| 913399 | |
| 24(1) | L. Workman |
| (613) 957-8953 |
Attention: 19(1) July 8, 1992
Dear Sirs:
Re: 24(1)
This is further to our correspondence of December 6, 1991 in which we indicated that we would provide a general opinion regarding whether a foreign currency swap transaction forms part of a bank's income or loss from an international banking centre ("IBC") business, as defined in paragraph 33.1(4)(a) of the Income Tax Act (the "Act"). We apologize for the delay in providing a reply to your request which in part was due the matters raised in your letter dated April 24, 1992.
It continues to be our view that a swap transaction, whether or not designed to hedge the foreign currency risk associated with an underlying loan, is a separate transaction from the loan. Paragraph 33.1(4)(a) of the Act establishes that a taxpayer's income or loss 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 eligible loans as that term is defined in subsection 33.1(1) of the Act. Accordingly given that a swap is a transaction that is distinct from the making of an eligible loan the gain or loss therefrom and the associated costs cannot in our view be considered to be income or loss derived from eligible loans for purposes of paragraph 33.1(4)(a) of the Act.
A bank calculates its income or loss for income tax purposes by including all revenue and expenses from carrying on the business of banking. A bank that carries on an IBC business removes from the income or loss otherwise determined the income or loss from the IBC business, as determined pursuant to the requirements of paragraph 33.1(4)(a) of the Act. Where a bank enters into a swap transaction, in the ordinary course of its business, the costs specifically incurred or the fees specifically received will generally be included in the bank's calculation of income for purposes of Part I of the Act.
While not determinative in arriving at our technical interpretation we would also note, as you pointed out, that a bank's foreign currency management is carried out on the basis of the global operations of the bank. Accordingly while eligible foreign currency deposits and eligible foreign currency loans which are recorded in the IBC are taken into account in determining the extent of the bank's swap requirements the swap arrangements entered into would not be specifically related to a particular eligible loan or eligible deposit.
With respect to your April 24, 1992 letter it remains our view that, consistent with a swap being a separate transaction that does not ordinarily form part of the IBC business, the calculation of the IBC income would include any foreign exchange gain or loss attributable to eligible deposits and eligible loans booked in the IBC that are denominated in a foreign currency independent of any hedging transactions that the Bank may have entered into.
We appreciate the policy concerns that you have in this regard and accordingly you may wish to pursue these together with possible legislative solutions with the Department of Finance. To the extent that the Department of Finance wishes our involvement in considering potential amendments we are prepared to participate in such discussions.
While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate