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.
July 21, 1986
Peter E. Salvatori (613)995-1787
RE: U.S. Dollar Banker's Acceptances
This is to reply to our memorandum of April 24, 1986 concerning the above captioned matter.
You describe a transaction where a Canadian importer draws a time draft on a Canadian bank which accepts the bill and returns it to the customer who transfers it to his foreign supplier in satisfaction of the price of goods. The face account of the draft exceeds the actual price of the goods on account of the time to run to maturity.
The question for decision is whether the discount, which is deemed by subsections 214(7) or 214(7.1) of the Act, as the case may be, to be interest for Part XIII purposes, may be treaty exempt by virtue of the interaction of Articles XI(4) and XI(3)(d) of the Canada-U.S. Income Tax Convention (1980) (the "Convention").
Article XI(3)(d) of the Convention is as follows:
The interest is beneficially owned by a seller who is a resident of the other Contracting State and is paid by a purchaser in connection with the sale on credit of any equipment, merchandise or services, except where the sale is made between persons dealing with each other not at arm's length.
As the acceptor of a bill of exchange renders himself primarily liable on the instrument and discharges his own obligation in making payment to the holder, an initial problem is whether the (deemed) interest is "paid by a purchaser" within the meaning of Article XI(3)(d) when the Canadian bank honours the bill.
The Non-Resident, Business, and Property Income Group have however taken the position that payment by the acceptor is in behalf of the drawer. If this position is correct, it would be possible to treat the purchaser as having paid the interest for treaty purposes.
We have some difficulty in agreeing with Mr. XXXX view that the Treaty Exemption would continue to be applicable in circumstances where the bill was assigned by the seller, because the interest would then no longer be "owned by a seller" as required.
Before rendering a firm opinion on the tax consequences of transactions involving U.S. Dollar Banker's Acceptances, it would of course be necessary to examine all relevant documents and also be apprised of all the material facts and circumstances. If we may be of further assistance in this regard, please advise.
Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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