CASLA: Canada sees positive changes
31 May 2019 Toronto
Image: Shutterstock
Positive change is happening in Canada after the Canadian government revealed it was to make changes to a variety of federal tax laws earlier this year, according to a panel at the Canada Securities Lending Association (CASLA) conference in Toronto.
Discussing the tax laws, Christopher Steeves, Fasken Martineau DuMoulin LLP, said: “Withholding tax rules applicable to certain cross-border share lending arrangements were amended in response to perceived withholding tax avoidance.”
He continued: “Canadian non-resident withholding tax generally only applies where certain payments (including dividends interest) are made by a resident to a non-resident of Canada.”
“Domestic rate of withholding tax is 25 percent. Rates may be reduced or payments may be exempt under an applicable tax treaty.”
The panel also pointed out that under Canada-US tax treaty, Article XXI exempts US pension funds from Canadian withholding tax on interest and dividends.
According to a speaker, interest and dividends may also be an example where the beneficial owner is entitled to claim sovereign immunity.
For securities lending arrangements completed prior to March 19, Steeves explained that compensation payments in respect of loaned corporate shares paid by a Canadian resident borrower to a non-resident lender were characterised as interest for withholding tax purposes unless the loan was fully collateralised.
Steeves noted that fully collateralised means that throughout the term of the securities lending arrangement the borrower provided collateral with a value not less than 95 percent of the value of the loaned shares.
He commented: “Securities lending arrangements completed prior to March 19, where a loan was fully collateralised, compensation payments in respect of loan corporate shares paid by a Canadian resident borrower to a non-resident lender were characterised as dividends.”
“Dividends would be subject to Canadian withholding tax. The New characterisation rule applies to compensation payments on or after March 19th unless the payments is pursuant to a written arrangement entered into before March 19th.”
In that case, the new rule will apply to compensation payments beginning in October 2019, Steeves added.
The moderator asked panellists if the supply-side sufficient right now. Speakers confirmed that a number of firms have indicated that there is a significant amount of supply and it could have a significant impact on pricing.
Meanwhile, another speaker predicted that there is a big plumbing change coming to the industry.
The speaker explained that the changes involve the futures having a liquid market, making sure that the swap conventions are consistent as well.
They said: “We are also focusing on fallbacks, for example, what happens if the current benchmark isn’t being published? We are focusing on fallback language for cash products and ISDA is focusing on a fallback for derivatives.”
Discussing the tax laws, Christopher Steeves, Fasken Martineau DuMoulin LLP, said: “Withholding tax rules applicable to certain cross-border share lending arrangements were amended in response to perceived withholding tax avoidance.”
He continued: “Canadian non-resident withholding tax generally only applies where certain payments (including dividends interest) are made by a resident to a non-resident of Canada.”
“Domestic rate of withholding tax is 25 percent. Rates may be reduced or payments may be exempt under an applicable tax treaty.”
The panel also pointed out that under Canada-US tax treaty, Article XXI exempts US pension funds from Canadian withholding tax on interest and dividends.
According to a speaker, interest and dividends may also be an example where the beneficial owner is entitled to claim sovereign immunity.
For securities lending arrangements completed prior to March 19, Steeves explained that compensation payments in respect of loaned corporate shares paid by a Canadian resident borrower to a non-resident lender were characterised as interest for withholding tax purposes unless the loan was fully collateralised.
Steeves noted that fully collateralised means that throughout the term of the securities lending arrangement the borrower provided collateral with a value not less than 95 percent of the value of the loaned shares.
He commented: “Securities lending arrangements completed prior to March 19, where a loan was fully collateralised, compensation payments in respect of loan corporate shares paid by a Canadian resident borrower to a non-resident lender were characterised as dividends.”
“Dividends would be subject to Canadian withholding tax. The New characterisation rule applies to compensation payments on or after March 19th unless the payments is pursuant to a written arrangement entered into before March 19th.”
In that case, the new rule will apply to compensation payments beginning in October 2019, Steeves added.
The moderator asked panellists if the supply-side sufficient right now. Speakers confirmed that a number of firms have indicated that there is a significant amount of supply and it could have a significant impact on pricing.
Meanwhile, another speaker predicted that there is a big plumbing change coming to the industry.
The speaker explained that the changes involve the futures having a liquid market, making sure that the swap conventions are consistent as well.
They said: “We are also focusing on fallbacks, for example, what happens if the current benchmark isn’t being published? We are focusing on fallback language for cash products and ISDA is focusing on a fallback for derivatives.”
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