| 24(1) | 5-901495 |
| M.M. Trotier | |
| (613) 957-8957 |
Attention: 19(1)
October 4, 1990
Dear Sirs:
This is in reply to your letters of May 2, 1990 and June 4, 1990 wherein you requested our interpretation on various issues dealing with the International Banking Centres ("IBC"). We will answer your queries in the same order as you listed them in your June 4th letter.
Definition of "Eligible Loan" pursuant to subsection 33.2(1) of the Income Tax Act ("Act")
You asked whether Euro certificates of deposit, foreign government debt instruments (e.g. United States treasury bills), debt instruments guaranteed by different levels of foreign governments (e.g. in the United States; ginnie mae) and commercial paper issued by non-resident corporations to a "prescribed financial institution" ("Bank"), within the meaning of section 7900 of the Income Tax Regulations, come within the meaning of "eligible loan" pursuant to subsection 33.1 of the Act.
It is our view, where the Bank is the first lender, that the financial instruments enumerated above, whether or not they are bearer instruments could be eligible loans provided all the requirements described in the definition of "eligible loan" pursuant to subsection 33.1(1) of the Act are met. Such a determination is a question of fact which requires a review of the particular situation.
Arm's Length
Section 33.1 of the Act refers to a bank dealing at arm's length with a non-resident person. You enquired whether subsections 251(1) and (2) of the Act would apply for purposes of section 33.1 of the Act. We can confirm that they would apply.
Transfer of "eligible loan" from an IBC
You queried whether a performing "eligible loan" entered on the books and records of an IBC of a Bank can be transferred to the books and records of that Bank.
Paragraph 33.1(11)(a) of the Act refers to a situation where an "eligible loan" ceases to be an "eligible loan", otherwise than by virtue of its disposition to another person. A disposition of the "eligible loan" is deemed to occur for proceeds equal to its fair market value at the time that the "eligible loan" ceases to be such. As was indicated by the Department of Finance in their release on IBC issued on January 28, 1987 and in their June 3, 1987 Technical Notes, paragraph 33.1(11)(a) of the Act ensures that any losses which have accrued in respect of eligible loans will be losses from the IBC and not another business of the Bank. The same would apply with respect to any accrued gains. The Bank would be deemed to have reacquired the loan immediately after that time at a cost equal to its fair market value. Any subsequent gains or losses would be included in the Part I income of the Bank.
We disagree with your statement that any income received from the loan in the year of transfer will be taxed as the income of the Bank and not the IBC. The income of loss derived from a loan during the period in which the loan was an "eligible loan" must be reported in the IBC as required by subsection 33.1(4) of the Act for that period.
Canadian branch of a foreign corporation
You have indicated that it is your view that a Canadian branch of a foreign corporation is a non-resident for the purposes of section 33.1 of the Act.
Paragraph 33.1(2)(d) of the Act specifies that a deposit made by or a loan made to a non-resident person does not include a deposit made by or a loan made to that person's fixed place of business in Canada. Even though a fixed place of business is not defined in the Act, it is our interpretation that this would include a Canadian branch of a foreign corporation.
Accordingly as paragraph 33.1(2)(d) of the Act excludes, for purposes of section 33.1 of the Act, loan and deposit transactions with a Canadian branch of a non-resident person the reason for your question is unclear to us. We would also note that subsection 33.1(10) of the Act could deny a Canadian branch of an arm's length non-resident a deduction for interest expense in a situation where the foreign office of the non-resident is used as an intermediary for its Canadian branch and the funds initially deposited with the foreign office are routed back to the Canadian Branch.
Foreign branches of the Bank
In our opinion foreign branches of a Bank resident in Canada are not "non-residents persons" for purposes of section 33.1 of the Act.
Reasonable inquiry
Whether or not "reasonable inquiry" has been made for purposes of subsection 33.1(1) of the Act is a question of fact which can only be determined after reviewing a particular situation. Nevertheless it would seem that in order to substantiate that "reasonable inquiry" has been made a Bank must be able to provide some sort of supporting evidence. We refer you to paragraph 40 of Information Circular 72-17R3 dated May 8, 1987 for Revenue Canada's view as to what may constitute "reasonable inquiry" for purposes of subsection 116(5) of the Act.
Hedging Transactions (Swaps)
It is a question of fact whether or not a particular transaction is relevant to the determination of income or loss from an IBC business pursuant to the requirements of paragraph 33.1(4)(a) of the Act.
Paragraph 33.1(4)(a) of the Act establishes that a taxpayer's income for a taxation year from an IBC business is determined on the assumption that the IBC is a separate business, the only income or loss of which is derived from an "eligible loan" as that term is defined in subsection 33.1(1) of the Act. It is our view that the income or loss arising from a swap transaction does not ordinarily form part of the Bank's IBC income or loss, since a swap is a separate transaction from the loan. A swap which produces income or loss independently of a loan does not satisfy the definition of "eligible loan".
Exemption from Withholding Tax
Subparagraph 212(1)(b)(xi) of the Act provides that interest payable by a Bank on an amount for the period which the amount is an "eligible deposit", is exempt from non-resident withholding tax under subsection 212(1) of the Act. We can confirm that this will be the case notwithstanding, no amount is included in the Bank's income in respect of the Bank's income or loss from its IBC business by virtue of subsection 33.1(3) of the Act.
Eligible Deposits
It is our opinion that obligations of the Canadian and Provincial governments described in subparagraph 212(1)(b)(ii) of the Act, do not come within the definition of "eligible loan".
End of the Day
It is our view that the reference in section 33.1 of the Act to "at the end of a day in the year" is to a day ending at midnight, Standard Time as such a time is defined in the Interpretation Act.
Expenses of the IBC
It is our interpretation that interest payable for the year in respect of eligible deposits which is not deductible in computing the income or loss of the IBC for a taxation year pursuant to subsection 33.1(4) of the Act could not be deducted in computing Part I income of the Bank by virtue of subsection 33.1(8) of the Act.
Although we hope the above comments are of assistance to you, they do not constitute an advance income tax ruling and, therefore, are not binding on the Department with respect to any particular situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate