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:
1)Is the "gross revenue" from indebtedness, where subsection 95(2.4) of the Act applies, excluded from the 90% gross revenue test in paragraph 95(2)(a.3) of the Act?
2)Does "gross revenue" from the sale of indebtedness include the full proceeds of disposition ("POD") received on the sale or only the "spread" (i.e., gross profit)?
Position:
1)No
2)POD
Reasons:
1)Wording of the provisions - the gross revenue is not specifically included.
2)Trading or dealing on income account - gross revenue would include POD. If on capital - POD or spread would not normally be considered "revenue" or "gross revenue" in the business context.
XXXXXXXXXX 970795
Attention: XXXXXXXXXX
May 21, 1997
Dear Sirs:
Re: Paragraph 95(2)(a.3) and Subsection 95(2.4)
This is in reply to your letter dated March 6, 1996, concerning the application of paragraph 95(2)(a.3) and subsection 95(2.4) of the Income Tax Act (the "Act") and the "90% gross revenue test" contained in paragraph 95(2)(a.3) of the Act.
Paragraph 95(2)(a.3) of the Act applies, inter alia, to deem income earned by a FA of a taxpayer from indebtedness (either directly or indirectly) of a person resident in Canada or in respect of a business carried on in Canada (other than certain specified deposits) to be income from a separate business other than an active business of the FA (and thus foreign accrual property income - herein referred to as "the deemed FAPI rule"), unless more than 90% of the FA's gross revenue derived (directly or indirectly) from all indebtedness (other than certain specified deposits) was derived (directly or indirectly) from indebtedness of non-resident persons with whom the FA deals at arm's length.
Subsection 95(2.4) of the Act provides an exception to the above deemed FAPI rule in respect of income derived by the FA of the taxpayer from indebtedness (directly or indirectly) to the extent that, inter alia:
(a)the income from the indebtedness is derived by the FA in the course of a business conducted principally with arm's length persons and the FA is a regulated financial institution in the country or jurisdiction in which the FA's business is principally carried on; and
(b)the income from the indebtedness is derived from the actual trading or dealing in the indebtedness (and any interest earned by the FA during a short-term holding on indebtedness acquired for the purpose of trading or dealing) with persons with whom it deals at arm's length and are not resident in Canada (i.e., "customers").
For purpose of this exception if the FA acquires indebtedness from the taxpayer for the purpose of trading or dealing the indebtedness to its customers (under same or similar market terms or conditions as other acquisitions and sales made by the FA with other arm's length persons), the income from such indebtedness will be deemed to be part of the trading or dealing in indebtedness described in paragraph (b) above.
Your question is would the "gross revenue" from indebtedness, the income from which would be excluded from the deemed FAPI rule, pursuant to subsection 95(2.4) of the Act, as described above, be excluded from the 90% gross revenue test? You also wanted our views as to whether gross revenue from the sale of indebtedness would include the full proceeds of disposition ("POD") received on the sale or only the "spread" (i.e., gross profit)?
While subsection 95(2.4) of the Act may apply to exclude the "income" from certain indebtedness from the deemed FAPI rule in paragraph 95(2)(a.3) of the Act, subsection 95(2.4) does not apply to exclude the "gross revenue" from such indebtedness from that paragraph. Accordingly, it is our view that the FA must take into account all gross revenue from indebtedness (other than from certain specified deposits) for the purpose of the 90% gross revenue test. It is also our view, that the gross revenue from "trading or dealing" in indebtedness for the purpose of paragraph 95(2)(a.3) of the Act will include the POD actually received or receivable in the year by the FA from the sale of such indebtedness and not the "spread" or "gross profit" therefrom.
While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department.
Yours truly,
F. Lee Workman
Section Chief
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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