30 September 1992 Income Tax Severed Letter 9224595 - 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.

922459
Michèle Trotier
24(1) (613) 957-3494
Attention: 19(1)
September 30, 1992

Dear Sirs:

Re: International Banking Centres ("IBC")

This is in reply to your letters of January 22, and May 15, 1992 wherein you requested our views on various issues dealing with section 33.1 of the Income Tax Act ("Act"). We responded on June 26, 1992 to the questions which were most important to you at that time and we are now responding to questions 2, 3, 5, 6, 9, 11 and 17. We have to consider further the issues raised in questions 7, 8, 14 and 15 and we will be responding to them at a later date. We have referred questions 13, 16, 18, 19 and 20 to the Department of Finance since they involve policy decisions. We understand that they will be replying directly to you on these questions.

As we indicated in our June 26 letter, International Financial Centres appear to cover a wide spectrum of financial institutions including brokers and insurers.

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IBC provided for in section 33.1 of the Act refer to a more restricted group of financial institutions as defined in section 7900 of the Income Tax Regulations and would not, as an example include insurers or brokers. An analysis will have to be made to determine whether a particular International Financial Centre qualifies as an IBC. Accordingly the comments in this letter are in respect of a financial institution that qualifies as an IBC for purposes of section 33.1 of the Act which may not include a financial institution that qualifies as an International Financial Centre.

Question 2

You asked whether promissory notes, bills of exchange or acknowledged or accepted invoices given by a foreign buyer to a Canadian supplier (exporter) as deferred payment for exported goods which are discounted or acquired by a prescribed financial institution, as defined in section 7900 of the Income Tax Regulations, qualify as "eligible loans" for purposes of subsection 33.1(1) of the Act.

In our view, the above instruments which are acquired or discounted by an IBC would not qualify as "eligible loans" since subsection 33.1(1) of the Act does not provide for the acquisition by an IBC of such instruments.

Question 3

You have asked whether loans to arm's length non-residents which are secured by fixed assets located in Canada and owned by such non-resident borrowers, such as income earning residential and commercial mortgages or non-income earning residential mortgages, qualify as "eligible loans" as defined in subsection 33.1(1) of the Act. You have also asked whether income earned on residential or commercial property by a non-resident IBC borrower is subject to Canadian income taxes under Part I or Part XIII of the Act.

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Whether such loans would qualify as "eligible loans" as defined in subsection 33.1(1) of the Act is a question of fact. The fact that they are secured by such properties should not prohibit their qualification as "eligible loans" as defined in subsection 33.1(1) of the Act provided they are not in fact guaranteed by a person referred to in subparagraph 33.1(1)(a)(i) of the definition of "eligible loans" in the Act and provided the proceeds from such loans were not used, directly or indirectly, in the financing of the secured assets described above or any other assets with income producing potential or for any other purpose set out in subparagraph 33.1(1)(a)(iii) of the definition of "eligible loans" in the Act.

Where income is earned on residential or commercial property by a non-resident IBC borrower, such income would generally be subject to tax in Canada under Part I or Part XIII subject to the terms of the relevant Income Tax Convention, if any. Paragraph 212(1)(b)(xi) of the Act has no relevance in this regard as we are not dealing with income generated on an amount deposited with a prescribed financial institution as defined in section 7900 of the Income Tax Regulations.

Question 5

You have asked whether both fee and interest income received on an "eligible loan" as defined in subsection 33.1(1) of the Act are exempt from Part I tax when such a loan is domiciled at the IBC for management purposes. We understand your reference to "for management purposes" as being made along the same lines as your comments in your question 4(a) which was answered in our June 26, 1992 letter.

The income from an international banking centre business must be computed as provided for by subsection 33.1(4) of the Act. While this determination can only be made when all the relevant information is available, it is our view that income derived from "eligible loans" could include fee income. However, we are not expressing any views as to which fees, if any, would be considered to be derived from "eligible loans".

Question 6 You have asked whether the requirement in clause 33.1(1)(a)(iv)(A) of the definition of "eligible loan" in the Act to obtain a statement signed by or on behalf of the borrower can be waived or eliminated altogether in favour of the IBC to making a statement on behalf of the borrower.

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The Act is very clear that the prescribed financial institution must obtain a statement signed by or on behalf of the borrower. In our view the requirement to obtain a signed statement should not cause any major difficulties. The Department of Finance would have to modify the Act to eliminate or modify this requirement and any representation to that effect should be made directly to the Department of Finance.

Question 9

You have asked whether it is necessary to match a loan with a specific term with a deposit of a similar term for purposes of the IBC provisions in the Act.

Paragraph 33.1(4)(b) of the Act requires that the "eligible loans" and the "eligible deposits" be matched on a daily basis. The example which was provided in the Release issued by the Department of Finance (87-16) dated January 28, 1987 on IBC supports our interpretation that one does not have to match specific deposits to specific loans.

Subsection 33.1(4) of the Act provides for the calculation of the interest expense which can be recorded in the IBC. It is the aggregate of the actual interest expense which must be disbursed with respect to the "eligible deposits" and any imputed interest expense which must be computed whenever "eligible deposits" are less than 96% of the "eligible loans" on any particular day during a taxation year. The Act essentially provides that at least 96% of the "eligible loans" are to be funded from "eligible deposits". Where this funding formula is not maintained for a particular day resulting in the "eligible deposits" being less than 96% of the "eligible loans" there will be an imputed interest expense amount calculated for the deposit shortfall which must be taken into account in calculating the income of the IBC.

We also note that subsection 33.1(8) of the Act must also be taken into account in computing business income or loss of a prescribed financial institution for purposes of Part 1 of the Act. It restricts the deduction of interest expense with respect to an "eligible deposit" to the computation of income or loss from an IBC business.

The income amount which has been calculated pursuant to subsection 33.1(4) of the Act may then be further reduced by the provisions of subsection 33.1(5) of the Act. Where 96% of "eligible loans" are not considered to have been funded by "eligible deposits", subsection 33.1(5) of the Act will reduce the amount of income from an IBC business otherwise calculated pursuant to subsection 33.1(4) of the Act.

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The amount of the reduction is computed pursuant to the formula set out in subsection 33.1(5) of the Act.

The decision to use a daily averaging as opposed to a weekly or monthly averaging was a policy decision made by the Department of Finance. Where it is felt that such a basis should be modified representations should be made to the Department of Finance directly.

Question 11

You have asked whether non-performing loans can be transferred onto domestic books at fair market value even though it is your understanding that such transfers at face value are not permitted under the Act.

There are no provisions in the IBC rules which would prohibit the transfer of non-performing loans at fair market value. In fact paragraph 33.1(11)(a) of the Act provides for a deemed disposition at fair market value where an "eligible loan" ceases to be an "eligible loan", otherwise than by reason of its disposition by the taxpayer to another person. This provision ensures that any losses which have accrued in respect of the "eligible loans" will be losses of the IBC.

Question 17

You have asked whether a foreign parent or subsidiary of an IBC can accept funds from non-residents and in turn deposit these funds in the IBC in the name of a pooled, numbered account such that the fiduciary deposit would qualify as an "eligible deposit" as defined in subsection 33.1(1) of the Act. The foreign parent or subsidiary of the IBC would certify that the fiduciary deposit is on behalf of non- residents.

Whether there is or not an agency relationship, whether all the depositors are dealing and would continue to deal at arm's length with the prescribed financial institution and whether all the requirements set out in section 33.1 of the Act are met are questions of facts which can only be determined after considering all the relevant documents and agreements between the parties involved.

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These comments represent our opinion of the Act as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We hope that the above comments will be of assistance to you.

Yours truly,

Section Chief
Financial Institutions
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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