6 May 1996 External T.I. 9612785 - FUNDS HELD IN A GIC

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:

Does interest calculated in respect of a GIC deposited at a Canadian bank on behalf of the Canadian corporation and paid on a debenture held by a non-resident qualify for the 212(1)(b)(vii) exemption?

Position:

No

Reasons:

	post-ample in 212 and 245 and question of economic 	compulsion to repay

		961278

XXXXXXXXXX C. Tremblay

Attention: XXXXXXXXXX

May 6, 1996

Dear Sirs:

Re: Subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act")

This is in reply to your letter of April 3. 1996, wherein you discussed the terms of a debenture between a Canadian corporation issuer and a non-resident corporation holder who deal at each other at arm's length. You requested our interpretation of subparagraph 212(1)(b)(vii) of the Act as it applies to the situation outlined in your letter.

The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Although we would need to examine all the facts, in our view, where the borrower is required to place all of the principal amount with a third party there may be an obligation to pay more than 25% of the principal amount within a 5 year period. Our concern is that at a certain point, for example after 2 years, the interest rate on the account may be less than the interest rate on the loan, and the borrower will be economically compelled to repay the loan. Further, we question why a corporate borrower would need to borrow funds from a non-resident lender if all the funds are invested with a third party. Accordingly, in our view, such a loan would not qualify for the withholding tax exemption.

It is a question of fact whether an interest payment on a debenture is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion. It is our view that where an interest payment to a non-resident person is computed by reference to the investment income that the Canadian corporation earns, the debenture will be considered computed by reference to revenue, profit, cash flow, or similar criterion.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch