.1) or (6.2) and subsection (5.1) deems the amount to have been received by another person as a taxable dividend,

  • (a) the corporation is deemed to have paid the amount as a taxable dividend, where the corporation is not a registered securities dealer; and

  • (b) the corporation is deemed to have paid 1/3 of the amount as a taxable dividend, where the corporation is a registered securities dealer.

• Marginal note:Non-resident withholding tax

  (8) For the purpose of Part XIII, any amount paid or credited under a securities lending arrangement or a specified securities lending arrangement by or on behalf of the borrower to the lender

  • (a) as an SLA compensation payment in respect of a security that is not a qualified trust unit is, subject to paragraph (c), deemed

    • (i) to the extent of the amount of the interest paid in respect of the security, to be a payment made by the borrower to the lender of interest, and

    • (ii) to the extent of the amount of the dividend paid in respect of the security, to be a payment made by the borrower, as a corporation, to the lender of a dividend payable on the security;

  • (b) as an SLA compensation payment in respect of a security that is a qualified trust unit, is deemed, to the extent of the amount of the underlying payment to which the SLA compensation payment relates, to be an amount paid by the trust and having the same character and composition as the underlying payment;

  • (c) as an SLA compensation payment is deemed to be a payment of interest made by the borrower to the lender, if

    • (i) the security that is transferred or lent to the borrower under the arrangement is a share of a class of the capital stock of a non-resident corporation,

    • (ii) the borrower and the lender are not dealing at arm’s length, and

    • (iii) the arrangement is not a fully collateralized arrangement; and

  • (d) as, on account of, in lieu of payment of or in satisfaction of, a fee for the use of the security is deemed to be a payment of interest made by the borrower to the lender.

• Marginal note:Deemed fee for borrowed security

  (8.1) For the purpose of paragraph (8)(d), if under a securities lending arrangement or a specified securities lending arrangement the borrower has at any time provided the lender with money, either as collateral or consideration for the security, and the borrower does not, under the arrangement, pay or credit a reasonable amount to the lender as, on account of, in lieu of payment of or in satisfaction of, a fee for the use of the security, the borrower is deemed to have, at the time that an identical or substantially identical security is or can reasonably be expected to be transferred or returned to the lender, paid to the lender under the arrangement an amount as a fee for the use of the security equal to the amount, if any, by which

  • (a) the interest on the money computed at the prescribed rates in effect during the term of the arrangement

  exceeds

  • (b) the amount, if any, by which any amount that the lender pays or credits to the borrower under the arrangement exceeds the amount of the money.

• Marginal note:Effect for tax treaties — interest

  (8.2) In applying subparagraph (8)(a)(i), if a securities lending arrangement or specified securities lending arrangement is a fully collateralized arrangement, any SLA compensation payment deemed to be a payment made by the borrower to the lender of interest is deemed for the purposes of any tax treaty to be payable on the security.

• Marginal note:Effect for tax treaties — dividend

  (8.3) In applying subparagraph (8)(a)(ii), if the security is a share of a class of the capital stock of a corporation resident in Canada (in this subsection referred to as the “Canadian share”), for the purposes of determining the rate of tax that Canada may impose on a dividend because of the dividend article of a tax treaty,

  • (a) any SLA compensation payment deemed to be a payment made by the borrower to the lender of a dividend is deemed to be paid by the issuer of the Canadian share and not by the borrower;

  • (b) the lender is deemed to be the beneficial owner of the Canadian share; and

  • (c) the shares of the capital stock of the issuer owned by the lender are deemed to give it less than 10% of the votes that could be cast at an annual meeting of the shareholders of the issuer and have less than 10% of the fair market value of all of the issued and outstanding shares of the capital stock of the issuer, if

    • (i) the securities lending arrangement or the specified securities lending arrangement is not a fully collateralized arrangement, and

    • (ii) the borrower and the lender are not dealing at arm’s length.

• Marginal note:Restricted financial institution

  (9) For the purposes of subsection 187.3(1), where at any time a dividend is received by a restricted financial institution on a share that was last acquired before that time pursuant to an obligation of a borrower to return or transfer a share under a securities lending arrangement, an acquisition of the share under the arrangement shall be deemed at and after that time not to be an acquisition of the share.

• Marginal note:Non-arm’s length compensation payment

  (9.1) For the purpose of Part XIII, if the lender under a securities lending arrangement or a specified securities lending arrangement is not dealing at arm’s length with either the borrower under the arrangement or the issuer of the security that is transferred or lent under the arrangement, or both, and subsection (8) deems an amount to be a payment of interest by a person to the lender, the lender is deemed, in respect of that payment, not to be dealing at arm’s length with that person.

• Marginal note:Partnerships

  (10) For the purpose of this section,

  • (a) a person includes a partnership; and

  • (b) a partnership is deemed to be a registered securities dealer if each member of the partnership is a registered securities dealer.

• Marginal note:Corporate members of partnerships

  (11) A corporation that is, in a taxation year, a member of a partnership is deemed

  • (a) for the purpose of applying subsection (5) in respect of the taxation year,

    • (i) to receive its specified proportion, for each fiscal period of the partnership that ends in the taxation year, of each amount received by the partnership in that fiscal period, and

    • (ii) in respect of the receipt of its specified proportion of that amount, to be the same person as the partnership;

  • (b) for the purpose of applying paragraphs (6.1)(a) and (6.2)(a) in respect of the taxation year, to become obligated to pay its specified proportion, for each fiscal period of the partnership that ends in the taxation year, of the amount the partnership becomes, in that fiscal period, obligated to pay to another person under the arrangement described in that paragraph; and

  • (c) for the purpose of applying section 129 in respect of the taxation year, to have paid

    • (i) if the partnership is not a registered securities dealer, the corporation’s specified proportion, for each fiscal period of the partnership that ends in the taxation year, of each amount paid by the partnership (other than an amount for which a deduction in computing income may be claimed under subsection (6.1) or (6.2) by the corporation), and

    • (ii) if the partnership is a registered securities dealer, 1/3 of the corporation’s specified proportion, for each fiscal period of the partnership that ends in the taxation year, of each amount paid by the partnership (other than an amount for which a deduction in computing income may be claimed under subsection (6.1) or (6.2) by the corporation).

• Marginal note:Individual members of partnerships

  (12) An individual that is, in a taxation year, a member of a partnership is deemed

  • (a) for the purpose of applying subsection (5) in respect of the taxation year,

    • (i) to receive the individual’s specified proportion, for each fiscal period of the partnership that ends in the taxation year, of each amount received by the partnership in that fiscal period, and

    • (ii) in respect of the receipt of the individual’s specified proportion of that amount, to be the same person as the partnership; and

  • (b) for the purpose of subsection 82(1), to have paid the individual’s specified proportion, for each fiscal period of the partnership that ends in the year, of each amount paid by the partnership in that fiscal period that is deemed by subsection (5.1) to have been received by another person as a taxable dividend.