6 June 1996 External T.I. 9524565 - FOREIGN AFFILIATES-DEFINITION OF INVESTMENT BUSINESS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

In the definition of investment business in subsection 95(1)(a)(i) in respect of foreign affiliates, must a foreign financial institution be regulated by the country in which its business is principally carried on, or can it be regulated by another country.

Position:

Should be regulated by the country in which its business is principally carried on.

Reasons:

Intent of law as indicated by Technical Notes and statement by Finance. Also, if the only requirement were that the foreign institution be regulated without regard to what country does the regulation, the words "in the country" in the phrase "regulated in the country" would not be necessary.

									                      952456
XXXXXXXXXX	 						                    J. Stalker

Attention: XXXXXXXXXX

June 6, 1996

Dear Sir:

Re: Foreign Affiliates - Definition of "Investment Business"

We are writing in response to your letter dated September 13, 1995, in respect of the definition of "investment business" in subsection 95(1) of the Income Tax Act (Canada) (the "Act"), and in particular the phrase "the activities of which are regulated in the country in which the business is principally carried on" in subparagraph 95(1)(a)(i) of that definition.

You have presented a hypothetical situation where a foreign bank incorporated in Country A carries on business principally in Country B. The law of Country B includes regulations regarding certain banking activities but the activities of the foreign bank are not subject to these regulations. The activities of the foreign bank in Country B are, however, subject to the regulation under the laws of Country A.

In our view the banking activities of the foreign bank would not be regulated in country B for the purposes of subparagraph 95(1)(a)(i) of the Act since the phrase "the activities of which are regulated in the country in which the business is principally carried on" requires the business to be regulated by the same country in which it is principally carried on. Although the technical notes expand this requirement where certain member states of the European community are involved, we emphasize that the notes state that the expansion only applies where the European regulatory law has been incorporated into the local regulatory law of the member state in which the business of the financial institution is principally carried on.

Further support that our interpretation is consistent with the intent is provided by statements made at the 1995 Canadian Tax Foundation conference by a representative of the Department of Finance. Those statements indicate that it was contemplated that the regulation of the business activities in a particular jurisdiction would be consistent across all financial institutions carrying on a particular activity in that jurisdiction ensuring a bona-fide financial institution competing in the international market place. The representative also noted that consolidated regulation in the European community is acceptable where the consolidated regulation is imported into the local regulatory law.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Internatioanl Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch