The federal government in Monday’s budget is seeking to make it easier to determine what qualifies as a stock exchange under tax rules.

Current tax rules define what qualifies as a stock exchange for a variety of reasons — everything from determining the RRSP eligibility of an investment to the availability of certain capital gains exemptions. The budget indicates that the significance of these qualifications varies, but that the current regime imposes the same qualification requirements regardless of their significance. The result is that, in some circumstances, exchanges are overqualified, and their approval unnecessarily delayed.

The budget proposes to streamline this qualification process, and in some cases simplify compliance, by creating three categories of recognition for exchanges: “designated stock exchanges,” “recognized stock exchanges” and simply “stock exchanges.”

“The new system will lower tax barriers both for domestic investors in international markets and for international investors in Canadian companies. It will also expedite the recognition of new and reorganized stock exchanges (such as the Alternative Investment Market of the London Stock Exchange and NYSE Arca),” the budget explains.

The designated exchanges category will include all the exchanges that already qualify as prescribed exchanges in the tax rules. This is the most strictly qualified category.

The recognized exchange category will consist of markets that are located in Canada, or in another country that is a member of the Organization for Economic Co-operation and Development and that has a tax treaty with Canada. There will be no formal qualifications for this category, other than its physical location. Membership in this category will mean that non-resident vendors of shares listed on one of these exchanges will be exempt from the capital gains tax withholding requirement.

Finally, the simple ‘stock exchange’ category will include any stock exchange, regardless of where it is located. There will be no process by which an entity is formally identified as a stock exchange, the government simply intends that the “general legal and commercial meaning of the term will govern”. This category will be used for the purposes of the securities lending rules.

The government indicates that, over time, it will review the appropriateness of using the second and third categories for certain of the tax rule provisions that require exchanges to be prescribed.