Recent U.S. legislation may impose U.S. withholding tax on certain equity-related swaps, sale-repurchase transactions and securities lending transactions. The legislation, enacted in response to concerns that non-U.S. persons were avoiding U.S. withholding tax on dividends through the use of swaps and other derivatives, applies to payments made on or after September 14, 2010 that are contingent on, or determined by reference to, U.S.-source dividends in sale-repurchase and securities lending transactions, and in certain swaps, including swaps where a non-U.S. counterparty buys or sells the underlying security from or to its counterparty. The new rules treat these dividend equivalent payments as U.S.-source dividend income. As a result, such payments received or paid by Canadian parties pursuant to the above-mentioned arrangements may be subject to U.S. withholding tax even if there is no U.S. counterparty to the transaction. After March 18, 2012, all swaps that contain U.S. dividend equivalent payments are potentially subject to U.S. withholding tax.

Because the legislation applies to payments made on certain swaps and other contracts on or after September 14, 2010, regardless of when the contract was entered into, taxpayers should review existing agreements for compliance. In many cases, this will require a review of International Swaps and Derivatives Association (ISDA) contracts, including any tax representations made by the parties when the contract was entered into, provisions dealing with tax indemnification and tax gross-ups, and termination provisions. To address the impact of the new legislation, the ISDA North American Tax Committee has published the “2010 HIRE Act Protocol” with guidelines to assist parties in amending existing ISDA agreements. Adopting the protocol, however, might change the parties’ rights and should be considered carefully.