2001 Ruling 2000-0057253 - INDEX LINKED NOTES

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:

Certificate of Deposit to be issued to non-residents with an interest return based on increase in S&P 500 index over the term of the deposit to a maximum of XXXXXXXXXX %. No negative return is possible. Is the interest exempt from withholding tax by virtue of clause 212(1)(b)(iii)(D) or would we consider that the postamble of paragraph 212(1)(b) is applicable to deem the return not to be interest because it is computed by reference to a commodity price (the index) or similar criteria?

Position:

Clause 212(1)(b)(iii)(D) will be applicable to exempt the interest from withholding. We will not consider the interest to be computed by reference to a commodity price or similar criteria.

Reasons:

The S&P 500 index cannot be considered to be a "proxy" for either the earnings of the issuer or a direct holding of the shares of the issuer (which would be taxable Canadian property to a non-resident). The amount of the return would not necessarily correspond to either the dividend rate on the issuer's shares or the change in value of the shares of the issuer.

XXXXXXXXXX 			2000-05725

Attention: XXXXXXXXXX

XXXXXXXXXX, 2001

Dear Sirs:

Re: Advance Income Tax Ruling - XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX in which you had requested an advance income tax ruling on behalf of XXXXXXXXXX (hereinafter referred to as "ACO").

Further to this request, you have advised that, to the best of your knowledge and that of responsible officials of ACO, none of the issues contained in your request for this advance income tax ruling is in an earlier return of ACO or of a person related to ACO, is being considered by a tax services office or a taxation centre of Canada Customs and Revenue Agency in connection with a previously filed tax return of ACO or of a person related to ACO, is under objection by ACO or by a person related to ACO, is before the courts or, if a judgment has been issued, the time limit for appeal to higher court has not expired, or is the subject of an advance income tax ruling previously issued by this Directorate.

Facts

1. ACO (Taxpayer ID Number: XXXXXXXXXX) is a XXXXXXXXXX Canadian chartered bank XXXXXXXXXX. ACO is a "taxable Canadian corporation" as that term is defined in subsection 89(1) of the Income Tax Act (the "Act") and is a "prescribed financial institution" as that term is defined in section 7900 of the Income Tax Regulations. The tax returns of ACO are filed at the XXXXXXXXXX Tax Services Office of the Canada Customs and Revenue Agency. ACO provides a full range of financial services.

2. XXXXXXXXXX ("Mr. A") is an individual resident at XXXXXXXXXX. Mr. A deals at "arm's length", within the meaning of that term in subsection 251(1) of the Act, with ACO.

Proposed Transaction

3. ACO proposes to issue to Mr. A, through an offshore branch, a certificate of deposit (the "CD"), the terms of which are described below and which will constitute a deposit liability of ACO as a matter of law and for Bank Act reporting purposes. The "Principal Amount" (as that term is defined in paragraph 4 of the Proposed Transactions) of the CD to be issued to Mr. A will be in the amount of XXXXXXXXXX.

4. The CD will have a fixed principal equal to the amount received from Mr. A (plus interest earned prior to the issue date, if any) (the "Principal Amount") and will be denominated in a currency other than Canadian currency (the "Foreign Currency"). All payments made under or in respect of the CD will be in the same Foreign Currency.

5. It is presently anticipated that the CD will have a term of XXXXXXXXXX years and will not be redeemable or cashable prior to maturity.

6. No interest or other amount will be paid or payable by ACO in respect of the CD until the maturity date.

7. There is no stipulated interest rate with respect to the CD nor is there any guaranteed return.

8. At maturity, Mr. A is entitled to be repaid the Principal Amount of the CD and to receive, in addition, an amount of interest (the "Return") calculated on the basis of the application of a formula, linked to the Standard & Poor's 500 Index (the "Index"), to the Principal Amount of the CD:

	Principal Amount x Final Index Level - Initial Index Level
					Initial Index Level

to a maximum of: Principal Amount x XXXXXXXXXX%

where:

Final Index Level = the Index level at the maturity date; and

Initial Index Level = the Index level on the issue date of the CD.

9. If the Final Index Level is equal to or less than the Initial Index Level, only the Principal Amount will be repaid to Mr. A by ACO on the maturity date.

10. The Return, if any, that Mr. A will receive from investing in the CD will only be known by Mr. A and ACO on the date the Final Index Level is determined. Before that date, the Return that Mr. A can expect to receive on the CD is indeterminable, being an amount between XXXXXXXXXX (inclusive) of the Principal Amount.

11. The aggregate Principal Amount will be used by ACO for general XXXXXXXXXX business purposes, and will not specifically be used to invest or purchase any shares underlying the Index.

12. At the time that Mr. A purchases the CD, Aco proposes to enter into a XXXXXXXXXX year term option contract (the "Option") with an arm's length third party for a fee (the "Option Fee"). Under the Option, the third party will be obligated to pay to ACO an amount equal to the aggregate Return, if any, at the end of the term.

13. The Option Fee will be negotiated at arm's length as a one-time payment in a fixed amount per $XXXXXXXXXX of the aggregate Principal Amount. The Option Fee is analogous to the cost of funds to ACO and is fixed over the term of the Option.

14. Although subject to market conditions, for example, interest rate fluctuations, ACO generally anticipates that the annualized cost of the Option Fee over the XXXXXXXXXX year term will be less than the cost of alternative means of raising funds in an amount equal to the aggregate Principal Amount.

Purpose of the Proposed Transaction

ACO wishes to expand its XXXXXXXXXX customer base by offering the CDs, particularly to non-residents of Canada.

Ruling Provided

Provided that the above statements of Fact are accurate and complete and that the Proposed Transactions are undertaken as described, the following ruling is provided:

The Return paid to Mr. A at maturity, if any, will not be subject to tax under subsection 212(1) of the Act by virtue of the exemption in clause 212(1)(b)(iii)(D) and, accordingly, ACO will not be required to deduct or withhold an amount of tax from the Return XXXXXXXXXX amounts paid to Mr. A.

This ruling is provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and is binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendments thereto.

Yours truly,

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