7 October 1987 Income Tax Severed Letter 95-3865 F

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.

Dear Sirs:

RE:     Technical Interpretation on Meaning of "Amount Deposited"

This is in reply to your letter of September 9, 1987.

You have asked for our technical interpretation of the words "amount ... deposited" found in clause 212(1)(b)(iii)(D) of the Income Tax Act (the "Act"). Specifically, you would like us to indicate whether a debenture or note issued by a Canadian bank or financial institution or assumed by such a bank or financial institution upon a transfer of assets and liabilities in the course of winding up a wholly-owned subsidiary into a parent company will be considered to be an "amount deposited" with a prescribed financial institution for the purposes of clause 212(1)(b)(iii)(D) of the Act.

In connection with this question1 you refer to the quotation by the Supreme Court of Canada in Re Alberta Legislation, [1938] 2 D.L.R. 81 at 99, from Macleod, Theory of Credit at pp. 368-9, as follows:

"... it is the entry to the credit of the customer which, in the technical language of modern banking is termed a Deposit ... A deposit is simply a credit in the banker's books. It is the evidence of the right of action which a customer has to demand a sum of money from the banker."

You also provide quotations from Crawford and Falconbridge: Banking and Bills of Exchange, 8th edition, volume 1, at pp 339-340:

"... all indebtedness incurred by a Canadian chartered bank for borrowed money - with the important exception of funds received from the issue of bank debentures is properly referred to as a deposit",

and at p. 759,

"It follows from these passages that a deposit could, depending on the contractual terms, refer to money loaned to a bank in exchange for any kind of document evidencing such indebtedness, including bonds, debentures (but not bank debentures), promissory notes and bank passbooks."

You indicate that the important exception noted by Crawford with respect to bank debentures refers to "bank debentures" as defined in section 132 of the Bank Act.

Based on the above authorities, it is your view that the words "amount ... deposited" in clause 212(1)(b)(iii)(D) of the Act are broad enough to include notes and debentures, i.e. that a note issued or assumed by a Canadian bank or financial institution or a debenture issued or assumed by a financial institution not governed by the Bank Act can constitute an "amount ... deposited" in that clause.

As you are aware, there are not yet any "prescribed financial institutions" in the Income Tax Regulations for purposes of clause 212(1)(b)(iii)(D) of the Act. That clause, which was amended by S.C. 1986, c. 55, s. 74(1), formerly referred to a "bank to which the Bank Act applies" rather than to a "prescribed financial institution." S.C. 1986, c. 55, s. 74(5) provides as a transitional measure that former clause 212(1)(b)(iii)(D) remains in effect with respect to interest paid or credited on amounts deposited before 1988 with a bank to which the Bank Act applies.

With respect to former clause 212(1)(b)(iii)(D), our position has been that an "amount deposited" with a bank to which the Bank Act applies is identified as any amount reported by the bank in items 1, 2 or 3 of the Liabilities section on Schedule J, which is the Consolidated Return of Assets and Liabilities which must be filed by the bank with the (federal) Superintendent of Financial Institutions (formerly the Inspector General of Banks). It is our understanding that an amount so reported in items 1, 2 or 3 represents unsecured debt of the bank which ranks pari passu with, rather than being subordinate to, all other unsecured deposits.

In our opinion, the above-mentioned position which we have taken finds support on pp. 290-1 of the above-mentioned Crawford and Falconbridge: Banking and Bills of Exchange, where the following is stated with respect to the difference between bank deposits and bank debentures:

"The provisions authorizing the issue of bank debentures ... were intended to provide a means by which banks might borrow other than by receiving deposits, so as not to incur reserve cost and deposit insurance premium cost ... Bank debentures ... have been excluded (from the classification of "deposit liabilities") by regulation ... In the Reserves Regulation ..., the Governor in Council defined deposit liabilities as comprising the sums the bank would be required to include in items 1 to 3 of the Liabilities section of its return under section 219 of the Act made in the form set out in Schedule J. Reference to Schedule J Bill disclose that bank debentures are listed as Liabilities, item 10, and therefore do not constitute deposit liabilities of the issuing bank."

We note the related fact that by virtue of section 132 of the Bank Act, bank debentures are "subordinate in right of payment to the prior payment in full of the deposit liabilities of the bank.

For purposes of amended clause 212(1)(b)(iii)(D) of the Act, our position therefore continues to be that an "amount ... deposited" with a bank to which the Bank Act applies is identified by its being reported in items 1, 2 or 3 of the Liabilities section of Schedule J filed with the Superintendent of Financial Institutions. An amount deposited with a financial institution to which the Bank Act does not apply and which ultimately becomes a "prescribed financial institution" would be, in our opinion, any unsecured debt of the financial institution which is reported to the applicable government authority (federal or provincial) as a deposit and which ranks pari passu with, rather than being subordinate to, all other unsecured deposits. We would maintain the above positions regardless of whether the bank or other financial institution, as the case may be, has issued or has assumed the debt in question.

We trust that the above will be of assistance to you.