Here’s what happens: A financial institution shorts a stock, which means they borrow it, sell the shares, and keep the proceeds with a promise to repay the shares later. At the same time, the financial institution owns the same number of shares and collects the dividends.
Budget 2022 proposes to amend the Income Tax Act to deny the deduction for a dividend received where the taxpayer has entered into these paired short-sale transactions. The Canadian government’s view appears to be that financial institutions that engage in this combined short-long strategy are collecting two tax benefits in one economically neutral transaction, said Joseph Micallef, KPMG’s national tax leader in its financial services practice.
Tara Benham, national tax leader for Grant Thornton LLP, said this proposal and others in the federal budget “are not wealth taxes. But they kind of are, where they looked to the industries or the entities that are making a lot of money and have the wherewithal to really plan for taxes.”