For equities, the issuer (the corporation or company) may be subject to the provisions of Canada’s Bankruptcy and Insolvency Act on corporate or commercial bankruptcy. In here, the owners or holders of equities may only receive the net proceeds of their investments, only after winding down the company and payment of the issuer’s debts according to the laws on creditor preferences and liens. Thus, it would mean that there’s a chance that the equity holder or owner may either receive their whole principal investment plus some dividends or may receive only the remaining portion thereof.
This is different with debt securities, since a secured creditor may be prioritized over unsecured creditors. However, a secured creditor under a debt security may be less prioritized over other forms of credits, such as trust claims, taxes, wages or salary claims, and liens. As such, while debt securities may either be secured or unsecured, it is of great importance that it must be backed by collateral, especially when the financial risk of bankruptcy is imminent on the invested issuer.
(3) Taxation
Taxation or tax treatments for securities and derivatives in Canada may generally depend on the type of distribution of the investment’s return or income.
- If investment income is distributed as an interest, it will be fully taxed similarly with the tax rate as that of an income tax, such as in a debt security and in a derivate contract that is a hedging transaction.
- For an equity, which typically distributes its income as dividends, preferential tax treatments for individuals may apply through dividend tax credits, but depending on the nature of the issuer or the corporation, and according to the guidelines set by Canada Revenue Agency.
- When a security is sold, as in the case of a debt security, it may be distributed as a capital gains where preferential tax treatments also apply, since only 50% of a capital gain is taxable.
- Since a hedging derivative contract’s income tax is dependent on the transaction, asset, or liability it is “hedged” upon, a speculative derivative contract’s income tax will be held by a taxpayer on the other hand.
In Canada, trading derivatives, especially futures, is generally governed by the Canadian Derivatives Clearing Corporation (CDCC), which is the central clearinghouse mainly for exchange traded derivatives (ETDs).