8 December 1989 External T.I. 74305 F - Sourcing of Income and Losses - Guarantee Agreements Between Canadian Bank and Foreign Subsidiaries

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.

SUBJECT:  Sourcing of fee income and losses arising from guarantee agreements between a Canadian bank ("Bank") and its foreign subsidiaries

This is in reply to your memorandum dated August 31, 1989 requesting our opinion concerning the above subject.  The sourcing of guarantee fee income and losses is relevant for purposes of the calculation of the foreign tax credit under section 126 of the Income Tax Act.

While the sourcing of the income and expenses with respect to a particular guarantee arrangement must be determined with regard to all of the relevant facts we understand the facts you are considering are typically as follows:

1.     The Bank has entered into guarantee agreements with its foreign subsidiaries to guarantee loans made by the foreign subsidiaries to third party borrowers.

2.     The Bank does not carry on business in the foreign countries, where the foreign subsidiaries are situated, through branches or otherwise.

3.     The guarantee agreements were negotiated in Canada and the Bank has entered into these guarantee arrangements in the ordinary course of carrying on its Canadian banking operations.

4.     The Bank charges guarantee fees to its foreign subsidiaries for providing such guarantees.

5.     Where the loans referred to in 1. above become non-performing the Bank is required to make payments under the guarantee agreements.  The Bank could also make "commutation payments" to its foreign subsidiaries to release itself from obligations under the guarantee agreements.  Such payments would be treated as losses arising from the guarantee agreements.

OPINION

Generally we are of the view that where guarantee agreements are negotiated and administered in Canada by the Bank the fee revenue and payments under the guarantee, including "commutation payments", should also be sourced in Canada as part of its business carried on in Canada.  Where any foreign taxes were paid by the Bank to a foreign jurisdiction, such taxes would fall within the definition of "non-business-income tax" as defined by paragraph 126(7)(c) since they would be excluded from the definition of "business income tax" as defined by paragraph 126(7)(a).  Consequently, the Bank would be entitled to claim a deduction pursuant to subsection 20(12) with respect to such taxes on the same basis of other Canadian businesses.

COMMENTS

23  21(1)(b)

We also note that the August 23, 1983 memorandum from the Corporate Rulings Division concluded, apparently on the basis of the IT position on interest, that the source of guarantee fee income would be the country of the payer.  Subsequently the Foreign Section of Rulings, in a memorandum dated October 31, 1988 (copy attached), expressed the opinion that the income from a loan made and negotiated in Canada by a Canadian bank with a non-resident borrower should be sourced in Canada.

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RECOMMENDATION

21(1)(b)

We trust that the above comments will be of assistance.

F. Lee WorkmanChiefFinancial Institutions SectionFinancial Industries DivisionRulings Directorate