(October 12 – 12:30 ET) – The Investment Dealears Association has asked the Department of Finance to broaden the exemption from federal withholding tax to include United States agency debt.
The IDA says that it has become increasingly difficult and expensive to borrow U.S. Treasury bonds for specific portfolio transactions, since U.S. federal agency bonds (Fannie Mae and Freddie Mac) have replaced U.S. Treasury bonds as the liquid benchmark securities in U.S. debt markets. The outstanding amounts of Treasury bonds, notes and T-bills have fallen significantly and is expected to accelerate as U.S. federal government surpluses increase. Agency debt is expected to surpass the outstanding U.S. federal debt by as early as 2003.
“The scarcity of U.S. Treasury securities to execute tax-exempt repurchase transactions has interfered with efficient trading in U.S. dollar-denominated bond markets,” says the IDA in a letter to Finance Minister Paul Martin.
The existing provisions promote a liquid repurchase market in U.S. government securities, allowing the efficient underwriting and distribution of the U.S. dollar-denominated offerings of Canadian corporations and governments; and facilitating institutional trading in these securities.
In an effort to ease the situation the IDA is seeking an exemption from federal withholding tax for U.S. agency debt. It says, this could be achieved by expanding the concept of government to include U.S. federal agency debt or, alternatively, by prescribing specific governmental agencies be eligible for the exemption. “This would enable Canadian dealers and their clients to borrow securities in the U.S. agency market and execute cross-border repurchase transactions in U.S. dollar-denominated debt in an efficient and cost-effective way,” it says.
-IE Staff