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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
WHETHER PURCHASE OF LOAN THAT IS A "PRESCRIBED SECURITY" TO THE SELLER QUALIFIES AS "LENDING OF MONEY" UNDER 95(1).
Position: NO
Reasons:
ONLY LITERAL INTERPRETATION IS AVAILABLE UNDER WORDS.
XXXXXXXXXX 950672
Attention: XXXXXXXXXX
November 24, 1995
Dear Sirs:
Re: Foreign Affiliate - Definition of "Lending of Money"
This is in response to your letter dated March 10, 1995 wherein you request clarification in reference to the above definition in subsection 95(1) of the Income Tax Act (the "Act") as it would be applied under the following set of facts.
1) FA is a foreign affiliate of a taxpayer resident in Canada.
2) FA is in the business of lending money to arm's length third parties (i) by making direct loans either alone or as a participant under loan agreements with borrowers, (ii) by acquiring negotiable notes and other evidences of indebtedness of corporate, government and bank issuers and (iii) by acquiring participation in loans made by and commercial paper purchased by others. The primary purpose of the business is the earning of interest so that its portfolio of loans and evidences of indebtedness are made or acquired with a view of holding the same to maturity as capital property and not as inventory.
You question whether in the above circumstances the activities of FA are brought in under the broadened definition of "lending of money" in subsection 95(1). You are particularly interested with the phrase "the acquisition by the lender of loans made by and lending assets...of another person" in paragraph (b) of that definition. You are concerned that certain assets acquired by FA would not be considered "lending assets" as defined in subsection 248(1) of the Act on the basis that they would be "prescribed securities" as defined in paragraph 6209(b) of the Regulations to the Act of the person from whom they were acquired.
We share your concerns. While it is not apparent why the categorization of an asset in reference to another person as a "prescribed security" or otherwise should have a bearing on whether a foreign affiliate that acquires such asset carries on the business of "lending of money", the legislation as presently worded clearly requires such a determination to be made. We understand that the Department of Finance is aware of your concerns and intends to give them serious consideration.
In the hypothetical situation described above however, the activities of FA would appear, in large part, to fall under the definition of lending money. Clearly the activity of making loans by FA directly would qualify. Moreover, the acquisition of loans made by other persons by FA would meet the expanded definition of "lending money" under subsection 95(1) as would the purchase of lending assets of other persons that are not "prescribed securities" in reference to such persons. Assuming that the business of "lending money" by FA qualifies as an active business, the remaining income of FA may in the appropriate circumstances be considered to pertain to or be incident to that business.
While it is not entirely clear that such is the case, for the purposes of our reply we have assumed that paragraph 95(2)(l) of the Act would not have application.
We hope that the above is of assistance to you.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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