10 November 1983 Income Tax Severed Letter 9C-311 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:

We are writing to request your views concerning the characterization of certain transactions conducted by Canadian banks, in the context of the requirements of a particular provision of the Income Tax Act.

With certain exceptions, the Income Tax Act exacts a withholding tax on interest paid by a resident of Canada to a non-resident. One of the exceptions relates to interest paid to an arm's length party by a bank on its debt. The particular provision is clause 212(1)(b)(iii)(D) of the Income Tax Act and the relevant wording is as follows:

" any debt owing by a bank to which the Bank Act applies, as or on account of an amount deposited with that bank that is not repayable in canadian currency".

An Amount Deposited With That Bank

The particular concern that we have is with the interpretation to be given to the words "an amount deposited with that bank". Schedule J of the Bank Act has, under the genreal heading "Liabilities", a number of sub-headings containing the word "Deposits". Where a debt is properly listed under such a sub-heading, we have considered such an amount to be one "deposited with the bank" for purposes of the aforementioned provision of the Income Tax Act. Do you agree with such an interpretation?

Bearer Paper

When Canadiana banks issue bearer paper to institutions in the form of bearer deposit notes or bearer certificates of deposit, it appears appropriate for purposes of Schedule J, to show the resultant liability as a deposit payable on a fixed date. We say appropriate because for purposes of Schedule J, the liability "Deposits Payable to Others - Payable on a Fixed Date" is said to include:

"All bearer notes and other bearer deposit instruments".

In addition to the above types of bearer paper, Canadian banks (including Schedule B banks) are borrowing funds on the U.S. commercial money market through the issuance of standard promissory notes bearing no interest and payable to bearer on a specified date. On the face of the notes, words similar to the following are printed:

"This note may not be sold to or purchased by a resident of Canada and, as required by the General By-Law adopted under the Canada Deposit Insurance Corporations Act, it does not evidence deposits insured under the Canada Deposit Insurance Corporations Act".

In your view,

(a) for purposes of Schedule J, should the liability resulting from the issuance of such notes be reflected under one of the Deposit sub-headings, or under the sub-heading "Other Liabilities" as a liability relating to "Foreign note circulation outstanding:, and

(b) does the liability resulting from the issuance of such notes present an amount deposited with that bank?

An early reply would be appreciated.