7 July 1997 External T.I. 9533305 - WITHHOLDING

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:

withholding where interest determined by fluctuation if FX rates

Position

FX not a commodity for purposes of postamble

Reasons:

	                            	953330
XXXXXXXXXX		                                   S. Tevlin

Attention: XXXXXXXXXX

July 7, 1997

Dear Sirs:

Re: Paragraph 212(1)(b) of the Income Tax Act (the "Act")

We have completed our review of the ending words of paragraph 212(1)(b) of the Act (the "postamble") and in particular whether the postamble may apply to loans from non-residents to which the interest payable on the debt instrument varies according to the value of a foreign currency. In this regard we offer the following comments.

Although foreign currency can be bought and sold and as such could be considered a commodity, it is our position that in the context of paragraph 212(1)(b) postamble, "commodity price" should not be considered to include foreign currency fluctuations, but rather in general is to be limited to (for example) prices for tangible commodities manufactured, extracted or grown. It is also our opinion that in cases of uncertainty it should be the underlying economic substance of a payment, and not the method of measurement per se, that determines whether or not it is interest for purposes of the paragraph 212(1)(b) exceptions. We do caution however, that there may be instances where the linkage between the interest rate, exchange rate and profitability causes the words of the postamble to have effect. Such might be the case where the borrower's profitability is little more than a product of changes in exchange rates (as it might be, for example, for a dealer in foreign currency). Varying interest payments according to those same rates could be an indirect way of varying them according to profits.

We apologize for the lengthy delay in responding to your request.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch