Canada: Budget 2013: Synthetic Dispositions

Budget 2013 proposes to introduce new anti-avoidance rules to deal with "synthetic dispositions"- "financial arrangements" that allow a taxpayer to "economically dispose of a property while continuing to own it for income tax purposes." The Budget Papers provide the following description of these kinds of transactions.

A synthetic disposition transaction typically involves a taxpayer entering into an arrangement under which the taxpayer eliminates their future risk of loss and opportunity for gain or profit in respect of a property and acquires another property (or a right to acquire another property) the value of which approximates what the taxpayer would have received as proceeds from disposing of the property. A taxpayer may enter into a synthetic disposition transaction to defer the tax associated with a sale or to obtain tax benefits associated with the continued ownership of a property (e.g., to avoid the application of the stop-loss rules in section 112 of the Income Tax Act).

Apparently, the Government's view is that certain of these types of monetization transactions can be challenged based on existing rules in the Income Tax Act (Canada) (the "Tax Act") Specific anti-avoidance rules are being introduced, however, to ensure that the "appropriate tax consequences" apply to these transactions because "any such challenge could be both time-consuming and costly."

Deemed disposition

Under the proposed rules, a taxpayer who enters into a "synthetic disposition arrangement" will be deemed to have disposed of the property in question immediately before the arrangement is entered into for proceeds equal to its then fair market value, and to have reacquired the property at the time the arrangement is entered into at a cost equal to the same amount. As a result, accrued gains or losses on the property will be realized at the time the arrangement is entered into. Although the Budget Papers do not address the interaction of the new anti-avoidance rules and certain existing loss denial rules, it would appear that, in many situations, the loss denial rules will apply to deny or suspend recognition of a capital loss realized on a deemed disposition under the proposed rules.

The Notice of Ways and Means Motion included in the Budget Papers defines a "synthetic disposition arrangement" as "one or more agreements or other arrangements" that:

  • are entered into by a taxpayer or by a person or partnership that does not deal at arm's length with the taxpayer;
  • have the effect, or would have the effect if entered into by the taxpayer instead of the non-arm's length person or partnership, of eliminating all or substantially all of the taxpayer's risk of loss and opportunity for gain or profit in respect of the property in question for a period of more than one year;
  • where the arrangement or agreement is entered into by a non-arm's person or partnership, can reasonably be considered to have been entered into, in whole or in part, with the purpose of obtaining the effect described above (i.e., eliminating risk of loss and opportunity for gain or profit for a period of more than one year); and
  • do not otherwise result in a disposition of the property within one year of the time that they are entered into.

The proposed rules do not apply to commercial leasing arrangements or to any transaction that otherwise results in a disposition (including a tax-deferred disposition). The Budget Papers further indicate that the proposed rules will not apply to "ordinary hedging transactions" because they "typically only involve managing the risk of loss" or generally affect the tax treatment of "ordinary-course securities lending arrangements."

In addition, the Budget Papers state that the proposed rules will not apply to an arrangement entered into by a non-arm's length person if it is "reasonable to conclude" that the non-arm's length person did so "without knowledge of the taxpayer's ownership of the property." Although the language in the Notice of Ways and Means Motion is quite different, the purpose test referred to in the third point above appears to be intended to provide the basis for this carve-out.

The proposed rules will apply regardless of the form of the transaction. The Budget Papers suggest that they may apply to forward sales of property (whether or not combined with a secured loan), "put-call collars" in respect of property, debt obligations that are exchangeable for property, total return swaps in respect of property, or a securities borrowing to facilitate a short sale of property that is identical or economically similar to a property of the taxpayer (or non-arm's length person).

The above definition is quite broad and does not incorporate the second component of the description of a "synthetic disposition" in the Budget Papers (i.e., the acquisition by a taxpayer of another property (or a right to acquire another property)). Accordingly, the new anti-avoidance rules may apply to a much broader range of arrangements than those that result in an "economic disposition".

Stop-loss rules

The Tax Act includes stop-loss rules that, in general, reduce a loss realized by a taxpayer on the disposition of shares by the amount of certain dividends received by the taxpayer before the disposition. These rules do not apply where, among other things, the taxpayer has held the shares in question throughout the 365-day period before the disposition.

Budget 2013 proposes to amend these stop-loss rules so that a taxpayer who is deemed to have disposed of and reacquired a property under the synthetic disposition arrangement rules (or who would be deemed to have disposed of the property under these rules if the references to "one year" in the definition of a "synthetic disposition arrangement" were to "30 days") will be deemed not to own the property while the arrangements are in place. This rule will not apply where the taxpayer owned the property in question throughout the 365-day period before the arrangement is entered into.

The definition of a "synthetic disposition arrangement" that applies for the purposes of this rule is broader than the definition that applies for the purposes of the new deemed disposition rule because it includes fairly short-term arrangements (i.e., anything more than 30 days). Accordingly, a taxpayer's period of ownership of a share for the purposes of the stop-loss rules may be interrupted in circumstances where the new deemed disposition rule does not apply because the duration of the arrangement is less than a year. In these circumstances, it would appear that, if the arrangement terminates without an actual disposition of the share, the ownership period is effectively reset at the time of the termination.

Foreign tax credits

The Tax Act limits the foreign tax credits to which a taxpayer is entitled in respect of the non-Canadian taxes paid on dividends or interest on shares or debt obligations held by the taxpayer for a period of one year or less to, in simplified terms, a portion of the taxpayer's economic profit on the shares or debt obligations determined in accordance with the rules in the Tax Act.

Budget 2013 proposes to modify this rule so that a taxpayer who is deemed to have disposed of a property under the synthetic disposition rules (or who would be deemed to have disposed of the property under these rules if the references to "one year" in the definition of a "synthetic disposition arrangement" were to "30 days") will be deemed, for the purpose of determining the ownership period for the purposes of this rule, to have acquired the property at the earlier of the time that is immediately before the deemed disposition and the time at which the arrangement is no longer in effect. This rule will not apply where the taxpayer owns the property for more than one year before the arrangement is entered into.

As is the case with the proposed changes to the stop-loss rules, this rule will apply more broadly than the deemed disposition rule and, specifically, will apply where the duration of the arrangement in question is for more than 30 days.

Effective date

The synthetic disposition rules proposed in Budget 2013 apply to arrangements or agreements entered into on or after March 21, 2013, and to any agreement or arrangement entered into before March 21, 2013, the term of which is extended on or after that date. An arrangement that is extended will be deemed to have been entered into at the time of the extension.

The amendments to the stop-loss rules proposed in section 112 and to the foreign tax credit rules in section 126(4.2) of the Tax Act are deemed to have come into force on March 21, 2013.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.