CIT – Tax Court of Canada finds that a regulated Barbados subsidiary which invested in corporate debt qualified under the s. 95(2)(l) exclusion for foreign banks

The question of whether an indirect Barbados subsidiary (“CCG”) of a Canadian company in the CIT group was earning property income and, thus, generating foreign accrual property income to the Canadian company, turned on whether it came within the “foreign bank” exception in s. 95(2)(l)(iii). Its business appears to have not come within CRA’s concept of banking and instead entailed borrowing money from Barbados (IBC) affiliates and using the borrowed funds to lend money, or purchase debt obligations, in arm’s length transactions.

Owen J noted the breadth of the definition of “foreign bank,” which included a foreign corporation which uses the word “bank” to describe its financial services business, and a foreign corporation which “engages, directly or indirectly, in the business of providing financial services and is affiliated with another foreign bank.” CCG had a U.S. sister company which used the word “bank” in its name and took in deposits and lent out money, so that the “affiliated” part of the quoted definition was satisfied - and CCG’s lending/debt purchasing activities came within the broad concept of “financial services.” Finally, the rather light oversight by the Barbados central bank of CCG (whose business required it to be registered as a Barbados trust and finance company) satisfied the requirement in s. 95(2)(l)(iii) that CCG be regulated.

Hence, no FAPI.

Neal Armstrong. Summary of CIT Group Securities (Canada) Inc. v. The Queen, 2016 TCC 163 under s. 95(2)(l)(iii).