21 February 1996 External T.I. 9532995 - DEFINITION OF INDEBTEDNESS FOR PURPOSES OF FAPI

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:

Definition of "Indebtedness" for purposes of FAPI - subsection 95(2.5) - would interest rate swaps be included in that definition ?

Position:

Only a pure interest rate swap in which the annual or semi-annual payments\receipts are based on a "notional" principal amount.

Reasons:

There may be a quality of indebtedness if there is to be an exchange of currencies involved.

							953299
XXXXXXXXXX						J.P. Dunn

Attention: XXXXXXXXXX

February 21, 1996

Dear Sirs:

Re: Definition of "Indebtedness" for Purposes of Foreign Accrual Property Income

We are writing in response to your correspondence of October 26, 1995 wherein you had requested the views of the Department regarding the inclusion of "interest rate swap agreements" in the definition of "indebtedness" in subsection 95(2.5) of the Income Tax Act (the "Act").

The definition of "indebtedness" in that provision provides that it "does not include...obligations...under agreements... providing for the purchase, sale or exchange of currency where the agreements are swap agreements, forward purchase or sale agreements, forward rate agreements, futures agreements, options or rights agreements, or similar agreements".

With respect to an interest rate swap agreement in which the parties exchange only amounts which are calculated by reference to a fixed or floating interest rate applied to a notional principal amount, it is our view that such an agreement would not constitute an "indebtedness" of either of the parties.

With respect to additional agreements referred to in subsection 95(2.5), we are currently unable to comment on their status as items of "indebtedness" within the meaning of subsection 95(2.5) of the Act, however, we would be prepared to offer our comments in that regard given the opportunity to review the documentation relative to a specific contract.

You had also requested our comments in this respect regarding subsection 95(2.1) of the Act which provides a rule for the definition of "investment business" as that term is used in subsection 95(1) of the Act and, more specifically, whether an interest rate swap agreement would qualify as an agreement for the "purchase, sale or exchange of currency" as provided in that subsection. It is the Department's view that the agreement must provide for, in the case of a swap agreement, an exchange of different currencies in order to qualify under this provision.

We trust that this is the information which you require.

Yours truly,

Section Chief
Leasing and Financing Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch