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.
Principal Issues:
1. Whether the proposed issuance of linked notes by an authorized foreign bank would constitute foreign property.
2. Whether the use of the linked notes to circumvent the foreign property limits would result in the application of GAAR.
3. Whether the disposition of the underlying foreign property by the Canadian Branch prior to year-end to avoid capital taxes would result in the application of GAAR.
Position:
1. No.
2. No.
3. No.
Reasons:
1. It is our view that the linked notes constitute indebtedness issued by an authorized foreign bank and payable at a Canadian branch and therefore fall within the exception provided for in subparagraph (g)(i) of the definition of "foreign property" in subsection 206(1).
2. We have given favourable GAAR rulings on similar arrangements.
3. Based on the Imperial Oil decision and the fact that an investor is not obligated to purchase a new linked note in the following year and the Canadian branch is not obligated to hedge its obligations under the note.
XXXXXXXXXX 2004-006089
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request:
i. is in an earlier return of the taxpayer or a related person;
ii. is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
iii. is under objection by the taxpayer or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. is the subject of a ruling previously requested by the taxpayer from the Directorate.
Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, the facts, proposed transactions and their purposes is set out below.
DEFINITIONS
a) "Bank" means XXXXXXXXXX,
b) "Bank Act" means the Bank Act (Canada),
c) "Branch Financial Statements" has the meaning assigned by subsection 20.2(1),
d) "Canadian Banking Business" has the meaning assigned by subsection 248(1),
e) "Canadian Branch" means the branch of the Bank operated in Canada at XXXXXXXXXX,
f) "Deficiency" means the amount by which the Maturity Amount of a Note is less than its Principal Amount,
g) "Excess" means the amount by which the Maturity Amount of a Note exceeds its Principal Amount,
h) "Final Pricing Date" means a specified business day prior to the Maturity Date,
i) "Fund Shares" means units or shares of the Reference Fund, as applicable,
j) "Initial Pricing Date" means a specified business day following the Issue Date,
k) "Investor" means a taxpayer described in any of paragraphs 205(a) to (f),
l) "Issue Date" means the date on which a Note is issued,
m) "Maturity Date" means the date on which a Note matures,
n) "Note" means the instrument issued by the Canadian Branch as described in 5 below,
o) "OSFI" means the Office of the Superintendent of Financial Institutions,
p) "Reference Fund" means Underlying Fund A or Underlying Fund B, as specified by the Investor,
q) "Underlying Fund A" means XXXXXXXXXX, a corporation incorporated in the XXXXXXXXXX, and
r) "Underlying Fund B" means a Series of XXXXXXXXXX, a trust established in XXXXXXXXXX.
FACTS
1. The Bank is a corporation organized under the laws of XXXXXXXXXX. Its principal offices are located in XXXXXXXXXX.
2. The Bank has over XXXXXXXXXX branches in XXXXXXXXXX and operates branches in over XXXXXXXXXX countries outside XXXXXXXXXX.
3. On XXXXXXXXXX, the Bank received approval from the Minister of Finance (Canada) to establish a full service foreign bank branch in Canada and, on XXXXXXXXXX, received an order from OSFI approving the commencement and carrying on of business in Canada pursuant to sections 524 and 534 of the Bank Act. The Bank is therefore an "authorized foreign bank" and a "bank" each as defined in subsection 248(1) and is a "financial institution" as defined in subsection 142.2(1). The Bank established and commenced operations of a Schedule III foreign bank branch under the Bank Act at the Canadian Branch. The taxation year-end of each of the Bank and the Canadian Branch is XXXXXXXXXX. The taxation centre of the Canadian Branch is in XXXXXXXXXX.
4. Neither Underlying Fund A or Underlying Fund B is a resident of Canada for the purpose of the Act nor do Underlying Fund A or Underlying Fund B carry on business in Canada. Fund Shares are "foreign property" as defined in subsection 206(1). The fiscal year of Underlying Fund A ends on XXXXXXXXXX of each year and the fiscal year of Underlying Fund B ends on XXXXXXXXXX of each year.
PROPOSED TRANSACTIONS
5. The Investor will advance an amount (the "Principal Amount") to the Canadian Branch on the Issue Date and will be issued a Note by the Canadian Branch. A Note issued to the Investor on the Issue Date will mature on the Maturity Date for a cash payment (the "Maturity Amount") linked to the return generated by a notional investment in Fund Shares having an initial value on the Initial Pricing Date equal to the Principal Amount. The Maturity Date will be before the end of the taxation year of the Canadian Branch in which the Issue Date occurs. The Maturity Amount will be an amount equal to the product obtained by multiplying the Principal Amount by a factor equal to the net asset value per Fund Share calculated on the Final Pricing Date divided by the net asset value per Fund Share calculated on the Initial Pricing Date, subject to an adjustment where there has been a distribution on the Fund Shares or if another adjustment event occurs, but in no case will be less than XXXXXXXXXX.
6. A Note will not provide the Investor with any right to acquire or vote Fund Shares or have any ownership interest in the Reference Fund. A Note will not be convertible into or exchangeable for Fund Shares. The Investor will be entitled only to a cash payment of the Maturity Amount. Payment will be made only at the Canadian Branch. Canadian law will govern the Note.
7. You advise that the Canadian Branch will charge a fee to an Investor in respect of the issuance of a Note. The fee will be between XXXXXXXXXX% and XXXXXXXXXX% of the Principal Amount, as negotiated with the Investor, which the Canadian Branch considers to be comparable to fees charged by other financial institutions for similar products.
8. You also advise that if the Bank were to become insolvent before the Maturity Date of a Note, by reason of section 71 of the Wind-up and Restructuring Act, the Investor would have a provable claim against the Bank and the amount would be determined by negotiation with the liquidator of the Bank or determined by the court. Alternatively, the Investor would be entitled to await the Maturity Date of the Note and claim an amount equal to the Maturity Amount of the Note.
9. The Canadian Branch is not required under the terms of a Note to hedge its obligations under the Note. However, the Canadian Branch has made a business decision to eliminate its risk under the Note and will purchase Fund Shares of the relevant Reference Fund on the Initial Pricing Date having a purchase price equal to the Principal Amount. The purchase will be made outside Canada at the offices of the relevant Reference Fund. The Canadian Branch will redeem the Fund Shares on the Final Pricing Date.
10. Fund Shares redeemed prior to the end of a taxation year of the Bank will not be reflected in the balance sheet of the Bank in respect of its Canadian Banking Business for that taxation year.
11. You advise that in computing the profit for a taxation year of the Bank from its Canadian Banking Business in its Branch Financial Statements:
a) If there is a payment of an Excess to an Investor on maturity of a Note, the Excess will be deducted in computing income in the statement of income and expenses comprised in the Branch Financial Statements of the Bank and, if there is a Deficiency, the Deficiency will be included in computing income.
b) The gain or loss on the disposition of Fund Shares will be included or deducted in computing income in the statement of income and expenses, as applicable.
c) There will be no netting of an Excess against any related gain on the Fund Shares or netting of any loss on Fund Shares against a Deficiency.
12. Investors are not required to acquire new Notes with the proceeds of the former Notes. For those who wish to do so, the Canadian Branch may issue new Notes to Investors in the following taxation year of the Canadian Branch. The Canadian Branch is not required to hedge its obligations under the new Notes. However, if in a taxation year, the Canadian Branch realized a loss on the disposition of Fund Shares of Underlying Fund A which were not "mark-to-market property" as defined in subsection 142.2(1), the Canadian Branch would not acquire Fund Shares of Underlying Fund A until after the 31st day following the disposition of such Fund Shares.
PURPOSE OF THE PROPOSED TRANSACTIONS
13. The purpose of the proposed transactions is to provide an Investor with a return that tracks the return of the Reference Fund for a period of up to a year and which does not constitute "foreign property" as defined in 206(1).
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:
A. A Note acquired by an Investor will not constitute foreign property by virtue of subparagraph (g)(i) of the definition of "foreign property" in subsection 206(1).
B. For the purposes of subsections 206(2) and 248(1), the "cost amount" of a Note to an Investor will be equal to the Principal Amount.
C. A Note will constitute a "qualified investment":
(a) for a registered retirement savings plan by virtue of subparagraph (b)(ii) of the definition "qualified investment" in subsection 146(1);
(b) for a registered education savings plan by virtue of subparagraph (b)(ii) of the definition "qualified investment" in subsection 146.1(1);
(c) for a registered retirement income fund by virtue of subparagraph (b)(ii) of the definition "qualified investment" in subsection 146.3(1); and
(d) for a deferred profit sharing plan by virtue of subparagraph (c)(ii) of the definition "qualified investment" in section 204 provided it is not a note or similar obligation described in paragraph 147(2)(c).
D. For the purposes of subparagraph 115(1)(a)(ii), a Deficiency or an Excess, as described in 11(a) above, will be included or deducted, as the case may be, by the Bank in computing profit from its Canadian Banking Business and paragraphs 18(1)(f) and (v) will not apply in respect of the Excess.
E. For the purposes of subparagraph 115(1)(a)(ii), a gain realized by the Bank on the disposition of Fund Shares acquired in order to hedge its obligations under a Note, as described in 11(b) above, will be included by the Bank in computing profit from its Canadian Banking Business and, subject to subsection 18(13), a loss realized by the Bank on the disposition of such Fund Shares, as described in 11(b) above, will be deducted in computing profit from its Canadian Banking Business.
F. For the purposes of paragraphs 190.13(d) and 181.3(3)(e), provided that the Fund Shares are disposed of by the Bank prior to the end of a taxation year of the Bank as described in 10 above, no amount in respect of the Fund Shares will be included in the capital of the Bank for the taxation year.
G. The provisions of subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue and Customs Agency provided that the proposed transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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