26 April 1991 Income Tax Severed Letter

April 26, 1991

Special Audits Division            Financial Institutions
E.H. Gauthier,                       Section
Director                           M. Trotier
                                   (613) 957-8957
Attention:  Doug Mitchell

                                   910877

International Banking Centres("IBC")

This is in reply to your memorandum dated March 25, 1991 wherein you requested our comments on certain issues concerning IBC and on your draft reply to 24(1)

We are in general agreement with the observations in your memorandum as to what constitutes "reasonable inquiries". With respect to the situation wherein a loan is acquired from a foreign bank with which the taxpayer is not dealing at arm's length, the reasonable inquiries requirement for purposes of paragraph 33.1(1)(b) of the definition of "eligible loan" of the Income Tax Act ("Act") must be carried out at the time of acquisition by the IBC. While it may be acceptable to rely on representations made by the related corporation, such representations should address the time the loan is being acquired rather than the time it was made. If the borrower's file has not been updated accordingly we should question whether the IBC (bank) has made "reasonable inquiries" as required.

Our understanding of the implications with respect to a loan which is or has become an ineligible loan within an IBC is that such a loan would not taint all the other "eligible loans" nor the IBC as a whole. Paragraph 33.1(4)(a) of the Act stipulates that the amount of an IBC's income or loss is to be determined on the assumption that its only income is derived from "eligible loans". Accordingly loans other than eligible loans are excluded from the income calculation but the IBC continues to qualify as such subject to the revocation provided for in subsection 33.1(3) of the Act. This interpretation is substantiated by other provisions such as subsections 33.1(9) and 33.1(11) of the Act which respectively deal with the situations where an IBC does not meet the 90% revenue rule with respect to its eligible loans and where an eligible loan of an IBC subsequently becomes an "ineligible loan".

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Our only comment on your draft reply to 24(1) is as you might consider adding a specific reference to the guidelines provided in paragraph 40 of Information Circular 72-17R3 with respect to "reasonable inquiries".

We trust that the above comments will be of assistance.

for director Financial Industries Division Rulings Directorate

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