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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether a fee for a letter of credit is consideration for agreement to lend money or make money available.
Position: Depends on the nature of the arrangement under which the letter of credit is issued.
Reasons: Circumstances would dictate whether subsection 214(15) can apply.
XXXXXXXXXX 2003-001414
Attention: XXXXXXXXXX
May 6, 2003
Dear XXXXXXXXXX:
Re: Letters of Credit
Subsection 214(15) of the Income Tax Act (the "Act")
This is in reply to your letter dated April 14, 2003, wherein you request our views in reference to the application of paragraph 214(15)(b) of the Act to a payment made by a resident of Canada to a non-resident bank as a fee for the issuance of a letter of credit.
We are unable to provide our views without full details of a particular arrangement. However, we are prepared to make general comments in reference to the following hypothetical scenario:
A Canadian resident ("Canco") wishes to purchase goods from a manufacturer ("Manco") in country X. Manco is unfamiliar with Canco and is unwilling to ship the goods before they are paid for by Canco. On the other hand, Canco is unfamiliar with Manco and is unwilling to pay for the goods until they are received. To resolve the stalemate, Canco purchases from a bank (the "Bank") resident in country X a letter of credit in favour of Manco which will entitle Manco to collect specified amounts (i.e., the sale price of the goods), in aggregate, not in excess of the purchase price of the letter of credit under certain specified conditions (e.g., on providing proof of shipment of the goods to Canco), from Bank. Canco will pay a fee (the "Fee") to Bank for entering into the arrangement based on the amount of the letter of credit.
Paragraph 214(15)(b) of the Act provides that any amount paid by a resident of Canada to a non-resident as consideration for "agreeing to lend money or make money available shall, if the non-resident person would be liable to tax under this Part in respect of interest payable on any obligation issued under the terms of the agreement on the date it was entered into, be deemed to be a payment of interest".
Under the terms of the above agreement, in and by itself, there is no obligation issued on which the interest paid would be liable to tax under Part XIII. Accordingly, it is our view that paragraph 214(15)(b) of the Act would not apply to deem the Fee to be interest. On the other hand, had Bank agreed to make a loan to Canco in respect of any amounts drawn by Manco under the letter of credit, it is our view the fee would be deemed interest pursuant to paragraph 214(15)(b) of the Act assuming the requisites for its application are otherwise present.
We trust the above is of assistance to you.
Yours truly,
Olli Laurikainen
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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