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. Given the impending
effective date of the new legislation, clients may wish to obtain
tax advice. Please feel free to contact any member of the Osler Tax Group with any questions you may have.
U.S. Tax (IRS Circular 230): Any U.S. tax or other legal advice
in this update is not intended and is not written to be used, and
it cannot be used, by any person to avoid penalties under U.S.
federal, state or local tax law, or promote, market or recommend to
any person any transaction or matter addressed herein.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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