On October 24, 2012, the Minister of Finance (Canada) tabled a Notice of Ways & Means Motion (the "Notice of Ways & Means Motion") containing almost 1000 pages of technical amendments to the Income Tax Act (Canada) (the "ITA").  Included in the Notice of Ways & Means Motion are changes to section 260 of the ITA (which applies to securities lending arrangements in Canada) that were originally announced back in 2002 and 2007 but were never enacted, largely because of federal elections and changes to the Canadian Government.  Importantly, a new modification to section 260 included in the Notice of Ways & Means Motions will greatly expand the types of listed securities that will be considered qualified securities for securities lending arrangements for Canadian tax purposes.

The original 2002 technical amendments proposed to add "qualified trust unit" to the definition of "qualified security" for securities lending arrangements under section 260.  Under the original proposals, a qualified trust unit means a mutual fund trust unit that is listed on a prescribed stock exchange. "Mutual fund trust" has a technical definition under the ITA and is limited to unit trusts resident in Canada.  In 2007, a proposed amendment to the definition of "qualified trust unit" was announced which effectively expanded the meaning of qualified security to include a mutual fund trust unit listed on a stock exchange (not necessarily a prescribed stock exchange).  While neither proposal was enacted, the expectation has been that when the technical amendments were finally brought into effect such amendments would be retroactively applied to the date of each announcement.

Under the Notice of Ways & Means Motion, the definition of "qualified trust unit" is as follows:

"qualified trust unit" means an interest, as a beneficiary under a trust, that is listed on a stock exchange.

This amendment means that any trust (whether Canadian resident or not) that has units listed on a stock exchange will be a qualified trust unit and therefore will be a qualified security for purposes of securities lending arrangements under section 260.  This will include non-Canadian exchange traded fund (ETF) units, U.S. REITs and other foreign trust units listed on a stock exchange.  The new amendment to the definition of "qualified trust unit" when enacted will be effective from October 24, 2012.

In the cross-border context, where a Canadian resident borrower of qualified trust units makes compensation payments to a non-resident lender in respect of distributions on the underlying foreign trust units, generally there will be no Canadian non-resident withholding tax payable.  Under the proposed amendments in the Notice of Ways & Means Motion, a compensation payment made by a Canadian resident borrower with respect to a distribution on a qualified trust unit would be treated as a payment by the trust to lender with the same character as the underlying payment.  This treatment is more favourable than some cross-border securities loans involving shares of foreign corporations where Canadian non-resident withholding tax may be payable with respect to the compensation payments paid by a Canadian resident borrower to a non-resident lender.

These are very positive developments for the securities lending industry in Canada and will be welcomed by most market participants.