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: meaning of "such persons" in paragraph (e) of definition of "restricted financial institution" in subsection 248(1)
Position: persons with whom the corporation is dealing at arm's length
Reasons: wording of ITA / basic grammar
August 5, 2005
TORONTO NORTH TSO HEADQUARTERS
Technical Applications and Denise Dalphy, LL.B.
Valuations Division 613 941-1722
Attention: Angelo Bertolas
Banking Industry Specialist 2005-013146
Definition of "restricted financial institution"
This is in response to your e-mail of May 3, 2005 wherein you requested our interpretation of paragraph (e) of the definition of "restricted financial institution" in subsection 248(1) of the Income Tax Act (the "Act"). In particular, you asked:
"The question which arises is whether the portion of the definition should be interpreted as "a corporation whose principal business is the purchasing of debt obligations issued by a corporation whose principal business is the lending of money or a combination thereof". In other words the reference to "such corporations" in the definition meaning a corporation whose principal business is the lending of money to persons at arms-length."
Paragraph (e) of the definition of "restricted financial institution" in subsection 248(1) of the Act provides that "restricted financial institution" means:
"(e) a corporation whose principal business is the lending of money to persons with whom the corporation is dealing at arm's length or the purchasing of debt obligations issued by such persons or a combination thereof,"
[emphasis added]
The question that you ask is what the words "such persons" refer to in the paragraph above. In other words, does "such persons" refer to:
(i) a corporation whose principal business is the lending of money to persons with whom the corporation is dealing at arm's length, or
(ii) persons with whom the corporation is dealing at arm's length.
In our view, paragraph (e) describes two types of principal business corporations: first, those corporations that lend money to certain persons, namely persons with whom they deal at arm's length, and second, those corporations that purchase debt obligations issued by persons with whom they deal at arm's length.
It is important to note that the reference in the second part of the definitional sentence is to "such persons", not "such corporations". "Such persons" requires one to refer to the earlier use of the term "persons". The noun, "persons", which is the object of the first part of this definitional sentence, is modified by the clause "with whom the corporation is dealing at arm's length". Accordingly, the same modifying clause, namely, "with whom the corporation is dealing at arm's length" must be applied to the use of the word "persons" in the second half of the sentence.
This interpretation is consistent with comments in both the 1998 and 1988 Technical Notes of the Department of Finance, wherein they describe a "restricted financial institution" as "a bank, a trust company, a credit union, an insurance corporation, a corporation whose principal business is the lending of money to persons with whom the corporation deals at arm's length or a corporation controlled by one or more such corporations". [emphahsis added] A speculation is that the policy was to include not only corporations that were the original issuers of arm's length debt, but also corporations that acquire arm's length debt.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
If you have any questions concerning this matter please feel free to contact us.
Steve Tevlin
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
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