CFM46430 - Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos: further examples: no income

Example: debtor repo: no income arises on securities during term of repo

CFM46350 explains why A has a debtor repo in this case.)

  • 1 January 2009: A (borrower) sells securities to C (lender) for 100.
  • 30 June 09: A repurchases the same or similar securities from C for 103. This includes a finance charge of 3 (6 months at 6% per annum).

A’s accounting entries, in accordance with GAAP in addition to the entries at CFM46350;

1 January 2009 to 30 June 2009 (repo ‘interest’ accrual):

  • Dr P&L3
  • Cr Financial Liability 3 (the financial liability which has increased to 103 is reduced to nil by the payment of the repurchase price of 30 June 2009)

Net Profit and Loss result

  • Debit 3: ‘interest’

ax Treatment of A

A’s finance charge of 3 is treated as interest for loan relationships purposes.

Further points to note

  • This transaction corresponds to the creditor repo example at CFM46300 (where C is a company).
  • A’s tax treatment would be the same if, instead of repurchasing the securities from C, A purchased them from another person (‘D’). Such a transaction corresponds to the creditor quasi-repo examples at CFM46330 (where C and D are companies).