The 2007 Federal Budget introduced changes regarding how stock exchanges are categorized under the Income Tax Act. There are now three categories of stock exchanges: Designated Stock Exchanges, Recognized Stock Exchanges, and Stock Exchanges. Securities listed on a Designated Stock Exchange are qualified investments for RRSPs, RRIFs, DPSPs, RESPs, RDSPs, and TFSAs.
The concept of a Designated Stock Exchange replaced the prescribed stock exchange. Under the former system, adding a prescribed stock exchange entailed amending the Income Tax Regulations through an order-in-council. The new system aims to be more flexible and responsive to market needs. Adding a Designated Stock Exchange only requires a designation by the Minister of Finance.
The Department of Finance released a Backgrounder on July 2, 2008 that outlines how the designation process is intended to operate. Applications begin with a written request from a senior representative of the exchange to the Minister of Finance. The submitted materials should include sufficient information about the exchange’s governance, ownership, financial resources, trading systems and infrastructure, listings, listing standards, liquidity measures, regulatory framework, and other relevant factors that enable the Department of Finance to evaluate the exchange’s application. If an exchange has more than one tier, the application must indicate which tiers are seeking designation status. Thus it appears that Canadians interested in expanding the list of Designated Stock Exchanges will need to approach or work with the exchanges they wish to have added to the list.
The Minister will consider all relevant information without limitation when reviewing an application. The Backgrounder lists criteria that the Minister will consider:
For domestic and foreign-based exchanges:
- The exchange carries out the normal business of an exchange in listing securities, facilitating the trading, clearing, and settlement of these securities, monitoring and enforcing trades executed on its system, and offering transparent pricing information to the public.
- The exchange has acceptable standards for new company listings, including standards that address the number of shareholders, the dispersion of ownership, and for the maintenance of a listing.
- The exchange operates within a regulatory framework that meets acceptable standards in relation to investor protection, disclosure requirements, corporate governance, and market integrity, as may be espoused by the International Organization of Securities Commissions (IOSCO).
- The exchange has an experienced management and governance team, a successful track record of operations, and sufficient financial resources to ensure long-term viability.
- The exchange has a range of listings and adequate liquidity for investors to buy and sell securities at reasonable bid-ask spreads.
- The host country of the exchange has commercial, legal and tax relations with Canada, for example, as demonstrated by having entered into a comprehensive tax information exchange agreement or a comprehensive tax treaty.
- The host country is a member in good standing in the international financial community through membership in such organizations as the World Trade Organization, the International Monetary Fund, IOSCO, the Financial Action Task Force, or similar bodies.
- The securities regulatory and juridical framework of the host country of the exchange provides rights and remedies to Canadian investors, including brokers acting on investors’ behalf, which are comparable to those available to investors in Canada.
- The exchange is recognized by the host government and other foreign governments, where applicable, for tax purposes comparable to those for designated exchanges under the Canadian Income Tax Act.
- The host country of the exchange has a low risk of imposing capital restrictions or other impediments on the liquidation of investments and the repatriation of funds by foreign investors.
Successful applicants will be notified and have the official name of the Designated Stock Exchange or tier of exchange published on the Department of Finance’s website. Unsuccessful applicants will be notified in writing and may resubmit a request for designation if the deficiencies, errors, or omissions identified in their initial application are sufficiently addressed.