Tax Insights: Alert for financial services industry: Measures of interest in Bill C-4 (2013 budget bill)

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Issue 2013-21

This edition of Tax Insights looks at four anti-avoidance measures introduced in the 2013 federal budget of particular interest to the financial services industry. The proposed rules create fundamentally new tax concepts not previously seen in the Income Tax Act (Act). Many interpretive issues are likely to arise in the context of applying these rules, once enacted in Bill C-4. Taxpayers will have to make interesting and difficult determinations as to how and in what circumstances the rules are intended to apply.

Proposals to amend the Act were originally announced in the March 21, 2013, federal budget. The proposals were released in draft form for comment on September 13, 2013 (September Proposals) and in revised form in a Notice of Ways and Means Motion, with accompanying Department of Finance Explanatory Notes, on October 18, 2013. These are now before Parliament as part of Bill C-4.

This publication describes some of the budget measures, as contained in Bill C-4, that may be of interest to the financial services industry, in particular:

  • the character conversion transition rules (CCT Rules)
  • the synthetic disposition arrangement rules (SDA Rules)
  • the leveraged life annuity rules
  • the proposals dealing with life insurance products commonly known as ‘10/8 policies’

The CCT Rules are designed to counter ‘character conversion’ transactions, which Budget 2013 described as follows:

A character conversion transaction typically involves an agreement (called a forward agreement) to buy or sell a capital property at a specified future date. The purchase or sale price of the capital property under a derivative forward agreement is not based on the performance of the capital property between the date of the agreement and the future date – instead, the price is determined, in whole or in part, by reference to some other measure, often the performance of a portfolio of investments. The reference portfolio typically contains investments that generally produce fully taxable ordinary income.

The CCT Rules target agreements that combine a derivative financial instrument with a purchase or sale of an otherwise unrelated capital property, and ensure that any return from the agreement is treated on income account.