Canada to expand accepted securities for lending
14 November 2012 Toronto
Image: Shutterstock
Securities lenders and borrowers in Canada will soon be able to trade any trust that is listed on a stock exchange, including exchange-traded funds (ETFs), US real estate investment trusts and foreign trusts, after the country’s minister of finance, Jim Flaherty, tabled a motion to implement outstanding technical tax amendments.
Flaherty put the motion forward to Canada’s parliament on October 24. If accepted, it would implement amendments to the country’s Income Tax Act.
He said: “The last comprehensive package of technical income tax legislation was passed by parliament in 2001. This has led to a significant backlog of outstanding measures. Today’s Notice of Ways and Means Motion will begin the process of addressing the backlog.”
Rob Ferguson, senior vice president for capital markets at CIBC Mellon, said that the amendments will affect “not only Canadian investors but also international investors active in Canada across a number of segments”.
He said: “CIBC Mellon and other market participants have been working with government and regulatory stakeholders for many years to help find the right direction for these reforms, and we very pleased to see these enhancements go forward. I think the changes help level the playing field and provide new opportunities for investors in a number of areas—in particular securities lending.”
The most important change for the securities lending industry is the expansion of the definition of “qualified security” under Canada’s Income Tax Act to include any trust that is listed on a stock exchange. “This means that ETFs and other exchange-listed trusts can now be lent as well as accepted as collateral in securities lending transactions,” said Ferguson.
He explained: “Canada’s Department of Finance is amending Canada’s definition of ‘qualified trust unit’ to mean ‘an interest, as a beneficiary under a trust, that is listed on a stock exchange’. This means any trust listed on a stock exchange—including non-Canadian-resident trusts and ETFs—will be qualified securities under the securities lending rules in section 260 of Canada’s Income Tax Act.”
When enacted, the proposed amendment will be effective from October 24. The amendment is an improvement on previously proposed changes, which could have been restrictive.
Ferguson said: “The recently announced amendments are a definite improvement over the originally proposed amendments from 2002, under which non-Canadian ETFs would not have been ‘qualified securities’ eligible to participate in securities lending. In 2007, a proposed amendment to the definition of ‘qualified trust unit’ was announced, which effectively expanded qualified securities to the current definition: any mutual fund trust unit listed on a stock exchange."
"While neither the 2002 nor the 2007 proposals were enacted, the expectation is that the amendments will be retroactive to the date of each announcement, so the past announcements remain relevant.”
Ferguson called the changes a “great development for securities lending in Canada—for both domestic and global participants”. He said: “For example, Canadian borrowers should now be able to borrow certain non-Canadian trust units from non-Canadian lenders without the imposition of Canadian withholding tax on compensation payments.”
“The amendments are likewise great news for ETF sponsors, beneficial owners and other trust participants, who can now access the expanded liquidity and new opportunities available through participation in Canada's securities lending market.”
Flaherty put the motion forward to Canada’s parliament on October 24. If accepted, it would implement amendments to the country’s Income Tax Act.
He said: “The last comprehensive package of technical income tax legislation was passed by parliament in 2001. This has led to a significant backlog of outstanding measures. Today’s Notice of Ways and Means Motion will begin the process of addressing the backlog.”
Rob Ferguson, senior vice president for capital markets at CIBC Mellon, said that the amendments will affect “not only Canadian investors but also international investors active in Canada across a number of segments”.
He said: “CIBC Mellon and other market participants have been working with government and regulatory stakeholders for many years to help find the right direction for these reforms, and we very pleased to see these enhancements go forward. I think the changes help level the playing field and provide new opportunities for investors in a number of areas—in particular securities lending.”
The most important change for the securities lending industry is the expansion of the definition of “qualified security” under Canada’s Income Tax Act to include any trust that is listed on a stock exchange. “This means that ETFs and other exchange-listed trusts can now be lent as well as accepted as collateral in securities lending transactions,” said Ferguson.
He explained: “Canada’s Department of Finance is amending Canada’s definition of ‘qualified trust unit’ to mean ‘an interest, as a beneficiary under a trust, that is listed on a stock exchange’. This means any trust listed on a stock exchange—including non-Canadian-resident trusts and ETFs—will be qualified securities under the securities lending rules in section 260 of Canada’s Income Tax Act.”
When enacted, the proposed amendment will be effective from October 24. The amendment is an improvement on previously proposed changes, which could have been restrictive.
Ferguson said: “The recently announced amendments are a definite improvement over the originally proposed amendments from 2002, under which non-Canadian ETFs would not have been ‘qualified securities’ eligible to participate in securities lending. In 2007, a proposed amendment to the definition of ‘qualified trust unit’ was announced, which effectively expanded qualified securities to the current definition: any mutual fund trust unit listed on a stock exchange."
"While neither the 2002 nor the 2007 proposals were enacted, the expectation is that the amendments will be retroactive to the date of each announcement, so the past announcements remain relevant.”
Ferguson called the changes a “great development for securities lending in Canada—for both domestic and global participants”. He said: “For example, Canadian borrowers should now be able to borrow certain non-Canadian trust units from non-Canadian lenders without the imposition of Canadian withholding tax on compensation payments.”
“The amendments are likewise great news for ETF sponsors, beneficial owners and other trust participants, who can now access the expanded liquidity and new opportunities available through participation in Canada's securities lending market.”
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