The Department of Finance Canada announced on Friday that only linked notes sold in 2017 and beyond will be subject to new tax rules affecting the investments first proposed by the Liberals in the 2016 federal budget.
Previously, the federal government had proposed that the new legislation would be effective for linked notes sold after September 2016.
“This [change] would provide additional time for purchasers and investment dealers involved in transactions involving linked notes to develop systems to accurately capture and report relevant information under the measure,” said Finance Canada in a document announcing draft legislation and regulatory proposals on a number of technical tax issues for consultation.
Linked notes, such as principal-protected or principal-at-risk note, are debt obligations issues by banks and other financial firms, the return on which is linked in some manner to the performance of a reference asset or index over the term of the debt obligation.
In the 2016 federal budget, the government proposed changes to the tax treatment of linked notes that in effect eliminated a tax-planning opportunity associated with the investment vehicles.
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Under current legislation, some investors who hold their linked notes as capital property sell them prior to the determination date effectively to convert the return on the notes from ordinary income to capital gains. To facilitate this, issuers of linked notes often establish a secondary market in which investors can sell their linked notes prior to maturity to an affiliate of the issuer.
In the 2016 budget, the government proposed that a deeming rule would apply for the purposes of the rule relating to accrued interest on sales of debt obligations. This deeming rule would treat any gain realized on the sale of a linked note as interest that accrued on the debt obligation for a period commencing before the time of the sale and ending at that time.
In Friday’s announcement, Finance Canada also announced a proposed technical change to the deeming rule affecting how gains on linked notes are calculated: “This proposed change would simplify the calculation of the deemed interest amount and the associated reporting requirement under the measure.”
The government’s consultation period on the draft legislation and regulatory proposals runs until Nov. 15.
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