9 October 1990 Ruling 59443 F - Swap Transactions Part of Bank's Income or Loss from International Banking Centre

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.

Attention: 19(1)

October 9, 1990

Dear Sirs:

Re:  Paragraph 33.1(4)(a) of the Income Tax Act (the "Act")

We are writing in response to your letters of January 19 and 23, 1990 in which you requested our views concerning whether a foreign currency swap transaction ("swap") forms part of a bank's income or loss from an international banking centre ("IBC") business.

The facts in your letter appear to relate to a specific proposed transaction. Accordingly, your query should take the form of a request for an advance income tax ruling. Although we cannot provide confirmation with respect to the tax consequences of specific proposed transactions in response to a request for an opinion, we have set out below our general comments on the matters you have raised.

It is our view that a swap transaction, whether or not designed to hedge the foreign currency risk associated with an underlying loan, is a separate transaction from the loan. Paragraph 33.1(4)(a) establishes that a taxpayer's income for a taxation year from an IBC business is determined on the assumption that the IBC is a separate business, the only income or loss of which is derived from eligible loans as that term is defined in subsection 33.1(1). It is a question of fact whether or not a particular transaction is relevant to the determination of income or loss from an IBC business pursuant to the requirements of paragraph 33.1(4)(a). As explained in the technical notes accompanying the Notice of Ways and Mean Motion released June 5, 1987, the income from an IBC business is to be determined as though the taxpayer had no income other than from that business and was allowed no deductions except to the extent that they may reasonably be regarded as applicable to that business.

A swap, in and of itself, does not meet the definition of eligible loan and is a separate transaction from an eligible loan. A swap may produce income or loss independently of a loan. It is our view, therefore, that the income or loss arising from a swap transaction does not ordinarily form part of a bank's IBC income or loss.

The opinions expressed herein are provided in accordance with the practice described in paragraph 24 of Information Circular 70-6R.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate