REASONS
FOR JUDGMENT
Owen J.
I. Introduction
[1]
These reasons address the appeals by CIT Group
Securities (Canada) Inc. (the “Appellant”) from
reassessments (collectively, the “Reassessments”)
of its 2003, 2004, 2005, 2006, 2007, 2008 and 2009 taxation years
(collectively, the “Taxation Years”). The
appeals were heard on common evidence.
[2]
The Reassessments included in the income of the
Appellant, as income from shares, amounts in respect of income earned by
controlled foreign affiliates (“CFAs”) of the
Appellant during 2003 through 2009 (the “relevant
period”), on the basis that such income was “foreign accrual property income” (“FAPI”) as defined in subsection
95(1) of the Income Tax Act (the “ITA”). The additional amount assessed
for each of the Taxation Years is as follows:
|
Taxation Year
|
FAPI[2]
|
|
2003
|
$41,366,142
|
|
2004
|
$37,710,239
|
|
2005
|
$44,024,634
|
|
2006
|
$29,047,662
|
|
2007
|
$23,375,091
|
|
2008
|
$23,891,920
|
|
2009
|
|
[3]
The sole issue in these appeals is whether
paragraph 95(2)(l) applies to include the income earned by CCG Trust
Corporation (“CCG”) during the relevant period in its income from property. If paragraph
95(2)(l) does apply, the Reassessments must stand, subject only to an
agreed-upon adjustment to reflect the correct relevant tax factor for each of
the Taxation Years. If paragraph 95(2)(l) does not apply, the Appellant must be
reassessed for each of the Taxation Years to delete the amounts set out in the
chart above together with any interest and penalties that resulted from the
inclusion of such amounts in the income of the Appellant.
[4]
At the commencement of the hearing, the
Respondent conceded that throughout the relevant period the Appellant met the
requirements of subparagraph 95(2)(l)(iv). Accordingly, the only questions
that need be addressed are whether the income of CCG earned during the relevant
period is caught by the opening words of paragraph 95(2)(l) and, if it
is, whether CCG meets the requirements in subparagraph 95(2)(l)(iii) for
the exception from inclusion of that income in CCG’s income from property.
[5]
Four witnesses testified for the Appellant. The
first witness for the Appellant was Mr. James Shanahan, who is the chief
regulatory counsel of CIT Group Inc. (“CITG”), a
United States corporation and the ultimate parent of the Appellant. Mr.
Shanahan has been employed by CITG since 1987 and is based at CITG’s office in
Livingston, New Jersey. He has held his current position for approximately 10
years and reports to the general counsel of CITG.
[6]
The other three witnesses are former managing directors
of CCG each of whom held that office during a portion of the relevant period. Following
their employment by CCG, two of the three former managing directors continued to
be employed in the CITG group of companies and the third sought employment
elsewhere.
[7]
I found all four of these witnesses to be
straightforward and credible.
[8]
The Appellant also presented two expert witnesses:
Sir Trevor Carmichael, Q.C. and Mary Mahabir, Q.C. Sir Trevor
Carmichael, Q.C. is a lawyer who was called to the Middle Temple in London and
to the Barbados Bar in December 1977. Sir Trevor Carmichael’s practice
includes the area of commercial law. Ms. Mary Mahabir, Q.C. is a
lawyer who was called to the Barbados Bar in October 1981. Ms. Mahabir’s practice is in the areas of corporate and commercial law.
Neither expert had acted for CCG or the Appellant at any time in the past.
[9]
The expert witnesses submitted expert reports
and testified regarding the relevant corporate law and commercial law of
Barbados and their application to CCG during the relevant period. In
particular, the experts described their understanding of the Financial
Intermediaries Regulatory Act, Chapter 324A of the Laws of Barbados (the “FIRA”), the Financial Institutions Act, Chapter
324A of the Laws of Barbados (the “FIA”), the Companies Act,
Chapter 308 of the Laws of Barbados (the “BCA”)
and the Central Bank of Barbados Act, Chapter 323C of the Laws of
Barbados (the “CBA”) and the application of
those statutes to CCG during the relevant period.
II. Facts
A. Overview of the Structure
[10]
The structure in place during the relevant period
is reproduced in Appendix A of these reasons.
[11]
The Appellant was the sole shareholder of eight
international business corporations incorporated and resident in Barbados, and the Appellant and CIT
Financial Ltd. (“CITF”) were the only
shareholders of a ninth international business corporation incorporated and
resident in Barbados.
I will refer to the nine international business corporations collectively as
the “IBCs”.
[12]
The eight IBCs wholly owned by the Appellant each
owned a single separate class of voting common shares in CCG. Collectively, these shares represented
76,000 votes in CCG. The ninth IBC owned 1,000 Class A common shares in CCG
carrying 1,000 votes per share - for a total of 1 million votes - and 1,650,000
Class P non-voting common shares. The total issued share capital of CCG
throughout the relevant period was $1,659,000.
[13]
The shareholders of the Appellant were CITF and
CCG Partners 1 Limited Partnership (“CCG LP”). CITF
owned 20 special shares in the Appellant that entitled it to 100 million votes
per share for a total of 2 billion votes.
[14]
CCG LP owned all of the issued Class A common
shares in the Appellant, which represented approximately 38% of the voting
shares in the Appellant.
Each limited partner in CCG LP owned a class of units in the partnership that
tracked the performance of one of the IBCs owned by the Appellant. This means
that if a particular partner’s interest tracked a particular IBC and the IBC
declared and paid a dividend to the Appellant, the Appellant would declare and
pay a dividend in the same amount to CCG LP and CCG LP would allocate and
distribute the amount of the dividend to the partner.
[15]
CITG owned all of the issued shares of CIT Bank
(“CITB”), a corporation incorporated in the
state of Utah, USA.
[16]
CITF was an indirect subsidiary of CITG. CITF in turn held the majority
of votes in the Appellant.
[17]
The Appellant controlled each of the IBCs, and
the ninth IBC, Adams, controlled CCG. Accordingly, the Appellant also
controlled CCG.
[18]
The parties agree that throughout the relevant
period each of the IBCs and CCG was a “controlled foreign affiliate” of the
Appellant as defined in subsection 95(1) of the ITA.
B. CITG
and CITB
[19]
CITG is a corporation incorporated and resident
in the United States the shares of which are listed on the New York Stock
Exchange.
Mr. Shanahan described his role in CITG as follows:
I have to oversee
the attorneys who handle review of our securities filings, bank regulatory
work, sanctions issued through OFAC, through OSFI, through Bank of England.
We work with the
compliance department on anti-money laundering, advising them on anti-money
laundering.
It is basically a
variety of regulatory aspects other than tax. We have a separate tax department
for that.
[20]
Mr. Shanahan described the business of CITG
during the relevant period as follows:
We provided
financing and leasing services to small- and medium-size businesses, the
transportation industry, and for a portion of that period, we would also
provide certain consumer loans, in terms of home equity, student loans, and I
think some manufactured housing.
[21]
Mr. Shanahan described the principal
purpose of the business of CITG over the same period as being to provide “financing and leasing to small businesses, middle market
companies, and the transportation industry.”
[22]
The largest portion of CITG’s business was in
the United States and the second largest was in Canada. CITG also conducted
business in Europe, Latin America and Asia.
During the relevant period, the CITG group of companies had anywhere from 4,000
to 7,700 employees worldwide and assets in the range of US$45 billion to US$90
billion.
[23]
The business of CITG was conducted through
business units that each targeted specific business segments. The business
units were referred to as Business Segments.
A business unit was managed as a single entity even though it might actually
comprise a large number of legal entities within the CITG group of companies. For
example, one business unit (or Business Segment) was equipment financing, which
was conducted through perhaps 15 separate legal entities.
[24]
CITG files a form 10-K with the United States Securities
and Exchange Commission (the “SEC”) on an annual basis.
In addition, CITG files form 10-Q quarterly and form 8-K periodically, and also
files proxy statements.
[25]
Mr. Shanahan stated that he “put together certain sections of the 10-K related to risk
factors and the description of our regulatory environment”. As well, Mr. Shanahan would review each such 10-K to “see if there is anything that looks out of character with my
understanding of the business.” When
asked if CITG tried to be accurate in the 10-Ks, Mr. Shanahan stated that “. . . we endeavour to make sure that it [the 10-K] gets
checked by multiple parties in order to ensure it is as accurate as we can.” He also stated that the SEC reviewed the 10-Ks and provided a
comment letter in which they could ask for clarification of certain issues or
for justification of the accounting treatment of certain issues.
[26]
The Respondent objected to any reliance on the
contents of the 10-Ks for determining matters of U.S. law on the basis that
such matters were the purview of a suitably qualified expert.
[27]
I agree with the Respondent that the testimony
of Mr. Shanahan and the descriptions in the 10-Ks of the U.S. regulatory
environment cannot be used as a substitute for expert evidence on relevant U.S.
law, nor can these sources be used as a substitute for expert evidence on the
status of CITG or CITB under relevant U.S. law.
[28]
Mr. Shanahan testified to his understanding
that the only bank subsidiary of CITG throughout the relevant period was CITB,
which he stated was chartered by the Utah division of Financial Institutions. The regulation section of
each of the 10-Ks identifies CITB by the name “CIT Bank”.
[29]
Mr. Shanahan described the business of CITB during
the relevant period in the following exchange with counsel:
Q. What
did CIT Bank do between 2003 and 2009?
A. It changed over time. It was initially
formed to provide financing for some of our vendor programs, particularly for
the Dell program. It expanded into doing programs -- that was generated
originally by our vendor finance unit. It started expanding into doing other
programs that it generated with various third-party companies where it was
providing financing.
Over time, it also got started getting into home equity loans. I
think around 2007, it started making corporate finance loans.
Q. Its
customers were whom?
A. Initially its customers were consumers. By
2007, it started developing into small- and medium-size businesses, and
somewhere in there they also made SBA loans, which would be small businesses.
Q. What about accepting deposits?
A. They funded themselves with a combination
of equity from the parent, loans from the parent, and deposits they accepted. Initially
it was through broker deposits. In other words, if someone went to Merrill
Lynch and said, “Can you find me a bank that is going to give me a good
interest rate on a certificate of deposit,” they would look around, and CIT
Bank would be one of the ones they would look at. It was primarily CDs at the
beginning.
C. CCG
(1) The
Employees of CCG
[30]
The senior employee of CCG throughout the
relevant period was its managing director. The primary role of the managing
director was to oversee CCG’s portfolio and to seek out and vet opportunities
for CCG consistent with CCG’s business objectives. In addition, the managing
director was responsible for the preparation of an annual “President’s Report” (which was tendered at the annual
general meeting), managing the staff of CCG, overseeing the preparation of
financial statements, tax returns and reports to the Central Bank of Barbados,
and liaising with the auditors of CCG.
[31]
During the relevant period, the managing
directors of CCG were as follows:
|
Name of Managing Director
|
Tenure as Managing Director
|
|
John Walker
|
February
1997 to December 2006
|
|
Bruce Ells
|
November
2006 to March 2009
|
|
Steven Blazevic
|
|
[32]
In addition to the managing director, CCG had
six other full-time employees during the relevant period, and each employee had
a distinct role to play.
[33]
At the time of his appointment as managing
director in February 1997, Mr. Walker had nine years’ experience as an
investment analyst focusing on private and public debt, which he acquired
through his employment with Confederation Life in Canada and the United States. Mr. Walker spent his
last years at Confederation Life in the United States managing the liquidation
of its assets. After leaving CCG, Mr. Walker returned to Canada, where he
is currently the director of corporate finance at CITF in Calgary.
[34]
At the time of his appointment as managing
director, Mr. Ells had relevant experience acquired over 18 years through
his employment by the Export Development Corporation (now Export Development
Canada), RBC Dominion Securities, Newcourt Credit Group and CITG. Mr. Ells described this
experience as follows:
In some ways,
much of what I had done in my working life until then was actually very direct
preparation for that role [as managing director of CCG]. I had broad
international experience both in origination and risk and treasury operations
from my time at EDC.
I had worked on
the bond desk in London for RBC Dominion Securities, so I had some capital
markets background from the point of view of a market maker, which was actually
useful for some of the capital markets transactions and administration we had
to do at CCG.
Then my work at
Newcourt and CIT was on the risk side of those businesses, so managing the
portfolio and the quality of the incoming assets and credit surveillance and
addressing or understanding and characterizing for the board any
underperformance by our existing financial assets. All of that was very
familiar from what by then was almost 20 years of experience in related roles.
[35]
Mr. Ells left the CITG group of companies
in March 2009. For the past two years, Mr. Ells has been the chief credit
officer of rail and aviation at Element Financial Corporation, a competitor of
CITG, and before that he was senior vice president, project finance at Dominion
Bond Rating Service for 3 years. Mr. Ells
was subpoenaed by the Appellant to testify.
[36]
At the time of his appointment as managing
director, Mr. Blazevic had 12 years’ experience in lending and lease
financing, which he had obtained through his employment by TD Bank, Newcourt
Financial Ltd., GE Capital and GE Fleet Services. In 2006, Mr. Blazevic
left his position as VP, risk management of GE Fleet Services and took the
position of assistant VP, credit at CITF, where he was responsible for the
commercial and industrial financing and syndication portfolio. He remained in
this position until he was appointed managing director of CCG on January 5, 2009.
After leaving CCG on July 31, 2014, Mr. Blazevic was appointed director,
energy and infrastructure at CITF in Toronto.
[37]
The testimony of Mr. Walker, Mr. Ells
and Mr. Blazevic regarding CCG differed only in the specific details
relating to the periods that they each served as managing director. Each
painted a similar picture regarding the business objectives of CCG, the
operations of CCG, the interaction of CCG with the authorities in Barbados, the
role of the managing director of CCG, the role of the board of directors of
CCG, and the activities of the employees of CCG. The following facts represent
a composite drawn from the evidence provided by these three witnesses.
(2) The
Operations of CCG
(a) General
[38]
The operations of CCG throughout the relevant
period were conducted from its offices at Chelston Park, Collymore Rock, St. Michael,
Barbados, which was CCG’s only location. The
operations were overseen by CCG’s board of directors, which included a representative
of the IBCs and high-profile Barbadian residents.
[39]
The managing director would meet with the board
on a regular basis and present the board with opportunities consistent with the
business objectives of CCG, and the board would decide whether to pursue these
opportunities.
The witnesses’ description of CCG’s business objectives was consistent and is
well summarized by Mr. Blazevic and Mr. Ells as follows:
The business
philosophy was to lend money to third-party corporations. The focus was on
investment-grade transactions or loans, predominantly in the project finance,
rail, and corporate finance spaces.
. . .
CCG Trust was
primarily a lender. The purpose was to optimize yield on fixed-income
investments.
. . .
CCG Trust was
primarily a buy-and-hold shop, meaning that we invested in long-term assets,
investment grade, typically investments vetted by a primary market process, and
those investments were intended to be held to maturity on the expectation that
they would continue to have a high credit quality.
[40]
To enforce the long-term hold philosophy vis-à-vis
the loans it originated, CCG would negotiate a “make-whole
premium” that required the borrower to make a payment if it chose to
repay its debt early. The payment of the premium was triggered by early
repayment and was intended to place CCG in the same position as it would have
been in if it had held the debt to maturity. The existence of the make-whole
premium removed the incentive for a borrower to repay its debt early.
[41]
An example of the triggering of a make-whole
premium occurred in 2005. In that year, a debtor prepaid a debt owed to CCG in
respect of the financing of four ships. The transaction had been funded in 1997
and was otherwise scheduled to mature in 2008. CCG received a make-whole
premium as a result of the early repayment, which was made because the debtor
was acquired by a new owner, who wished to prepay the debt.
[42]
The managing director sourced opportunities for
CCG through third party agents and brokers, mainly on Wall Street. The initial
contacts were developed by Mr. Walker from individuals he had dealt with
while at Confederation Life.
His successors continued to use those contacts and others. The contacts included
individuals at Deutsche Bank, Citibank, Credit Suisse, Lehman Bros., Merrill
Lynch and Bank of America.
[43]
Each year during the relevant period the
managing director prepared a President’s Report, which was presented at the
annual general meeting of CCG.
Each report would take 5 or 6 weeks to prepare and was modelled on the prior
year’s report. The managing director would receive assistance from the other
employees of CCG in preparing the report.
[44]
The first paragraph of the 2003 through 2007
reports stated:
The business of
CCG Trust Corporation (“CCG”) is the lending of money through international
asset-based financings, primarily for high value transportation and industrial equipment.
CCG was established in 1989 for participation by a number of large Canadian
life insurance companies as an element of their extensive domestic and international
investment portfolios. Since its formation, the company has structured and
provided in excess of $1 billion of debt financing.
[45]
Each report provided details regarding the
year’s activities (i.e., the 2003 report addressed activities in 2003), the
composition, distribution and performance of CCG’s portfolio, including the
swap transactions it had in place, the terms of each financing funded by CCG
and the credit characteristics of the borrowers. In addition, each report
provided an operational overview which included a description of the staffing
of CCG, the regulation of CCG, the aircraft inspection program (2003, 2004,
2005), the auditors of CCG, the board of directors, the executive committee,
government relations and the Barbados economy.
[46]
The managing director would make a presentation
at each annual general meeting of CCG. Mr. Walker described this presentation
as follows:
I would do almost
like a state of the union, I guess, and go through the operations of the
business over the previous year, what the portfolio looked like, additions,
maturities, things like that, anything they should be aware of. Just anything I
felt was prudent to bring to their attention.
Even looking forward, if there was anything, the Barbados economy we
would talk about or if there was a rumour of a change of legislation, just
anything that I felt was germane to what they needed to know.
(b) The Funding of CCG
[47]
The business of CCG was funded entirely by loans
provided by the IBCs. Specifically, CCG borrowed from the IBCs in either
Canadian or U.S. dollars at varying rates of interest secured by CCG’s assets.
The outstanding balance of the loans at the end of 2002 and at the end of each
fiscal year in the relevant period was as follows:
|
YEAR
|
BALANCE (Cdn $)
|
|
2002
|
586,799,542
|
|
2003
|
498,967,904
|
|
2004
|
429,152,116
|
|
2005
|
328,617,544
|
|
2006
|
390,911,567
|
|
2007
|
346,097,930
|
|
2008
|
369,596,019
|
|
2009
|
|
[48]
The manner in which these loans were made to CCG
was described by Mr. Walker in cross-examination as follows:
We would have
made requests to the IBCs at different times for funding. They would provide
that funding to CCG. CCG then had that funding, that cash within CCG. We would
then with cash make an investment. We would fund a borrower, whatever
transaction we happened to be looking at at the time that was approved by the
board.
[49]
A specific IBC might choose to fund CCG so that CCG
could enter in specific investment or an IBC might choose not to fund a
specific investment. If one or more of the IBCs funded a specific investment by CCG, the
IBCs’ loan to CCG would be secured by the investment under the terms of the
inter-lenders agreement among CCG and the IBCs. The
IBCs’ security interests in the assets of CCG were reported in a chart in the
annual President’s Reports and were also reported to the Central Bank of
Barbados. However, CCG was the owner of the assets, not the IBCs.
[50]
The notes to the financial statements of CCG
state that the “scheduled
maturity dates of loans payable to shareholders are consistent with that of the
loans receivable”. Mr. Walker confirmed
that the terms of the loans by the IBCs to CCG were “consistent with that of the loans receivable
on the loan portfolio with third parties”.
(c) CCG’s Portfolio
[51]
For the most part, the portfolio of CCG
consisted of long-term debt obligations originated by CCG (i.e., CCG was the
original creditor), or acquired by CCG in the secondary market, that related to
the long-term financing of large assets such as rail cars, ships and aircraft. The
make-up of the portfolio is well documented in CCG’s financial statements and
in the annual President’s Reports for the relevant period. I do not see any
need to describe the underlying transactions in detail.
[52]
There was one exception to CCG’s focus on high
quality, long-term debt obligations. In 2004, CCG acquired a credit linked note
(“CLN”) from Deutsche Bank. The CLN was acquired due to the low interest
rate environment at the time and provided a return to CCG in exchange for
credit exposure to an underlying basket of 100 individual credit default swaps. The CLN was acquired in March
2004 and matured on June 20, 2009.
CCG did not purchase the CLN for cash but rather was liable to Deutsche Bank to
the extent that there were defaults in the underlying portfolio exceeding a
specified threshold.
[53]
CCG would typically invest surplus cash in short-term
deposits until a suitable long-term investment opportunity came along. In 2006,
CCG entered into convertible asset swaps (“CAS”)
with Deutsche Bank. The CAS were short-term debt obligations that were used by
CCG to replace term deposits because of the low interest rate provided on such
deposits in 2006. The CAS involved the purchase by CCG of callable and puttable
bonds with a term of 1 to 3 years and the entering into of an arrangement with Deutsche Bank that provided CCG with a
premium in addition to the interest payable to CCG on the bonds.
[54]
The low interest rate environment in 2004 to
2006 resulted in a higher proportion of short-term debt than was considered
ideal for CCG. Mr. Ells described the steps taken by CCG to move from short-term
obligations back into long-term obligations as follows:
When I first arrived,
CCG had about $150 million of $400 million in total balance sheet was in short-term
instruments and deposits. When I say short-term instruments, that includes the
convertible asset swaps and includes ordinary short-term cash deposits.
That was considered
not an ideal circumstance in that CCG made better returns by doing long-term
transactions in transportation and project assets, mainly.
Over that year,
the change was deploying those short-term cash instruments into longer-term
private placements. Actually, it took longer than the first year. It was really
at the end of 2007, we did a $50 million loan as part of a larger deal to
Swisscom, not coincidentally based in Switzerland, and then five more
transactions in 2008, and that reduced substantially the amount of so-called
undeployed or short-term cash instruments replaced by these longer-term higher-yielding
private placements.
[55]
Throughout the relevant period, CCG was a party
to swap transactions that were structured to ensure that CCG received fixed-rate
Canadian dollar cash flows from its portfolio, which included significant U.S.-dollar-denominated
obligations. Mr. Walker, Mr. Ells and Mr. Blazevic described the
swap transactions as follows:
. . . As I
mentioned, we didn’t like to sell transactions. We liked to buy and hold them,
and part of that was that we wanted fixed-rate Canadian dollar securities. A
lot of the securities we would purchase, while most of them were fixed rate to
begin with, they were U.S. dollar, so we entered into a swap to convert over
the life of the transaction those U.S. dollar cash flows to Canadian. We
therefore built up a fairly significant swap book that I would report on, as
well.
. . .
. . . Most of the
transactions were U.S. dollar denominated, so we swapped them from fixed-rate
U.S. dollar financing through floating-rate U.S. dollar financing into fixed-rate
Canadian.
. . .
Yes, the swaps
were entered into to hedge any currency risk, so the primary market that CCG
Trust dealt in was the U.S., so most private debt issuances were done in U.S.
dollars, and we reported in Canadian dollars, so we swapped the U.S. dollar
interest and principal payments to Canadian dollar interest and principal
payments.
(d) CCG’s Income
[56]
The financial statements of CCG for 2003 through
2008 show that interest income represented in excess of 96% of CCG’s total
realized revenue for 2003 to 2008. In 2009, the adoption of International
Financial Reporting Standards and the restatement of the 2008 financial
statements to reflect fair market value instead of amortized cost resulted in a
change in the accounting presentation, but interest continued to be a very
significant component of CCG’s realized revenues for 2008 and 2009.
[57]
The interest paid by CCG to the IBCs on the
loans from the IBCs would be slightly less than the interest received by CCG on
its debt portfolio. For example, in 2004, CCG’s interest income was
approximately $39.7 million while its interest expense was approximately $38.9
million.
(e) CCG’s Interaction with the
Authorities in Barbados
[58]
In response to a request to admit under
subsection 130(1) of the Tax Court of Canada Rules (General Procedure)(the
“Rules”), the Respondent admitted that “[o]n November 21, 1995, a license (‘the CCG
license’) was issued to CCG Trust pursuant to part 3 of the Financial
Intermediaries Regulatory Act, 1992-13, of Barbados.” I will address the import of this licence in my review of the
expert evidence tendered by the Appellant.
[59]
CCG paid to the Central Bank of Barbados (the “Central Bank”)
an annual licence fee of Barbados $25,000.
As well, CCG filed monthly and quarterly reports with the Central Bank. The monthly and quarterly
reports for the Central Bank were prepared by the controller of CCG using a
template provided by the Central Bank. The managing director signed the
reports.
[60]
In addition to the filing of reports,
representatives of CCG would meet with representatives of the Central Bank, and
the Central Bank performed two
audits of CCG, one of which was in 2009.
[61]
CCG also filed annual tax returns with the
Barbados Department of Inland Revenue.
The income tax returns of CCG for the relevant period were prepared in Barbados
dollars by Ernst and Young on the basis of the audited financial statements of
CCG. The managing director of CCG signed the income tax returns for the 2003,
2004, 2006, 2007, 2008 and 2009 taxation years. The return for the 2005
taxation year was signed by David Gittens, a member of the CCG board of directors,
because Mr. Walker was away from Barbados at the time.
(f) Other Information
[62]
In cross-examination, each of the three
witnesses confirmed that CCG did not accept deposits, offer chequing or other
types of accounts to the public, or act as a trustee, executor or fiduciary. As
well, CCG did not offer insurance products or collect insurance premiums.
D. Expert Evidence
[63]
Sir Trevor Carmichael and Ms. Mahabir submitted
expert reports and testified as expert witnesses. In their respective expert
reports, Sir Trevor Carmichael and Ms. Mahabir provided the
following opinions regarding Barbados law and the status of CCG under that law:
1. On October 26, 1989, CCG was incorporated under the Companies Act of
Barbados as CCG Equipment Limited.
As a company incorporated under the laws of Barbados, CCG was subject to and
governed by the laws of Barbados during the relevant period. CCG was duly
incorporated and validly existing throughout the relevant period. These opinions were based
upon, and supported by, searches by the experts of the Register of Companies in
Barbados. Each expert included in his or her expert report a copy of the
certificate of incorporation of CCG and a copy of the certificates of amendment
of CCG’s Articles of Incorporation, whereby its name was changed to CCG Trust
Corporation and its share capital was amended.
2. On November 21,
1995, CCG was issued a licence by the Minister of Finance under Part III of the
FIRA, which entitled CCG to carry on the business of a trust and finance
company in accordance with the provisions of paragraphs 24(1)(b), (c)
and (d) of the FIRA.
3. The FIRA was
replaced by the FIA effective July 1, 1997. Under section 116 of the FIA, a
company licensed under Part III of the FIRA on July 1, 1997 was
deemed from that date to be licensed under the FIA, and the provisions of the
FIA applied accordingly.
Consequently, effective July 1, 1997, paragraphs 24(1)(b), (c)
and (d) of the FIRA were replaced by paragraphs 23(1)(b), (c)
and (d) of the FIA. Section 22, subsection 23(1) and sections 24 and 27
of the FIA state:
22. In
this Part [Part III], “licensee” means a company licensed under this Part to
carry on business as a trust company, a finance company or a merchant bank or
similar financial institution licensed under this Part.
23.(1) The business of a trust company, a finance company or a
merchant bank or similar financial institution is
(a) banking business; or
(b) the business of the acquisition of funds by
(i) the
acceptance of deposits,
(ii) the
issue of shares,
(iii) the
grant of loans,
(iv) the
collection of premiums, and the investment of such funds;
(c) performing functions as trustee, administrator or
executor; and
(d) the business of broker, investment analyst,
investment adviser and such other business that is not specifically prohibited
by the Central Bank by notice published in the Official Gazette for the
purposes of this Part.
. . .
24. No person other than a bank licensed under Part II of the Offshore
Banking Act shall carry on the business of a trust company, a finance
company or a merchant bank without a licence issued under this Part.
. . .
27.(1) A
licence issued under this Part shall show the class or classes of business to
be carried on by the licensee.
(2) A licence issued under this Part
is subject to such conditions as the Minister may specify in respect of the
class or classes of business to be carried on by the licensee.
(3) A licence under this Act remains
valid until revoked pursuant to this Part but it is a condition of every
licence that an annual fee be paid by the licensee in the amount and at the
time prescribed.
4. The language of paragraphs
23(1)(b), (c) and (d) of the FIA differed from the
language of paragraphs 24(1)(b), (c) and (d) of the FIRA
only in the placement of the words “and the investment of such funds” in paragraph
23(1)(b) of the FIA. Notwithstanding the different placement, those
words continue to qualify all of the activities listed in subparagraphs 23(1)(b)(i)
to (iv) of the FIA.
5. As a company
licensed to carry on the business of a trust and finance company in accordance
with the provisions of paragraphs 23(1)(b), (c) and (d) of
the FIA, CCG was permitted to carry on the business of a trust
company and the business of a finance company. However, CCG was not required to carry on
both businesses at the same time or to carry them on at all.
6. The activities of
CCG during the relevant period were permitted under the licence issued to CCG
under Part III of the FIA. The nature and extent of the activities carried on by
CCG in Barbados during the relevant period required CCG to be licensed under
Part III of the FIA. CCG would have been subject to a penalty under
section 102 of the FIA if it conducted its business without the required
licence.
7. A licensee under
Part III of the FIA is required to pay to the Central Bank an annual licence
fee of Barbados $25,000.
8. During the relevant
period, CCG was a trust company under the FIA because it was licensed to act in
that capacity. However, CCG did not fit within the generally
understood meaning of trust company in the sense of “a corporate entity that
was formed for the purpose of and was carrying on the business of acting as a
trustee or fiduciary and providing related trust services”.
9. During the relevant
period, CCG was regulated in accordance with the provisions of the FIA. The Central Bank enforced the regulatory
provisions in the FIA. The FIA required CCG to fulfil its various
obligations under threat of penalty. These obligations included a requirement
to provide monthly and quarterly reports to the Central Bank, to provide such
other returns as the Central Bank might require and to publish its audited
financial statements in the Official Gazette and in a daily newspaper. In addition, CCG was required to appoint
an auditor, to seek approval for certain changes, to maintain a certain level of capital and to manage risk in accordance with
published guidelines.
[64]
Sir Trevor Carmichael and Ms. Mahabir each
included a copy of the licence issued to CCG with his/her expert report.
[65]
The copy of the licence included with the TC
Report at Tab G has under the signature the title “Minister responsible for Finance”. As well, the certificate has a square stamp with the date “05 DEC
1995” and the inscription “Bank
Supervision Dept.” Sir Trevor Carmichael testified
that a partner in his firm had sent a request to the Central Bank by e-mail and
that the copy of the licence at Tab G was enclosed with the letter received
from the Central Bank in response to that query. The letter is included with
the TC Report at Tab H. The letter at Tab H is on Central Bank letterhead,
is addressed to the Head, Commercial and Tax, at Sir Trevor Carmichael’s law
firm, is dated March 4, 2015 and is from Mrs. Cheryl A. Greenidge,
Deputy Director, Bank Supervision Department. The letter states:
We refer to your
email request of March 3, 2015 and confirm that CCG Trust Corporation has been
licensed since November 21, 1995 under the Financial Intermediaries Regulatory
Act, 1992-13, has paid its licence fees and has been regulated from said date
by the Central Bank of Barbados.
[66]
Sir Trevor Carmichael explained that the Bank
Supervision Department is the department that oversees the licensing and
ongoing regulation of banks and of entities licensed under Part III of the
FIRA. He stated that he knew Mrs. Greenidge personally and that he
recognized her signature from past dealings with her.
[67]
Sir Trevor Carmichael understood the document
included with the letter to be a copy “of the original
certificate, of the original licence” issued pursuant to Part III of the
FIRA to CCG on November 21, 1995. Sir Trevor
Carmichael provided the following explanation regarding the stamp:
This stamp, which
says received, I would have to give an explanation for that. Maybe I will take
you above the stamp first. The document is signed by the Minister of Finance,
and that is the signature of Owen Arthur, who at that time was Minister of
Finance.
The procedure is
such that when a license is signed by the Minister of Finance, that license is
then sent back to the Central Bank of Barbados, and typically, on the license,
the Central Bank will stamp the date that it was received, and that is what
that stamp is about. It is signed by the Minister of Finance, the signature,
which I readily recognize and know.
[68]
The copy of the certificate included with Ms. Mahabir’s
report was obtained from instructing counsel.
Ms. Mahabir testified that as part of her due diligence she met personally
with Mrs. Greenidge to “ascertain the extent and
nature of the regulation” of CCG. Ms. Mahabir
included with her report a copy of a letter to her from Mrs. Greenidge dated
March 4, 2015, which stated:
We refer to our
meeting held on March 2, 2015 and confirm that CCG Trust Corporation
has been licensed since November 21, 1995 under the Financial Intermediaries
Regulatory Act, 1992-13 and has been regulated from said date by the Central
Bank of Barbados.
[69]
The Respondent takes the position that the
content of the licence and of the letters received by the expert witnesses from
the Central Bank is hearsay and should be disregarded. The Respondent does not,
however, challenge the authenticity of these documents.
[70]
With respect to the licence, in my view, the authentic
copy included in the expert reports and the authentic copy entered into
evidence as Exhibit A-14 is original evidence of the fact that a licence was
issued to CCG by the Central Bank. The content of the document is not hearsay
but merely evidence of the nature of the licence that was issued. As stated in The
Law of Evidence in Canada at paragraph 2.37:
A document may be
introduced into evidence merely to prove its existence, or to prove that it was
in the possession of some person, in which case it is material in itself
irrespective of its contents. When so introduced, it falls within the category
of “things”. When a document is introduced to prove its contents, it merits a
separate classification. Although, in many cases, a document does not differ
materially from an unsworn statement in that it is introduced as an assertion
of fact under an appropriate exception to the rule that prohibits the introduction
of hearsay evidence, in other cases it has special characteristics which do not
fit within any of the other categories. It may be a photograph. It may be
evidence of a transaction as, for instance, a written contract, deed or share
certificate, in which case it is admissible as original evidence quite apart
from any exception to the hearsay rule.
[Footnote omitted, emphasis added.]
[71]
In this case, Exhibit A-14 (a copy of the
licence) is evidence of a transaction: the issuance of a licence to CCG. The hearsay
rule is not applicable. The evidence of both expert witnesses confirms that
Exhibit A-14 is in the form issued by the Minister of Finance under Part III of
the FIRA. The Respondent concedes that such a licence was issued.
[72]
The content of the letters received by the
experts from the Central Bank is hearsay. However, it is well established that
an expert may rely on hearsay in formulating an expert opinion. In R. v.
Lavallee, Sopinka J., in concurring reasons, made the following
observations:
The resolution of
the contradiction inherent in Abbey, and the answer to the criticism Abbey
has drawn, is to be found in the practical distinction between evidence that an
expert obtains and acts upon within the scope of his or her expertise (as in City
of St. John), and evidence that an expert obtains from a party to
litigation touching a matter directly in issue (as in Abbey).
In the former
instance, an expert arrives at an opinion on the basis of forms of enquiry
and practice that are accepted means of decision within that expertise. A
physician, for example, daily determines questions of immense importance on the
basis of the observations of colleagues, often in the form of second- or
third-hand hearsay. For a court to accord no weight to, or to exclude, this
sort of professional judgment, arrived at in accordance with sound medical
practices, would be to ignore the strong circumstantial guarantees of
trustworthiness that surround it, and would be, in my view, contrary to the
approach this Court has taken to the analysis of hearsay evidence in general,
exemplified in Ares v. Venner, [1970] S.C.R. 608. In R. v. Jordan
(1984), 39 C.R. (3d) 50 (B.C.C.A.), a case concerning an expert’s evaluation of
the chemical composition of an alleged heroin specimen, Anderson J.A. held, and
I respectfully agree, that Abbey does not apply in such circumstances. (See
also R. v. Zundel (1987), 56 C.R. (3d) 1 (Ont. C.A.), at p. 52, where
the court recognized an expert opinion based upon evidence “. . . of a general
nature which is widely used and acknowledged as reliable by experts in that
field.”)
Where, however,
the information upon which an expert forms his or her opinion comes from the
mouth of a party to the litigation, or from any other source that is inherently
suspect, a court ought to require independent proof of that information. The
lack of such proof will, consistent with Abbey, have a direct effect on
the weight to be given to the opinion, perhaps to the vanishing point. But it
must be recognized that it will only be very rarely that an expert’s opinion is
entirely based upon such information, with no independent proof of any of it. Where
an expert’s opinion is based in part upon suspect information and in part upon
either admitted facts or facts sought to be proved, the matter is purely one of
weight. In this respect, I agree with the statement of Wilson J. at p. 896, as
applied to circumstances such as those in the present case:
. . . as long as
there is some admissible evidence to establish the foundation for the expert’s
opinion, the trial judge cannot subsequently instruct the jury to completely
ignore the testimony. The judge must, of course, warn the jury that the more
the expert relies on facts not proved in evidence the less weight the jury may
attribute to the opinion.
[Emphasis added.]
[73]
The inquiries made of the Central Bank by Sir
Trevor Carmichael’s partner and by Ms. Mahabir fall squarely within the scope of the sort
of inquiry one would expect lawyers to make in order to provide the opinions
requested by the Appellant for the benefit of the Court. In City of Saint
John v. Irving Oil Co. Ltd., the
Supreme Court of Canada stated the principles applicable to expert opinions
based on hearsay evidence from third party sources:
Counsel on behalf
of the City of Saint John pointed out that if the opinion of a qualified
appraiser is to be excluded because it is based upon information acquired from
others who have not been called to testify in the course of his investigation,
then proceedings to establish the value of land would take on an endless character
as each of the appraiser’s informants whose views had contributed to the
ultimate formation of his opinion would have to be individually called. To
characterize the opinion evidence of a qualified appraiser as inadmissible
because it is based on something that he has been told is, in my opinion, to
treat the matter as if the direct facts of each of the comparable transactions
which he has investigated were at issue whereas what is in truth at issue is
the value of his opinion.
The nature of the
source upon which such an opinion is based cannot, in my view, have any effect
on the admissibility of the opinion itself. Any frailties which may be
alleged concerning the information upon which the opinion was founded are in my
view only relevant in assessing the weight to be attached to that opinion, and
in the present case this was entirely a question for the arbitrators and
not one upon which the Appeal Division could properly rest its decision.
[Emphasis added.]
[74]
I see no reason to afford the opinions of Sir
Trevor Carmichael and Ms. Mahabir less weight because the thorough due
diligence performed by them necessarily includes reliance on statements by a
senior official of the Central Bank that are hearsay. The hearsay rule is in
place to protect against the use of untrustworthy sources of information to
establish facts without the benefit of cross-examining the source of those
facts. The source of the information obtained by Sir Trevor Carmichael and
Ms. Mahabir is an instrumentality of a sovereign democracy with a legal
heritage rooted in the common law. I see no basis at all for finding that the
source of the information is not trustworthy. Moreover, the circumstances in
which the information was obtained by the expert witnesses —due diligence
queries of the Central Bank to support expert opinions provided to this Court —
provide a strong circumstantial guarantee of trustworthiness.
[75]
The Respondent tendered an affidavit to
demonstrate that she had made inquiries of the Central Bank similar to those
made by the expert witnesses but had been rebuffed by the Central Bank. This,
the Respondent says, points to the inherent unreliability of the letters from
the Central Bank included with the expert reports. Leaving aside the
evidentiary issues associated with such an affidavit, I disagree.
[76]
The expert witnesses testified that in the
course of their law practices in Barbados they had regular contact with the
Central Bank over a period of decades. No doubt they are well known to the
authorities at the Central Bank, including Ms. Greenidge. As well, the
experts were retained by the Appellant, which is the indirect parent of CCG.
The fact that the Central Bank was receptive to the requests of well-known
senior Barbados lawyers representing the indirect parent of CCG but not to the
request of a lawyer from the Canadian Department of Justice is hardly evidence
that the Central Bank is an unreliable source. If anything, it establishes that
the Central Bank will not hand out information regarding a licensee without
some legal justification for doing so. Ironically, if the Central Bank had
responded to the request made by the Department of Justice, I have no doubt
that the question of whether CCG was licensed under Part III of the FIA during
the relevant period would have been answered in the same manner as it was in
the contested letters.
[77]
I say this because I have heard the credible and
uncontradicted testimony of three witnesses for the Appellant, supported by
contemporaneous documentary evidence, that indicates that on November 21, 1995,
CCG was issued a licence under Part III of the FIRA (a fact that the Respondent
has admitted), that CCG paid an annual licence fee of Barbados $25,000 to the
Central Bank to maintain that licence (a requirement confirmed by both expert
witnesses), that CCG prepared and submitted detailed monthly and quarterly
reports to the Central Bank, that representatives of CCG met with
representatives of the Central Bank on a regular basis and that CCG was subjected
to two audits by the Central Bank. While much of this evidence may be
circumstantial, collectively it establishes to my satisfaction that CCG was
licensed under Part III of the FIRA in 1995 and continued to be licensed under
Part III of the FIA throughout the relevant period. Accordingly, I have
concluded that the facts stated in the hearsay evidence relied upon by the
expert witnesses have been independently proven through the testimony of the
witnesses for the Appellant.
III. The Statutory
Provisions
[78]
The statutory provisions that I have considered
in these appeals are as follows: section 91 of the ITA; the definitions of “active business”, “controlled
foreign affiliate”, “foreign accrual property
income”, “foreign accrual tax”, “foreign affiliate”, “foreign
bank”, “income from an active business”,
“income from property”, “investment business”, “investment property”, “lending
of money”, “participating percentage”, “permanent establishment”, “relevant
tax factor” and “trust company” in
subsection 95(1) of the ITA; clause 95(2)(a)(ii)(B) of the ITA;
paragraph 95(2)(l) of the ITA; subsection 95(2.4); the definition of “specified deposit” in subsection 95(2.5) of the ITA; the
definition of “lending asset” in subsection
248(1) of the ITA; and the definition of “foreign bank”
in section 2 of the Bank Act. These
provisions as they read during the relevant period are set out in Appendix B of these reasons.
IV. The Positions of the Parties
A. The Position of the Appellant
[79]
The Appellant submits that paragraph 95(2)(l)
does not apply to require CCG to include in computing its income from property
the income of CCG earned during the relevant period. The Appellant proffers two
reasons why this is the case.
[80]
First, in order for the income of CCG to be
included in computing its income from property by the words of paragraph 95(2)(l)
that precede subparagraph 95(2)(l)(i) (I will refer to this part of
paragraph 95(2)(l) as the “preamble”), the principal purpose of
the business of CCG during the relevant period must have been to “derive income from trading or dealing in
indebtedness”. The Appellant submits that the
principal purpose of the business of CCG during the relevant period was not to
“derive income from trading or
dealing in indebtedness” and that the
parenthetical phrase “which for
the purpose of this paragraph includes the earning of interest on indebtedness” does not alter that fact. In particular, the parenthetical phrase
does not expand the meaning of “trading or dealing in indebtedness”.
Rather, the parenthetical phrase merely refers to an activity that is adjunct
to trading or dealing in indebtedness – the earning of interest on indebtedness
while the indebtedness is the object of trading or dealing. The phrase expands
or confirms the type of income from the business of trading or dealing in
indebtedness that is included in income from property, but it does not modify
the word “business” or expand the meaning of the words “trading or dealing in indebtedness”.
[81]
Second, even if the business of CCG is caught by
the preamble, CCG meets the requirements of subparagraph 95(2)(l)(iii)
and, as conceded by the Respondent, the Appellant meets the requirements of
subparagraph 95(2)(l)(iv). Consequently, CCG’s income earned during the
relevant period is not included in computing its income from property by
paragraph 95(2)(l) because of the exception created by subparagraphs
95(2)(l)(iii) and (iv).
B. The Position of the Respondent
[82]
The Respondent submits that the business of CCG
during the relevant period is described in the preamble and does not satisfy
the requirements of subparagraph 95(2)(l)(iii). Consequently, the income
of CCG earned during the relevant period must be included in computing CCG’s
income from property for the purposes of Subdivision i of Division B of Part I
of the ITA. Because the income of CCG during the relevant period is income from
property, the interest paid by CCG to the IBCs during the relevant period is
not deductible by CCG in computing the amounts prescribed to be its earnings or
loss for a taxation year from an active business carried on outside Canada and,
therefore, subparagraph 95(2)(a)(ii) of the ITA does not apply to deem
the interest paid by CCG to the IBCs to be income of the IBCs from an active
business. Instead, the interest received by the IBCs is income from property of
the IBCs which is included in the FAPI of the IBCs under A of the formula found
in the definition of FAPI (I will refer to the formula in the definition of
FAPI as the “FAPI Formula”). Under subsection 91(1), the Appellant is required to include in its
income, as income from its shares in the IBCs, the FAPI of CCG and the IBCs.
[83]
The Respondent agrees that the Appellant is
entitled to a deduction from income under subsection 91(4) equal to the portion
of the foreign accrual tax paid by CCG and the IBCs that is attributable to the
amount included in the Appellant’s income under subsection 91(1) multiplied by
the relevant tax factor. The Respondent concedes that because of a retroactive
statutory amendment the Reassessments did not reflect the correct relevant tax
factor for each of the Taxation Years and that the Appellant should be
reassessed to apply the correct relevant tax factor.
[84]
In addition to the foregoing arguments, the
Respondent also suggested that the overall structure was a “conduit” to
transfer the income of CCG to the partners of CCG LP and that this should be
taken into account in interpreting paragraph 95(2)(l).
V. Analysis
A. Overview of the Relevant Statutory Provisions
[85]
Under the ITA, taxpayers resident in Canada are subject to income
tax on their world-wide income. The foreign affiliate regime in Subdivision i
of Division B of Part I of the ITA (the “FA regime”) addresses the taxation of outbound
investment by Canadian resident taxpayers made through one or more non-resident
corporations.[123]
[86]
In general terms, the FA regime applies to a non-resident
corporation if that corporation is a foreign affiliate (an “FA”) of a taxpayer resident in
Canada. A non-resident corporation is an FA of such a taxpayer if the
taxpayer’s direct and indirect ownership of the non-resident corporation
reaches a specified level.[124]
If an FA of a taxpayer is also a CFA of the taxpayer, then a subset of the FA
regime, generally referred to as the FAPI regime, also applies to the FA.
The Appellant admits that CCG and each of the IBCs is a CFA of the Appellant.
[87]
The FAPI regime is intended to ensure that Canadian resident
taxpayers pay tax on certain income earned through one or more non-resident
corporations when it is earned rather than when it is distributed to Canada. This
avoids the deferral of the Canadian income tax liability that would result if
the income was earned directly by a person resident in Canada.
[88]
A taxpayer resident in Canada that directly owns a share in a CFA
is required to include in income for a taxation year, as income from the share,
the proportion of the FAPI of each CFA of the taxpayer that is represented by
the share
for each taxation year of the CFA ending in the taxpayer’s taxation year,
whether or not any of that income is actually distributed to the taxpayer in
that year. This is in contrast to the “basic” FA regime, which in general terms taxes the
income of foreign affiliates of Canadian resident taxpayers only when that
income is actually distributed to Canada.
[89]
The sources of the income included in FAPI are described in the
definition of FAPI in subsection 95(1). Although it is sometimes said that the
FAPI regime taxes “passive income”,
it is not that simple, and one must carefully consider the definition of FAPI
and the various other definitions and rules that bear upon that definition.
[90]
One source of income included in A of the FAPI Formula is “income(s) for the year from property”.[127] During the
relevant period, “income from property”
was defined in subsection 95(1) as follows:
2003 to 2008
“income from property” of a
foreign affiliate of a taxpayer for a taxation year includes its income for the
year from an investment business and its income for the year from an adventure
or concern in the nature of trade, but, for greater certainty, does not include
its income for the year that is because of subsection (2) included in its
income from an active business or in its income from a business other than an
active business;
2009
“income from property” of a
foreign affiliate of a taxpayer for a taxation year includes the foreign
affiliate’s income for the taxation year from an investment business and the
foreign affiliate’s income for the taxation year from an adventure or concern
in the nature of trade, but does not include
(a) the
foreign affiliate’s income for the taxation year from a business that is deemed
by subsection (2) to be a business other than an active business of the foreign
affiliate, or
(b) the
foreign affiliate’s income for the taxation year that pertains to or is
incident to
(i) an active
business of the foreign affiliate, or
(ii) a
non-qualifying business of the foreign affiliate.
[91]
The definition of “income
from property” expands the usual meaning of that phrase to
include income from an “investment
business”, as defined in subsection 95(1), and income from an
adventure or concern in the nature of trade. For 2003 to 2008, the definition
excludes any amount included by subsection 95(2) in an FA’s income from an
active business or income from a business other than an active business.[128] For 2009,
the exclusionary portion of the definition was amended to read as set out in
paragraphs (a) and (b).
[92]
Where its conditions for application are satisfied, paragraph
95(2)(l) includes in an FA’s income from property income that would
otherwise be income from a business of the FA that is not an investment
business of the FA. The issue in these appeals is whether, during the relevant
period, CCG’s income from its business was to be included in the computation of
its income from property under paragraph 95(2)(l).
[93]
The portions of paragraph 95(2)(l) most relevant to these
appeals state:
95(2)(l)
in computing the income from property for a taxation year of a foreign
affiliate of a taxpayer there shall be included the income of the affiliate for
the year from a business (other than an investment business of the affiliate)
the principal purpose of which is to derive income from trading or dealing in
indebtedness (which for the purpose of this paragraph includes the earning of
interest on indebtedness) other than
(i) indebtedness . . .
(ii) trade accounts receivable . . .
unless
(iii) the business is carried on by the affiliate as a foreign bank,
a trust company, a credit union, an insurance corporation or a trader or dealer
in securities or commodities, the activities of which are regulated under the
laws
(A) of each country in which the business is carried on through a
permanent establishment in that country and of the country under whose laws the
affiliate is governed and any of exists, was (unless the affiliate was
continued in any jurisdiction) formed or organized, or was last continued,
(B) of the country . . . or
(C) . . . of the country . . .
[94]
Both the definition of “income
from property” and paragraph 95(2)(l) refer to income from an “investment business”. Income from an investment
business is included in “income from property”
and, because of this, that same income is excluded from the application of the
deeming rule in paragraph 95(2)(l), presumably to avoid the possibility
of double counting.
[95]
The Appellant and the Respondent did not plead,
argue or otherwise suggest that the business of CCG during the relevant period
was an investment business. Accordingly, this
analysis is premised on the business of CCG during the relevant period not
being an investment business. However, the definition of investment business is
still relevant to a contextual analysis of paragraph 95(2)(l).
[96]
For the relevant period, the portions of
the definition of “investment business”
in subsection 95(1) relevant to these appeals stated:
2003 to 2008
“investment
business” of a foreign affiliate of a taxpayer
means a business carried on by the affiliate in a taxation year (other than a
business deemed by subsection (2) to be a business other than an active
business carried on by the affiliate) the principal purpose of which is to
derive income from property (including interest, dividends, rents, royalties or
any similar returns or substitutes therefor), income from the insurance or
reinsurance of risks, income from the factoring of trade accounts receivable,
or profits from the disposition of investment property, unless it is
established by the taxpayer or the affiliate that, throughout the period in the
year during which the business was carried on by the affiliate,
(a) the business (other than any business conducted
principally with persons with whom the affiliate does not deal at arm’s length)
is
(i) a business carried on by it as a foreign bank, a trust company,
a credit union, an insurance corporation or a trader or dealer in securities or
commodities, the activities of which are regulated under the laws
(A) of each country in which the business is carried on through a
permanent establishment in that country and of the country under whose laws the
affiliate is governed and any of exists, was (unless the affiliate was
continued in any jurisdiction) formed or organized, or was last continued,
. . .
. . . or
(ii) the development of real estate for sale, the lending of money,
the leasing or licensing of property or the insurance or reinsurance of risks .
. .
[97]
The 2009 version of the definition of “investment business” is virtually the same except that
it adds the phrase “and other than a non-qualifying
business of the foreign affiliate” to the first parenthetical phrase in
the preamble to the definition.
[98]
The phrase “lending of
money” is defined expansively in subsection 95(1) to include, among
other things, the acquisition of accounts receivable owed by arm’s length
persons and the acquisition or sale of loans or lending assets owed by arm’s
length persons. “Lending asset” is defined in
subsection 248(1) to mean “a bond, debenture, mortgage,
hypothecary claim, note, agreement of sale or any other indebtedness or a
prescribed share, but does not include a prescribed property”. Accordingly,
the reference to the “lending of money” in
subparagraph (a)(ii) of the definition of “investment
business” includes acquiring and/or selling indebtedness owed by arm’s
length persons.
[99]
A final piece of the puzzle is paragraph 95(2)(a).
Where certain conditions are satisfied that paragraph includes in an FA’s
income from an active business certain income that would otherwise be income
from property. The IBCs relied on clause 95(2)(a)(ii)(B) to include in
their respective incomes from an active business the interest paid or payable
to them by CCG.
[100] One requirement for the application of clause 95(2)(a)(ii)(B)
is that the interest paid or payable by CCG to the IBCs must be deductible by
CCG “in computing the amounts
prescribed to be its earnings or loss for a taxation year from an active
business (other than an active business carried on in Canada)”. If CCG’s income from its business is included in computing CCG’s
“income from property” because of paragraph 95(2)(l), then the interest paid by
CCG to the IBCs does not meet this requirement as it would be deducted in
computing CCG’s income from property rather than its income from an active
business. Accordingly, the IBCs would have income from property equal to the
interest received from CCG, which is included in the FAPI of the IBCs by virtue
of A in the FAPI Formula.
B. The Interpretation of Paragraph
95(2)(l)
[101] In interpreting paragraph 95(2)(l), I must apply the
principles of statutory interpretation sanctioned by the Supreme Court of
Canada. In Canada Trustco Mortgage Co. v. Canada, the Supreme Court stated:
10 It has
been long established as a matter of statutory interpretation that “the words
of an Act are to be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament”: see 65302 British Columbia Ltd. v. Canada,
[1999] 3 S.C.R. 804, at para. 50. The interpretation of a statutory provision
must be made according to a textual, contextual and purposive analysis to find
a meaning that is harmonious with the Act as a whole. When the words of a
provision are precise and unequivocal, the ordinary meaning of the words play[s]
a dominant role in the interpretive process. On the other hand, where the words
can support more than one reasonable meaning, the ordinary meaning of the words
plays a lesser role. The relative effects of ordinary meaning, context and
purpose on the interpretive process may vary, but in all cases the court must
seek to read the provisions of an Act as a harmonious whole.
[102] In Lehigh Cement Limited v. The Queen, Stratas J.A. of the Federal Court of Appeal reproduced the above
paragraph and then stated:
[39] The
provisions in taxation statutes are often detailed and particular. The Income
Tax Act is “an instrument dominated by explicit provisions dictating
specific consequences,” and this invites “a largely textual interpretation”: Canada
Trustco, at paragraph 13.
[40] As a
result, “[w]here Parliament has specified precisely what conditions must be
satisfied to achieve a particular result, it is reasonable to assume that
Parliament intended that taxpayers would rely on such provisions to achieve the
result they prescribe”: Canada Trustco, supra at paragraph 11.
Where the provision at issue is “clear and unambiguous,” its words “must simply
be applied”: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622 at
paragraph 40. In such circumstances, a supposed purpose “cannot be used to
create an unexpressed exception to clear language” or “supplant” clear language:
Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006
SCC 20, [2006] 1 S.C.R. 715 at paragraph 23, citing P. W. Hogg, J. E. Magee and
J. Li, Principles of Canadian Income Tax Law (5th ed. 2005), at page
569.
…
[44] Overall,
though, our task is to discern the meaning of the provision’s text using all of
the objective clues available to us.
[103] In addition to these principles, it is helpful in this case to
review some of the basic premises that must be kept in mind when interpreting
statutes. In Sullivan on the Construction of Statutes, Professor
Sullivan states:
By well established
convention, legislation is drafted in a formal, impersonal style. Legislative
prose strives to be spare, non-emotive and unforegrounded. It values uniformity
and consistency over stylistic variation and straightforward expression over
aesthetic appeal; a legislative drafter never indulges his or her sense of humour.
Legislative style tends to be monotonous due to an unusually heavy reliance on
repetition and parallel structures. The first obligation of a drafter is to be
accurate; the second is to be clear; the third is to be concise. There is no
obligation to inspire or entertain.
[104] In Statutory Interpretation, Professor Sullivan summarizes
the presumptions associated with legislative drafting at pages 168 to 169:
In analyzing
legislative texts, interpreters draw not only on the ordinary conventions of
language and common sense but also on the presumptions about legislative
drafting described above:
•
the legislature has flawless linguistic
competence and encyclopedic knowledge;
•
it has an intelligible goal and a rational plan;
•
its choice of words, word order, and structure
and its sequencing of material are careful and orderly, with an accurate
appreciation of the impact on meaning;
•
it uses a direct, straightforward style,
avoiding rhetorical devices and relying on fixed patterns and pattern
variations; and
•
every feature of the text is there for a reason
and has its own work to do.
[105] Cognizant of these principles and presumptions, I will break the
analysis of paragraph 95(2)(l) into two parts, each addressing one of
the Appellant’s two main positions. In each case, I will perform a textual,
contextual and purposive analysis of the relevant statutory language, keeping
in mind that context and purpose play a lesser role when the words are precise
and unequivocal.
[106] The words most relevant to the analysis of the Appellant’s first
position are those in the preamble and immediately following the preamble:
in computing the
income from property for a taxation year of a foreign affiliate of a taxpayer
there shall be included the income of the affiliate for the year from a
business (other than an investment business of the affiliate) the principal
purpose of which is to derive income from trading or dealing in indebtedness
(which for the purpose of this paragraph includes the earning of interest on
indebtedness) other than
(i) indebtedness . . .
(ii) trade accounts receivable . . .
[107] The Appellant and Respondent each present a different interpretation
of the preamble. The Appellant submits that the parenthetical phrase at the end
of the preamble - “which for the purpose of this
paragraph includes the earning of interest on indebtedness” (the “parenthetical”) - merely clarifies that, in determining
what income is included in computing income from property, it is necessary to
include as part of the income from the FA’s business, the principal purpose of
which is “to derive income from trading or dealing in
indebtedness”, interest on the indebtedness that is the object of the
trading or dealing.
[108] The Respondent submits that the parenthetical expands the meaning of
the phrase “trading or dealing
in indebtedness” to include the earning of
interest on any indebtedness. As a result of this, the preamble requires a
determination of whether the principal purpose of CCG’s business was to derive
income from “trading or dealing
in indebtedness”, assuming this activity
includes within its scope the earning of interest on any indebtedness. For the
reasons that follow, I prefer the Respondent’s interpretation of the preamble.
[109] I will start by considering the construction of the preamble. To
this end, it is helpful to break down the preamble into six parts, as follows:
(1)[in computing
the income from property for a taxation year of a foreign affiliate of a
taxpayer] (2)[there shall be included the income of the affiliate for the year
from a business] (3)[(other than an investment business of the affiliate)] (4)[the
principal purpose of which is to derive income from trading or dealing in
indebtedness] (5)[(which for the purpose of this paragraph includes the earning
of interest on indebtedness)] (6)[other than
(i) indebtedness . . .
(ii) trade accounts receivable . . . ]
[110] In my view, the role of five of these constituent parts is clear and
unambiguous:
1. These words describe what paragraph 95(2)(l) relates to — the
computation of an FA’s income from property for a taxation year.
2. These words describe what is to be included in computing the FAs
income from property — the income of the FA from a business.
3. These words describe the business referred to in 2 — the business
does not include an investment business.
4.
These words describe the business referred to in
2 — the business must have a principal purpose as described.
5. To be determined.
6. These words describe the business referred to in 2 — the principal
purpose of the business is to be determined without regard to the types of
indebtedness described in subparagraphs 95(2)(l)(i) and (ii).
[111] The positions of the Appellant and the Respondent raise the question
of whether the parenthetical is, as its position in the paragraph suggests,
part of the description of the business of the FA caught by the preamble or
part of the description of the income from the business that is to be included
in computing the income from property of the FA.
[112] To help in a textual interpretation of the parenthetical, the words
can be pared down as follows:
a business . . . the
principal purpose of which is to derive income from trading or dealing in indebtedness
(which for the purpose of this paragraph includes the earning of interest on
indebtedness) other than
(i) indebtedness . . .
(ii) trade accounts receivable . . .
[113] These words describe the type of business by reference to its “principal purpose”. The “principal
purpose” is identified with the business by the words “of which”. The verb structure of the clause — “is to derive” — expresses a requirement. The words
after the verb phrase “is to derive” provide the
description necessary to determine whether the principal purpose requirement is
met.
[114] The words after the parenthetical qualify the last word before the
parenthetical — “indebtedness” — and describe two
types of indebtedness that do not count in the determination of whether the
principal purpose requirement is met. Although not reproduced in the shortened
version above, the words after subparagraph 95(2)(l)(ii) introduce an
exception for a business that is otherwise caught by the preamble.
[115] The parenthetical itself starts with the word “which”. This identifies the parenthetical as a relative
(or adjectival) clause. As such, the usual role of the parenthetical would be
to modify a preceding noun or noun phrase.
[116] The first noun preceding the parenthetical is “indebtedness”.
Relating the parenthetical back to this word alone would result in the
nonsensical meaning “indebtedness
. . . includes the earning of interest on indebtedness”, which I conclude was not the meaning intended by Parliament.
[117] The group of words “trading
or dealing in indebtedness” is a noun phrase
composed of two gerunds (“trading” and “dealing”) and a prepositional phrase (“in indebtedness”). Collectively, they
describe an activity as opposed to an action. Syntactically, it is
reasonable to assume that the parenthetical is qualifying this noun phrase. This
conclusion is supported by the fact that the structure of the parenthetical is
parallel to the noun phrase. Specifically, “trading or dealing in indebtedness”
is parallel to “the earning of
interest on indebtedness”. The construction is
careful and precise, as is to be expected of legislative drafting.
[118] There is a larger noun phrase preceding the parenthetical: “income from trading or dealing in
indebtedness”. Referring the parenthetical back
to this larger phrase would convey the meaning of “income from trading or dealing in
indebtedness . . . includes the earning of interest on indebtedness”. The structures are not parallel and the apparent meaning makes
considerably less sense than is the case if the parenthetical qualifies “trading or dealing in indebtedness”.
[119] However, even if that interpretation were to be adopted, it does not
assist the Appellant unless I also find that the reference to “indebtedness”
in the parenthetical is a reference to the indebtedness that is the object of the
trading or dealing. Apart from syntax, the text simply does not support such a
construction without adding a word such as “the” or “that” before
“indebtedness” in the parenthetical. It is not appropriate to read in such a word
if the text supports a reasonable interpretation without the addition of the
word.
[120] There are other clues in the text that support the view that the
parenthetical modifies the phrase “trading or dealing in indebtedness”. For
example, if paragraph 95(2)(l) applies to a business of an FA, the words
in the first two parts of the preamble clearly state that all of the
income from that business is included in computing the FA’s income from
property. Hence, to the extent that the FA is conducting a business that meets
the principal purpose requirement, all income from that business is recast as
income from property. Given that, it is hard to see why it would be necessary
for Parliament to state at the very end of the preamble that for the purposes
of this inclusion the income of the FA from trading or dealing in indebtedness
includes interest on the indebtedness that is the object of the trading or
dealing. Under general principles any such income would be from that same
business source.
[121] If, as the Appellant suggests, Parliament had intended to qualify
what is included in the income being earned from a business that meets the
principal purpose requirement, then it could easily have made that clear. In
that regard, the Respondent points to the language in subparagraph 95(2.4)(b)(i)
as evidence of an approach that would unambiguously make the point:
(i) the
income is derived by the affiliate from trading or dealing in the indebtedness
(which, for this purpose, consists of income from the actual trading or dealing
in the indebtedness and interest earned by the affiliate during a short term
holding period on indebtedness acquired by it for the purpose of the trading or
dealing) . . .
[122] The Appellant submits that the use of such language would result in
circularity, but the point is not that the exact language of subparagraph
95(2.4)(b)(i) need be used. Rather, it is that, where an interpretation
similar to that advocated by the Appellant is intended, one can reasonably
expect that explicit language to that effect will be adopted.
[123] I also note that the wording of the parenthetical deviates
substantially from other instances in the ITA in which additional words are
used to clarify what is to be included in income from property. For example,
the definition of “investment
business” in subsection 95(1) uses the wording “the principal purpose of which is to derive
income from property (including interest . . .)”
and the definition of “specified
investment business” in subsection 125(7) uses
the wording “the principal
purpose of which is to derive income (including interest . . .) from property”.
[124] In both of these examples, the additional words clearly and
syntactically qualify the scope of the meaning of “income from property”, with the slightly different placement of those words being best
explained by the fact that “income
from property” is a defined term in subsection
95(1) for the purposes of Subdivision i and therefore should not be broken up
by the qualifying words.
[125] A further comparison is found in the current and past definitions of
“specified deposit” in subsection 95(2.5), which state, in part:
Years of FAs
beginning after October 2012
“specified
deposit”, of a foreign affiliate of a taxpayer, means . . . other than a
business the principal purpose of which is to derive income from property
(including any interest, dividends, rents, royalties or similar returns, or any
substitutes for any of those) or profits from the disposition of investment
property.
Years of FAs
beginning after 1994
“specified
deposit” means . . .
(a) . . .
(other than a business the principal purpose of which is to derive income from
property including interest, dividends, rents, royalties or similar returns or
substitutes therefor or profits from the disposition of investment property),
or
[126] Again, in each example, it is clear from the words and syntax that
it is the scope of the phrase “income
from property” that is being qualified. If
Parliament wanted to qualify what the preamble includes in the income from
property of the FA, it was clearly aware of how to accomplish that result. The
fact that Parliament chose substantively different text that syntactically
qualifies the words “trading or
dealing in indebtedness” suggests to me that
that was precisely the result intended by Parliament for the parenthetical
phrase.
[127] The Appellant points to the context and the purported purpose of
paragraph 95(2)(l) to counter the Respondent’s position vis-a-vis the
textual meaning of the parenthetical.
[128] With respect to context, the Appellant submits that the Respondent’s
interpretation eviscerates the exception from the definition of “investment business” for a business that is the “lending of money”. This exception is
found in subparagraph (a)(ii) of the definition of “investment business”. Generally speaking, this exception applies to a business of an FA
described in the opening words of the definition of “investment business” where the business is the “lending of money” and additional
requirements are satisfied.
[129] It is true that paragraph 95(2)(l) focuses the benefit of
this exception on a much narrower class of FAs, but it is not true that
paragraph 95(2)(l) eviscerates the exception. Paragraph 95(2)(l)
does not apply to a business the principal purpose of which is to derive income
from indebtedness or trade accounts receivable as described in subparagraphs
95(2)(l)(i) and (ii), nor does paragraph 95(2)(l) apply if the
exception created by subparagraphs 95(2)(l)(iii) and (iv) applies. These
substantive exceptions counter the Appellant’s contextual argument.
[130] With respect to purpose, the Appellant points to the draft
iterations of “investment
property” and paragraph 95(2)(l) and to the technical notes that
accompanied these drafts. The Respondent counters with public comments made by
Mr. Wallace E. Conway of the Department of Finance after paragraph 95(2)(l)
was enacted. While such materials may be of assistance in some cases, they
cannot be used to override the clear and unambiguous text of a statutory
provision. Nevertheless, I will briefly consider the technical notes.
[131] The technical notes that accompanied the introduction of paragraph
95(2)(l) in 1995 stated, in part:
. . . It [paragraph
95(2)(l)] applies to the affiliate in respect of its income from a
business (other than an investment business) the principal purpose of which is
to derive income from the trading or dealing in indebtedness (which, for this
purpose, includes interest on indebtedness).
[132] The Appellant submits that the description in the technical notes
confirms the Appellant’s interpretation of the parenthetical. However, in my
view, this short form description first refers to “income from the trading or dealing in
indebtedness” and then clarifies that such
income includes “interest on
indebtedness”. This
description is not in accordance with the actual text, but in any event it does
not assist the Appellant’s interpretation.
[133] I will now apply my interpretation of the preamble to the facts.
[134] In their testimony, the three former managing directors of CCG consistently
described the business objective of CCG during the relevant period as entering
into transactions that resulted in CCG holding high quality long-term debt with
a view to optimizing CCG’s yield on the money borrowed from the IBCs. If CCG could not realize
this business objective, it would temporarily invest its available cash in
short-term debt such as short-term deposits and CAS (convertible asset swaps)
until a better opportunity arose.
On one occasion CCG invested in a CLA (credit linked note).
[135] The financial statements of CCG identify most of the realized income
of CCG during the relevant period as interest on debt owed to CCG by arm’s
length third parties. Although CCG also earned income that was not interest and
that would not be considered income from trading or dealing in indebtedness in
the ordinary sense of that phrase, such as the premium on the CAS and the income
from the CLAs and the swap transactions, it is clear that the vast majority of
CCG’s income earned during the relevant period was in the form of interest on debt
owed to CCG by third parties.
[136] Consequently, CCG’s business objective during the relevant period, as
described by the three managing directors, and the results of CCG’s business as
described in the financial statements of CCG for the relevant period all point
to the conclusion that the principal purpose of CCG’s business during the
relevant period was to earn interest on indebtedness. By virtue of the
parenthetical, earning interest on indebtedness is considered to be “trading or dealing in indebtedness” and therefore the principal purpose of CCG’s business during the
relevant period was to derive income from trading or dealing in indebtedness,
with the result that the business is caught by the opening words of paragraph
95(2)(l) (that is, is caught by the words of the preamble).
[137] The Appellant’s second position turns on the interpretation of
subparagraph 95(2)(l)(iii). The relevant parts of that subparagraph are
as follows:
(iii) the
business is carried on by the affiliate as a foreign bank, a trust company, a
credit union, an insurance corporation or a trader or dealer in securities or
commodities, the activities of which are regulated under the laws
(A) of each country in which the business is carried on through a
permanent establishment in that country and of the country under whose laws the
affiliate is governed and any of exists, was (unless the affiliate was
continued in any jurisdiction) formed or organized, or was last continued,
(B) of the country . . .
(C) . . . of the country . . .
[138] The first requirement of subparagraph (iii) is that the business of
the FA described in the preamble must be carried on by the FA “as” a foreign bank, a trust company, etc. The
Appellant did not suggest that CCG was a credit union, an insurance corporation
or a trader or dealer in securities or commodities. Accordingly, I will focus
only on the references in subparagraph 95(2)(l)(iii) to “a foreign bank” and, if necessary, “a trust company”.
[139] In the abstract, the word “as” has a number of possible meanings
and forms. However, in this textual context, it is clear that “as” is being
used as a preposition to express a relation between the following noun phrases
and the preceding words. With regard to “as” in prepositional form, the only
definition in the Canadian Oxford Dictionary (2nd ed.) that makes sense
is “in the capacity or form of”.
The New Oxford American Dictionary provides a more descriptive
definition of the word “as” when used as a preposition: “used to refer to the function or character that someone or something
has”.
[140] The focus on the FA imposed by the use of the word “as” in this
manner makes sense given that the preamble has already identified the business
that is prima facie caught by paragraph 95(2)(l). Specifically, once the
business caught by the preamble has been identified, subparagraph 95(2)(l)(iii)
imposes two requirements that must be met to benefit from the exception: CCG
must carry on that business in one of the capacities or forms described in the
subparagraph and the activities of CCG in that capacity or form must be
regulated in the relevant foreign jurisdiction(s).
[141] CCG can satisfy the first requirement if it carried on the business
in the capacity or form of a foreign bank or a trust company throughout the
relevant period. The phrase “foreign
bank” is exhaustively defined in subsection
95(1) as follows:
“foreign bank”
means an entity that would be a foreign bank within the meaning assigned by the
definition of that expression in section 2 of the Bank Act if
(a) that definition were read without reference
to the portion thereof after paragraph (g) thereof, and
(b) the entity had not been exempt under section
12 of that Act from being a foreign bank.
[142] The definition of “foreign bank” in
section 2 of the Bank Act, after modification to conform with paragraphs
(a) and (b) of the definition in the ITA, states:
foreign
bank . . . means an entity incorporated or
formed by or under the laws of a country other than Canada that
(a) is a bank according to the laws of any foreign country
where it carries on business,
(b) carries on a business in any foreign country that, if
carried on in Canada, would be, wholly or to a significant extent, the business
of banking,
(c) engages, directly or indirectly, in the business of
providing financial services and employs, to identify or describe its business,
a name that includes the word “bank”, “banque”, “banking” or “bancaire”, either
alone or in combination with other words, or any word or words in any language
other than English or French corresponding generally thereto,
(d) engages in the business of lending money and accepting
deposit liabilities transferable by cheque or other instrument,
(e) engages, directly or indirectly, in the business of
providing financial services and is affiliated with another foreign bank,
(f) controls another foreign bank, or
(g) is a foreign institution, other than a foreign bank
within the meaning of any of paragraphs (a) to (f), that controls
a bank incorporated or formed under this Act . . .
[143] Subsection 6(1) of the Bank Act describes in the following
terms the case where one entity is affiliated with another entity:
6 (1) One entity is affiliated with another entity if
one of them is controlled by the other or both are controlled by the same
person.
[144] Finally, section 3 of the Bank Act defines control, in part,
as follows:
3(1) For the purposes
of this Act,
(a) a person controls a body corporate if securities of the
body corporate to which are attached more than 50 per cent of the votes that
may be cast to elect directors of the body corporate are beneficially owned by
the person and the votes attached to those securities are sufficient, if
exercised, to elect a majority of the directors of the body corporate;
. . .
(d) a person controls an entity if the person has any direct
or indirect influence that, if exercised, would result in control in fact of
the entity.
. . .
(2) A person who
controls an entity is deemed to control any entity that is controlled, or
deemed to be controlled, by the entity.
(3) A person is
deemed to control, within the meaning of paragraph (1)(a) or (b),
an entity if the aggregate of
(a) any securities of the entity that are beneficially owned
by that person, and
(b) any securities of the entity that are beneficially owned
by any entity controlled by that person
is such that, if
that person and all of the entities referred to in paragraph (b) that
beneficially own securities of the entity were one person, that person would
control the entity.
[145] The Appellant submits that CITB is a foreign bank under paragraphs (a)
and (c) of the definition in the Bank Act and that CCG is a
foreign bank under paragraph (e)
of that definition. In light of the absence of expert evidence addressing the
status of CITB under U.S. law, I will confine my analysis to paragraph (c)
of the definition in the Bank Act.
[146] Paragraph (c) of the definition of “foreign bank”
in the Bank Act requires that CITB use, to identify or describe its
business, a name that includes the word bank and that it engage, directly or
indirectly, in the business of providing financial services.
[147] The testimony of Mr. Shanahan and the sections of the 10-Ks on
regulation drafted by him confirm that CITB had the word “bank” in its name throughout the relevant period. It
is therefore clear that CITB was holding itself out to the public as a bank
whether or not it was a bank under U.S. law. In my view, given that CITB’s business included the taking of deposits and the
provision of credit, this is sufficient to conclude
that CITB was using the word bank to identify or describe its business.
Consequently, CITB meets the first requirement. I do not understand the Respondent
to suggest otherwise.
[148] The term “financial
services” is not defined in the Bank Act
nor does its meaning for the purposes of the definition of “foreign bank”
in the Bank Act appear to have been the subject of judicial interpretation.
The Canadian Oxford Dictionary (2nd ed.) and Black’s Law Dictionary
(10th ed.) define “finance” as follows:
Canadian Oxford Dictionary:
Noun the
management of large amounts of money, esp. by governments or large companies.
transitive verb provide capital for (a person, purchase, or enterprise), esp. as a
loan.
Black’s:
That aspect of business concerned with the
management of money, credit, banking, and investments.
[149] The Canadian Oxford Dictionary defines the adjective “financial” as meaning “of or
pertaining to revenue or money matters.” It seems reasonable to conclude
therefore that “financial services” include services
in respect of the management of money, the provision of credit, banking and
investment, or any combination of these activities. I certainly see no reason
to give such an open-ended phrase as “financial
services” a narrow or overly technical meaning. I
note in passing that where Parliament has chosen to define the phrase, for
example, in the Excise Tax Act, it
has used a broad definition.
[150] During the relevant period, CITB lent money to various third parties,
including consumers and small and medium-sized businesses. CITB also accepted
deposits from third parties - typically through the agency of brokers - and
borrowed money from related entities. It is clear therefore that CITB engaged
directly or indirectly in the business of providing financial services in the
form of the provision of credit and the taking of deposits. Accordingly, I find
that CITB was a foreign bank throughout the relevant period under paragraph (c)
of the definition of “foreign
bank” in the Bank Act.
[151] The next question is whether during the relevant period CCG is a
foreign bank under paragraph (e) of the definition of foreign bank in the Bank Act. To be a
foreign bank under that paragraph, CCG must be affiliated with CITB and must
engage, directly or indirectly, in the business of providing financial services.
[152] With respect to whether CITB and CCG were affiliated throughout the
relevant period, CITB was wholly owned by CITG and was therefore controlled by
CITG. CITF was an indirect subsidiary of CITG and had voting control of the
Appellant. The Appellant in turn had voting control of Adam, which had voting
control of CCG. Accordingly, under the extended definition of control in
section 3 of the Bank Act, CITG controlled CCG. As both CITB and CCG
were controlled by CITG, CCG was affiliated with CITB under subsection 6(1) of
the Bank Act.
[153] With respect to the second requirement in paragraph (e) of
the definition of foreign bank in the Bank Act, CCG provided credit to arm’s
length third parties.
As an adjunct to this activity, CCG also entered into convertible asset swaps, credit
linked notes and currency swap transactions with third parties. CCG financed its
operations by borrowing from the IBCs. Based on these facts, it is clear that
CCG was engaged directly or indirectly in the business of providing financial
services in the form of the provision of credit to arm’s length third parties.
[154] As CCG satisfied the two requirements in paragraph (e) of
the definition of foreign bank in the Bank Act,
CCG was a foreign bank throughout the relevant period.
[155] CCG’s only business during the relevant period was the business
caught by the preamble and that same business was the business that allowed CCG
to qualify as a foreign bank. Given the inextricable relationship between the
business carried on by CCG and the status of CCG as a foreign bank, the only
possible conclusion is that the business of CCG was carried on by CCG as a foreign
bank.
[156] The Respondent argues that CCG is not a foreign bank because it is
not licensed under Part II of the FIA and that its licence did not authorize it
to carry on a banking business under paragraph 23(1)(a) of the FIA.
However, paragraph (e) of the definition of “foreign bank”
in the Bank Act does not require CCG to be licensed as a bank under the
laws of the foreign country, nor does it require CCG to carry on a banking
business as such. This is in stark contrast to paragraphs (a) and (b)
of the same definition, which do impose such a requirement:
(a) is a
bank according to the laws of any foreign country where it carries on business,
(b)
carries on a business in any foreign country that, if carried on in Canada,
would be, wholly or to a significant extent, the business of banking.
[157] It is clear that the definition of “foreign
bank” in the Bank Act identifies not only entities that are banks
in the traditional sense but also other entities that may not be banks as such
under either Canadian law or the law of the relevant foreign jurisdiction. If, for
the purposes of the ITA, Parliament had wanted to narrow the field to the
former category, it could have referred only to paragraphs (a) and (b)
of the definition in the Bank Act; or it could have crafted a definition
exclusive to the ITA. However, Parliament did not do that and in fact took out
the exclusions in the preamble and post-amble of the Bank Act definition
that is adopted by the ITA.
[158] As well, the text of subparagraph 95(2)(l)(iii) does not
impose the requirement suggested by the Respondent. Rather, subparagraph 95(2)(l)(iii)
requires that the business caught by the preamble be carried on by CCG as a
foreign bank. The definition of “foreign bank” in turn requires that
CCG meet certain conditions in order to be considered a foreign bank. The
Respondent appears to be reading in an additional requirement that CCG be
licensed to carry on a banking business in Barbados. I do not accept that
proposition. As Stratas J.A. stated in Lehigh:
[41] When
interpreting provisions in taxation statutes, we must keep front of mind their
real life context: many taxpayers study closely the text of the Act to manage
and plan their affairs intelligently. Accordingly, we must interpret “clear and
unambiguous” text in the Act in a way that promotes “consistency,
predictability and fairness,” with due weight placed upon the particular
wording of the provision: Canada Trustco, at paragraph 12, citing Shell
Canada Ltd., supra at paragraph 45.
[42] We
must not supplant or qualify the words of paragraph 95(6)(b) by creating
“unexpressed exceptions derived from [our] view of the object and purpose of
the provision,” or by resorting to tendentious reasoning. Otherwise, we would
inject “intolerable uncertainty” into the Act, undermining “consistency,
predictability and fairness”: 65302 British Columbia Ltd. v. Canada,
[1999] 3 S.C.R. 804, at paragraph 51, citing P. W. Hogg and J. E. Magee, Principles
of Canadian Income Tax Law (2nd ed. 1997) at pp. 475-76; see also Canada
Trustco, at paragraph 12.
[159] What the clear and unambiguous text of subparagraph 95(2)(l)(iii)
does require is that the activities of CCG as a foreign bank be regulated under
the laws of the country or countries described in clause 95(2)(l)(iii)(A),
(B) or (C).
[160] The documentary evidence and the evidence of each of the experts confirms
that CCG was incorporated under the laws of Barbados and that CCG existed under
the laws of Barbados during the relevant period. The evidence of the three
managing directors of CCG establishes that throughout the relevant period the
business of CCG was carried on solely in Barbados through a permanent
establishment located in that country. Therefore, in accordance with clause
95(2)(l)(iii)(A), the question is whether the activities of CCG as a
foreign bank were regulated under the laws of Barbados.
[161] I start by observing that the text of subparagraph 95(2)(l)(iii)
focuses on the regulation of the activities of CCG as a foreign bank and not on
the regulation of a particular business of CCG. Although in this case the
activities of CCG and the business of CCG are one and the same, it is clear
that subparagraph 95(2)(l)(iii) does not require that a specific
business of the FA be regulated. Rather the focus is on the activities of the
FA as a foreign bank.
[162] The Respondent has admitted that in 1995 a licence was issued to CCG
under Part III of the FIRA, which statute the expert evidence establishes was
superseded by the FIA in July 1997. The evidence of the three managing
directors of CCG is that CCG conducted itself in a manner consistent with
regulation under the FIA. Specifically, the employees of CCG filed monthly and
quarterly reports with the Central Bank and regularly met with officials of the
Central Bank. As well, CCG was subjected to two audits by the Central Bank and
paid an annual fee to the Central Bank to maintain its licence under Part III
of the FIA. Ms. Mahabir testified that, as part of her due diligence, she
confirmed that CCG had complied with its obligation to publish its audited
financial statements in the Official Gazette and in a local newspaper.
[163] The licence granted to CCG by the Minister responsible for Finance
permitted CCG to carry on the activities described in paragraphs 23(1)(b),
(c) and (d) of the FIA (paragraphs 24(1)(b), (c)
and (d) of the FIRA prior to July 1997). Paragraph 23(1)(b) of
the FIA permitted CCG to raise capital through the issuance of shares or the
granting of loans and to invest the funds so raised. That is precisely what CCG
did throughout the relevant period. Section 24 of the FIA prohibited the
conduct of the activities described in section 23 of the FIA without a licence
issued under Part III of the FIA.
[164] The evidence of the expert witnesses is that the activities of CCG
were permitted under the licence issued to CCG under Part III of the FIA. Moreover,
the nature and extent of the activities carried on by CCG in Barbados during
the relevant period required CCG to be licensed under Part III of the FIA, and
CCG would have been subject to a penalty under section 102 of the FIA if it had
conducted these activities without the required licence.
[165] The expert evidence also establishes that CCG was subject to
regulation by the Central Bank in the manner set out in Part IV of the FIA. The FIA imposed various reporting
requirements on CCG and invested the Central Bank with various powers to audit
the affairs of CCG and enforce its obligations under the FIA. The evidence of
the three managing directors, supported by contemporaneous documentation,
confirms that the regulatory requirements in the FIA were both enforced and
satisfied.
[166] In the circumstances, it is clear that the activities of CCG
throughout the relevant period were regulated under the laws of Barbados and
that these activities encompassed the business caught by the preamble, which
was carried on by CCG as a foreign bank. Accordingly, I find that CCG met the
requirements of subparagraph 95(2)(l)(iii). As the Respondent conceded
that the Appellant met the requirements of subparagraph 95(2)(l)(iv),
the business of CCG during the relevant period is excepted from the application
of paragraph 95(2)(l).
[167] In light of this conclusion, it is not necessary for me to determine
if the business of CCG was carried on by CCG as a trust company the activities
of which were regulated under the laws of Barbados.
[168] Before concluding, I note that in reaching the foregoing conclusion
I have taken into account the Respondent’s suggestion that the so-called “conduit”
nature of the structure is a relevant consideration in the interpretation of
paragraph 95(2)(l).
[169] First, there is simply no evidence that the arrangement involved a “conduit” in any sense of that word. Any movement of
funds took place in accordance with the legal status of the various parties and
the legal relationships among those parties. For example, funds moved from the
Appellant’s shareholders to the Appellant in the form of contributions of share
capital; funds moved from the Appellant to the IBCs in the form of
contributions of share capital and funds moved from the IBCs to CCG in the form
of interest-bearing loans. Similarly, funds moved from CCG to the IBCs in the
form of interest on loans or the repayment of loans; funds moved from the IBCs
to the Appellant in the form of dividends or returns of share capital; and funds
moved from the Appellant to its shareholders in the form of dividends or
returns of share capital.
[170] Second, the Respondent raised neither the general anti-avoidance
rule in section 245 nor paragraph 247(2)(b) of the transfer pricing
rules. Instead, the Respondent relied solely on the very specific text of
paragraph 95(2)(l). The Supreme Court of Canada has long since put to
rest the notion that the sophistication of the tax planning alters the manner
in which one should interpret specific provisions in the ITA such as paragraph
95(2)(l). In Shell Canada Ltd. v. Canada, the Supreme Court
stated:
[45] However,
this Court has made it clear in more recent decisions that, absent a specific
provision to the contrary, it is not the courts’ role to prevent taxpayers from
relying on the sophisticated structure of their transactions, arranged in such
a way that the particular provisions of the Act are met, on the basis that it
would be inequitable to those taxpayers who have not chosen to structure their
transactions that way. This issue was specifically addressed by this Court in Duha
Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, at para. 88, per
Iacobucci J. See also Neuman v. M.N.R., [1998] 1 S.C.R. 770, at para.
63, per Iacobucci J. The courts’ role is to interpret and apply the Act
as it was adopted by Parliament. Obiter statements in earlier cases that
might be said to support a broader and less certain interpretive principle have
therefore been overtaken by our developing tax jurisprudence. Unless the Act
provides otherwise, a taxpayer is entitled to be taxed based on what it
actually did, not based on what it could have done, and certainly not based on
what a less sophisticated taxpayer might have done.
[46] Inquiring
into the “economic realities” of a particular situation, instead of simply
applying clear and unambiguous provisions of the Act to the taxpayer’s legal
transactions, has an unfortunate practical effect. This approach wrongly
invites a rule that where there are two ways to structure a transaction with
the same economic effect, the court must have regard only to the one without
tax advantages. With respect, this approach fails to give appropriate weight to
the jurisprudence of this Court providing that, in the absence of a specific
statutory bar to the contrary, taxpayers are entitled to structure their
affairs in a manner that reduces the tax payable: Stubart, supra,
at p. 540, per Wilson J., and at p. 557, per Estey J.; Hickman
Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, at para. 8, per
McLachlin J.; Duha, supra, at para. 88, per Iacobucci J.; Neuman,
supra, at para. 63, per Iacobucci J. An unrestricted application of
an “economic effects” approach does indirectly what this Court has consistently
held Parliament did not intend the Act to do directly.
[171] For the foregoing reasons, the appeals are allowed and the
Reassessments are referred back to the Minister for reconsideration and
reassessment on the basis that the income of CCG throughout the relevant period
was not subject to the application of paragraph 95(2)(l) of the ITA. The
parties have 30 days from the date of the judgment in these appeals to make
submissions as to the award of costs.
Signed at Ottawa, Canada, this 4th day of July 2016.
“J.R. Owen”
APPENDIX
B
Section 91
91(1) Amounts to be included in respect of share of foreign
affiliate -- In computing the income for a taxation year of a taxpayer resident
in Canada, there shall be included, in respect of each share owned by the
taxpayer of the capital stock of a controlled foreign affiliate of the
taxpayer, as income from the share, the percentage of the foreign accrual
property income of any controlled foreign affiliate of the taxpayer, for each
taxation year of the affiliate ending in the taxation year of the taxpayer,
equal to that share’s participating percentage in respect of the affiliate,
determined at the end of each such taxation year of the affiliate.
(2) Reserve where foreign exchange restriction -- Where an amount in
respect of a share has been included in computing the income of a taxpayer for
a taxation year by virtue of subsection 91(1) or 91(3) and the Minister is
satisfied that, by reason of the operation of monetary or exchange restrictions
of a country other than Canada, the inclusion of the whole amount with no
deduction for a reserve in respect thereof would impose undue hardship on the
taxpayer, there may be deducted in computing the taxpayer’s income for the year
such amount as a reserve in respect of the amount so included as the Minister
deems reasonable in the circumstances.
(3) Reserve for preceding year to be included -- In computing the
income of a taxpayer for a taxation year, there shall be included each amount
in respect of a share that was deducted by virtue of subsection 91(2) in
computing the taxpayer’s income for the immediately preceding year.
(4) Amounts deductible in respect of foreign taxes -- Where, by
virtue of subsection 91(1), an amount in respect of a share has been included
in computing the income of a taxpayer for a taxation year or for any of the 5
immediately preceding taxation years (in this subsection referred to as the “income amount”),
there may be deducted in computing the taxpayer’s income for the year the
lesser of
(a) the product obtained when
(i) the portion of the
foreign accrual tax applicable to the income amount that was not deductible
under this subsection in any previous year
is multiplied by
1. (ii) the relevant tax factor, and[154]
(b) the amount, if
any, by which the income amount exceeds the total of the amounts in respect of
that share deductible under this subsection in any of the 5 immediately
preceding taxation years in respect of the income amount.
(5) Amounts deductible in respect of dividends received -- Where in
a taxation year a taxpayer resident in Canada has received a dividend on a
share of the capital stock of a corporation that was at any time a controlled
foreign affiliate of the taxpayer, there may be deducted, in respect of such
portion of the dividend as is prescribed to have been paid out of the taxable
surplus of the affiliate, in computing the taxpayer’s income for the year, the
lesser of
(a) the amount by
which that portion of the dividend exceeds the amount, if any, deductible in
respect thereof under paragraph 113(1)(b), and
(b) the amount, if any, by which
(i) the total of all
amounts required by paragraph 92(1)(a) to be added in computing the
adjusted cost base to the taxpayer of the share before the dividend was so
received by the taxpayer
exceeds
(ii) the total of all
amounts required by paragraph 92(1)(b) to be deducted in computing the
adjusted cost base to the taxpayer of the share before the dividend was so
received by the taxpayer.
(6) Idem -- Where a share of the capital stock of a foreign
affiliate of a taxpayer that is a taxable Canadian corporation is acquired by
the taxpayer from another corporation resident in Canada with which the
taxpayer is not dealing at arm’s length, for the purpose of subsection 91(5),
any amount required by section 92 to be added or deducted, as the case may be,
in computing the adjusted cost base to the other corporation of the share shall
be deemed to have been so required to be added or deducted, as the case may be,
in computing the adjusted cost base to the taxpayer of the share.
(7) Shares acquired from a partnership -- For the purpose of
subsection (5), where a taxpayer resident in Canada
acquires a share of the capital stock of a corporation that is immediately
after the acquisition a foreign affiliate of the taxpayer from a partnership of
which the taxpayer, or a corporation resident in Canada with which the taxpayer
was not dealing at arm’s length at the time the share was acquired, was a
member (each such person referred to in this subsection as the “member”) at
any time during any fiscal period of the partnership that began before the
acquisition,
(a) that portion
of any amount required by subsection 92(1) to be added to the adjusted cost
base to the partnership of the share of the capital stock of the foreign
affiliate equal to the amount included in the income of the member because of
subsection 96(1) in respect of the amount that was included in the income of
the partnership because of subsection (1) or (3) in respect of the foreign
affiliate and added to that adjusted cost base, and
(b) that portion
of any amount required by subsection 92(1) to be deducted from the adjusted
cost base to the partnership of the share of the capital stock of the foreign
affiliate equal to the amount by which the income of the member from the
partnership under subsection 96(1) was reduced because of the amount deducted
in computing the income of the partnership under subsection (2), (4) or (5) and
deducted from that adjusted cost base
is deemed to be an amount required by subsection 92(1) to be added
or deducted, as the case may be, in computing the adjusted cost base to the
taxpayer of the share.
Subsection 95(1)
active business
Applicable for taxation years from 2003 to 2008:
“active
business” of a foreign affiliate of a taxpayer
means any business carried on by the affiliate other than
(a) an investment business carried
on by the affiliate, or
(b)
a business that is deemed by subsection (2) to be a business other than an
active business carried on by the affiliate;
Applicable in
respect of taxation years of a foreign affiliate of a taxpayer after 2008:[155]
“active business” of a foreign
affiliate of a taxpayer
means any business
carried on by the foreign
affiliate other than
(a) an investment business carried
on by the foreign affiliate,
(b)
a business that is deemed by subsection (2) to be a business other than an
active business carried on by the foreign affiliate, or
(c) a non-qualifying business of
the foreign affiliate;
controlled foreign
affiliate
For taxation years
of a foreign affiliate of a taxpayer that begin after 2002 and on or before
February 27, 2004:[156]
“controlled
foreign affiliate”, at any time, of a taxpayer
resident in Canada, means
(a) a foreign affiliate of the
taxpayer that is, at that time, controlled
(i) by the
taxpayer,
(ii) by
the taxpayer and not more than four other persons resident in Canada, or
(iii) by
not more than four persons resident in Canada, other than the taxpayer, or
(b)
a foreign affiliate of the taxpayer that would, at that time, be controlled by
the taxpayer if the taxpayer owned
(i) all of
the shares of the capital stock of the foreign affiliate that are owned at that
time by the taxpayer,
(ii) all
of the shares of the capital stock of the foreign affiliate that are owned at
that time by persons who do not deal at arm’s length with the taxpayer,
(iii) all
of the shares of the capital stock of the foreign affiliate that are owned at
that time by the persons (each of whom is referred to in this definition as a “relevant Canadian shareholder”), in any set of persons not exceeding four (which set of persons
shall be determined without reference to the existence of or the absence of any
relationship, connection or action in concert between those persons), who
(A) are
resident in Canada,
(B) are
not the taxpayer or a person described in subparagraph (ii), and
(C) own,
at that time, shares of the capital stock of the foreign affiliate, and
(iv) all
of the shares of the capital stock of the foreign affiliate that are owned at
that time by persons who do not deal at arm’s length with any relevant Canadian
shareholder;
For all other taxation
years of a foreign affiliate of a taxpayer in the relevant period:
“controlled foreign affiliate”, at any time, of a taxpayer resident in Canada, means
(a)
a foreign affiliate of the taxpayer that is, at that time, controlled by the
taxpayer, or
(b)
a foreign affiliate of the taxpayer that would, at that time, be controlled by
the taxpayer if the taxpayer owned
(i) all of
the shares of the capital stock of the foreign affiliate that are owned at that
time by the taxpayer,
(ii) all
of the shares of the capital stock of the foreign affiliate that are owned at
that time by persons who do not deal at arm’s length with the taxpayer,
(iii) all
of the shares of the capital stock of the foreign affiliate that are owned at
that time by the persons (each of whom is referred to in this definition as a “relevant Canadian shareholder”), in any set of persons not exceeding four (which set of persons
shall be determined without reference to the existence of or the absence of any
relationship, connection or action in concert between those persons), who
(A) are resident in Canada,
(B) are
not the taxpayer or a person described in subparagraph (ii), and
(C) own,
at that time, shares of the capital stock of the foreign affiliate, and
(iv) all
of the shares of the capital stock of the foreign affiliate that are owned at
that time by persons who do not deal at arm’s length with any relevant Canadian
shareholder;
foreign accrual
property income
“foreign accrual
property income” of a foreign affiliate of a
taxpayer, for any taxation year of the affiliate, means the amount determined
by the formula
(A + A.1 + A.2 + B + C) - (D + E + F + G + H)
where
For taxation years of a foreign affiliate of a taxpayer from 2003 to
2008, the description of A would read:
A is the amount that would, if section 80 did not apply to the
affiliate for the year or a preceding taxation year, be the total of the affiliate’s
incomes for the year from property and businesses (other than active
businesses) determined as if each amount described in clause (2)(a)(ii)(D)
that was paid or payable, directly or indirectly, by the affiliate to another
foreign affiliate of either the taxpayer or a person with whom the taxpayer
does not deal at arm’s length were nil where an amount in respect of the income
derived by the other foreign affiliate from that amount that was paid or
payable to it by the affiliate was added in computing its income from an active
business, other than . . .
(a) interest that
would, by virtue of paragraph 81(1)(m), not be included in computing the
income of the affiliate if it were resident in Canada,
(b) a dividend
from another foreign affiliate of the taxpayer,
(c) a taxable
dividend to the extent that the amount thereof would, if the dividend were
received by the taxpayer, be deductible by the taxpayer under section 112, or
(d) any amount
included because of subsection 80.4(2) in the affiliate’s income in respect of
indebtedness to another corporation that is a foreign affiliate of the taxpayer
or of a person resident in Canada with whom the taxpayer does not deal at arm’s
length,
For taxation years of a foreign affiliate of a taxpayer that begin
after 2008, the description of A reads:[157]
A is the amount that would, if section 80 did not apply to the
affiliate for the year or a preceding taxation year, be the total of all
amounts, each of which is the affiliate’s income for the year from property,
the affiliate’s income for the year from a business other than an active business
or the affiliate’s income for the year from a non-qualifying business of the
affiliate, in each case that amount being determined as if each amount
described in clause (2)(a)(ii)(D) that was paid or payable, directly or indirectly,
by the affiliate to another foreign affiliate of the taxpayer or of a person
with whom the taxpayer does not deal at arm’s length were nil where an amount
in respect of the income derived by the other foreign affiliate from that
amount that was paid or payable to it by the affiliate was added in computing
its income from an active business, other than
(a) interest that
would, by virtue of paragraph 81(1)(m), not be included in computing the
income of the affiliate if it were resident in Canada,
(b) a dividend
from another foreign affiliate of the taxpayer,
(c) a taxable
dividend to the extent that the amount thereof would, if the dividend were
received by the taxpayer, be deductible by the taxpayer under section 112, or
(d) any amount
included because of subsection 80.4(2) in the affiliate’s income in respect of
indebtedness to another corporation that is a foreign affiliate of the taxpayer
or of a person resident in Canada with whom the taxpayer does not deal at arm’s
length,
A.1 is twice the total of all amounts included in computing the
affiliate’s income from property or businesses (other than active businesses)
for the year because of subsection 80(13),
A.2 is the amount determined for G in respect of the affiliate for
the preceding taxation year,
B is the total of all amounts each of which is the portion of the
affiliate’s income (to the extent that the income is not included under the
description of A) for the year, or of the affiliate’s taxable capital gain for
the year that can reasonably be considered to have accrued after its 1975
taxation year, from a disposition of property
(a) that is not,
at the time of disposition, excluded property of the affiliate, or
(b) that is, at
the time of disposition, excluded property of the affiliate, if any of
paragraphs (2)(c), (d) and (d.1), subparagraph (2)(e)(i)
and paragraph 88(3)(a) applies to the disposition,[158]
C is, where the affiliate is a controlled foreign affiliate of the
taxpayer, the amount that would be required to be included in computing its
income for the year if
(a) subsection
94.1(1) were applicable in computing that income,
(b) the words “earned directly by the taxpayer” in that subsection were replaced by the words “earned by the person resident in Canada in
respect of whom the taxpayer is a foreign affiliate”,
(c) the words “other than a controlled foreign affiliate of
the taxpayer or a prescribed non-resident entity”
in paragraph 94.1(1)(a) were replaced by the words “other than a prescribed non-resident entity
or a controlled foreign affiliate of a person resident in Canada of whom the
taxpayer is a controlled foreign affiliate”, and
(d) the words “other than a capital gain” in paragraph 94.1(1)(g) were replaced by the words “other than any income that would not be
included in the taxpayer’s foreign accrual property income for the year if the
value of C in the definition “foreign accrual property income” in subsection
95(1) were nil and other than a capital gain”,
For taxation years of a foreign affiliate of a taxpayer from 2003 to
2008, the description of D would read:
D is the total of the affiliate’s losses for the year from property
and businesses (other than active businesses) determined as if there were not
included in the affiliate’s income any amount described in any of paragraphs (a)
to (d) of the description of A and as if each amount described in clause
(2)(a)(ii)(D) that was paid or payable, directly or indirectly, by the
affiliate to another foreign affiliate of either the taxpayer or a person with
whom the taxpayer does not deal at arm’s length were nil where an amount in
respect of the income derived by the other foreign affiliate from that amount
that was paid or payable to it by the affiliate was added in computing its
income from an active business,
For taxation years of a foreign affiliate of a taxpayer that begin
after 2008, the description of D reads:[159]
D is the total of all amounts, each of which is the affiliate’s loss
for the year from property, the affiliate’s loss for the year from a business
other than an active business of the affiliate or the affiliate’s loss for the
year from a non-qualifying business of the affiliate, in each case that amount
being determined as if there were not included in the affiliate’s income any
amount described in any of paragraphs (a) to (d) of the
description of A and as if each amount described in clause (2)(a)(ii)(D)
that was paid or payable, directly or indirectly, by the affiliate to another
foreign affiliate of the taxpayer or of a person with whom the taxpayer does
not deal at arm’s length were nil where an amount in respect of the income
derived by the other foreign affiliate from that amount that was paid or
payable to it by the affiliate was added in computing its income from an active
business,
Prior to February 27, 2004 in the relevant period, the description
of E in effect would have been:[160]
E is the amount of the affiliate’s allowable capital losses for the
year from dispositions of property (other than excluded property) that can
reasonably be considered to have accrued after its 1975 taxation year,
As applicable to dispositions of property by a foreign affiliate
that occur after February 27, 2004 but in taxation years of the foreign
affiliate that end before August 20, 2011, the description of E in effect would
be:[161]
E is the amount of the affiliate’s allowable capital losses for the
year from dispositions of property (other than excluded property and property
in respect of which an election is made by the taxpayer under subsection
88(3.3)) that can reasonably be considered to have accrued after its 1975
taxation year,
F is the prescribed amount for the year,
G is the amount, if any, by which
(a) the total
of amounts determined for A.1 and A.2 in respect of the affiliate for the year
exceeds
(b) the total of
all amounts determined for D to F in respect of the affiliate for the year, and
H is
As applicable in respect of years up until 2006, paragraph (a)
of the description of H read:
(a) where the
affiliate was a member of a partnership at the end of the fiscal period of the
partnership that ended in the year and the partnership received a dividend at a
particular time in that fiscal period from a corporation that was, for the
purposes of sections 93 and 113, a foreign affiliate of the taxpayer at that
particular time, the portion of the amount of that dividend that is included in
the value of A in respect of the affiliate for the year and that is deemed by
paragraph 93.1(2)(a) to have been received by the affiliate for the
purposes of sections 93 and 113, and
As applicable in respect of taxation years of a foreign affiliate of
a taxpayer that end after 2006, paragraph (a) of the description of H
reads:[162]
(a) if the
affiliate was a member of a partnership at the end of the fiscal period of the
partnership that ended in the year and the partnership received a dividend at a
particular time in that fiscal period from a corporation that would be, if the
reference in subsection 93.1(1) to “corporation resident in Canada” were
a reference to “taxpayer
resident in Canada”, a foreign affiliate of the
taxpayer for the purposes of sections 93 and 113 at that particular time, then
the portion of the amount of that dividend that is included in the value
determined for A in respect of the affiliate for the year and that would be, if
the reference in subsection 93.1(2) to “corporation resident in Canada” were
a reference to “taxpayer
resident in Canada”, deemed by paragraph
93.1(2)(a) to have been received by the affiliate for the purposes of
sections 93 and 113, and
(b) in any
other case, nil;
foreign accrual tax
“foreign
accrual tax” applicable to any amount included in
computing a taxpayer’s income by virtue of subsection 91(1) for a taxation year
in respect of a particular foreign affiliate of the taxpayer means
(a) the portion of any income or
profits tax that was paid by
(i) the
particular affiliate, or
(ii) any
other foreign affiliate of the taxpayer in respect of a dividend received from
the particular affiliate
and that may reasonably be regarded as
applicable to that amount, and
(b)
any amount prescribed in respect of the particular affiliate to be foreign
accrual tax applicable to that amount;
foreign affiliate
“foreign affiliate”, at any time, of a taxpayer resident in Canada means a non-resident
corporation in which, at that time,
(a) the taxpayer’s
equity percentage is not less than 1%, and
(b) the total of
the equity percentages in the corporation of the taxpayer and of each person
related to the taxpayer (where each such equity percentage is determined as if
the determinations under paragraph (b) of the definition “equity percentage” in subsection (4) were made without reference to the equity
percentage of any person in the taxpayer or in any person related to the
taxpayer) is not less than 10%,
except that a corporation
is not a foreign affiliate of a non-resident-owned investment corporation;
foreign bank
“foreign bank” means an entity that would be a foreign bank within the meaning
assigned by the definition of that expression in section 2 of the Bank Act
if
(a) that
definition were read without reference to the portion thereof after paragraph (g)
thereof, and
(b) the entity had
not been exempt under section 12 of that Act from being a foreign bank;
income from an active
business
Applicable for
years from 2003 to 2008:
“income from an active business” of a foreign
affiliate of a taxpayer for a taxation year includes, for greater certainty,
any income of the affiliate for the year that pertains to or is incident to
that business but does not include
(a) other income that is its income from property for the
year, or
(b) its income for the year from a business that is deemed
by subsection (2) to be a business other than an active business carried on by
the affiliate;
Applicable in
respect of taxation years of a foreign affiliate of a taxpayer after 2008:[163]
“income from an active business” of a foreign
affiliate of a taxpayer for a taxation year includes the foreign affiliate’s
income for the taxation year that pertains to or is incident to that active
business but does not include
(a) the foreign affiliate’s income from property for the
taxation year,
(b) the foreign affiliate’s income for the taxation year
from a business that is deemed by subsection (2) to be a business other than an
active business of the foreign affiliate, or
(c) the foreign affiliate’s income from a non-qualifying
business of the foreign affiliate for the taxation year;
income from property
Applicable for
years from 2003 to 2008:
“income from property” of a foreign
affiliate of a taxpayer for a taxation year includes its income for the year
from an investment business and its income for the year from an adventure or
concern in the nature of trade, but, for greater certainty, does not include
its income for the year that is because of subsection (2) included in its
income from an active business or in its income from a business other than an
active business;
Applicable in
respect of taxation years of a foreign affiliate of a taxpayer after 2008:[164]
“income from property” of a foreign
affiliate of a taxpayer for a taxation year includes the foreign affiliate’s
income for the taxation year from an investment business and the foreign
affiliate’s income for the taxation year from an adventure or concern in the
nature of trade, but does not include
(a) the foreign affiliate’s income for the taxation year
from a business that is deemed by subsection (2) to be a business other than an
active business of the foreign affiliate, or
(b) the foreign affiliate’s income for the taxation year
that pertains to or is incident to
(i) an active business of the foreign affiliate, or
(ii) a non-qualifying business of the foreign affiliate;
investment business
Applicable for
years from 2003 to 2008, the opening words of the definition of “investment business” were:
“investment
business” of a foreign affiliate of a taxpayer
means a business carried on by the affiliate in a taxation year (other than a
business deemed by subsection (2) to be a business other than an active
business carried on by the affiliate) the principal purpose of which is to
derive income from property (including interest, dividends, rents, royalties or
any similar returns or substitutes therefor), income from the insurance or
reinsurance of risks, income from the factoring of trade accounts receivable,
or profits from the disposition of investment property, unless it is
established by the taxpayer or the affiliate that, throughout the period in the
year during which the business was carried on by the affiliate,
As applicable in
respect of taxation years of a foreign affiliate of a taxpayer after 2008, the
opening words of the definition of “investment business” were:[165]
“investment business” of a foreign affiliate of a taxpayer means a
business carried on by the foreign affiliate in a taxation year (other than a
business deemed by subsection (2) to be a business other than an active
business carried on by the foreign affiliate and other than a non-qualifying
business of the foreign affiliate) the principal purpose of which is to derive
income from property (including interest, dividends, rents, royalties or any
similar returns or substitutes for such interest, dividends, rents, royalties
or returns), income from the insurance or reinsurance of risks, income from the
factoring of trade accounts receivable, or profits from the disposition of investment
property, unless it is established by the taxpayer or the foreign affiliate
that, throughout the period in the taxation year during which the business was
carried on by the foreign affiliate,
For all the years in the relevant period, the rest of the definition
of “investment business” in effect was as follows:
(a) the business
(other than any business conducted principally with persons with whom the
affiliate does not deal at arm’s length) is
(i) a business carried
on by it as a foreign bank, a trust company, a credit union, an insurance
corporation or a trader or dealer in securities or commodities, the activities
of which are regulated under the laws
(A) of each country in
which the business is carried on through a permanent establishment in that
country and of the country under whose laws the affiliate is governed and any
of exists, was (unless the affiliate was continued in any jurisdiction) formed
or organized, or was last continued,
(B) of the country in
which the business is principally carried on, or
(C) if the affiliate is
related to a non-resident corporation, of the country under whose laws that
non-resident corporation is governed and any of exists, was (unless that
non-resident corporation was continued in any jurisdiction) formed or organized,
or was last continued, if those regulating laws are recognized under the laws
of the country in which the business is principally carried on and all of those
countries are members of the European Union, or
(ii) the development of
real estate for sale, the lending of money, the leasing or licensing of
property or the insurance or reinsurance of risks,
(b) either
(i) the affiliate
(otherwise than as a member of a partnership) carries on the business (the
affiliate being, in respect of those times, in that period of the year, that it
so carries on the business, referred to in paragraph (c) as the “operator”),
or
(ii) the affiliate
carries on the business as a qualifying member of a partnership (the
partnership being, in respect of those times, in that period of the year, that
the affiliate so carries on the business, referred to in paragraph (c)
as the “operator”), and
(c) the
operator employs
(i) more than five
employees full time in the active conduct of the business, or
(ii) the equivalent of
more than five employees full time in the active conduct of the business taking
into consideration only
(A) the services
provided by employees of the operator, and
(B) the services
provided outside Canada to the operator by any one or more persons each of whom
is, during the time at which the services were performed by the person, an
employee of
(I) a corporation
related to the affiliate (otherwise than because of a right referred to in
paragraph 251(5)(b)),
(II) in the case where
the operator is the affiliate,
1. a corporation
(referred to in this subparagraph as a “providing shareholder”) that is a
qualifying shareholder of the affiliate,
2. a designated
corporation in respect of the affiliate, or
3. a designated
partnership in respect of the affiliate, and
(III) in the case where
the operator is the partnership described in subparagraph (b)(ii),
1. any person
(referred to in this subparagraph as a “providing member”) who is a
qualifying member of that partnership,
2. a designated
corporation in respect of the affiliate, or
3. a designated
partnership in respect of the affiliate,
if the corporations
referred to in subclause (B)(I) and the designated corporations, designated
partnerships, providing shareholders or providing members referred to in
subclauses (B)(II) and (III) receive compensation from the operator for the
services provided to the operator by those employees the value of which is not
less than the cost to those corporations, partnerships, shareholders or members
of the compensation paid or accruing to the benefit of those employees that
performed the services during the time at which the services were performed by
those employees;
investment property
“investment property” of a foreign affiliate of a taxpayer includes
(a) a share of the
capital stock of a corporation other than a share of another foreign affiliate
of the taxpayer that is excluded property of the affiliate,
(b) an interest in
a partnership other than an interest in a partnership that is excluded property
of the affiliate,
(c) an interest in
a trust other than an interest in a trust that is excluded property of the
affiliate,
(d) indebtedness
or annuities,
(e) commodities or
commodities futures purchased or sold, directly or indirectly in any manner
whatever, on a commodities or commodities futures exchange (except commodities
manufactured, produced, grown, extracted or processed by the affiliate or a person
to whom the affiliate is related (otherwise than because of a right referred to
in paragraph 251(5)(b)) or commodities futures in respect of such
commodities),
(f) currency,
(g) real estate,
(h) Canadian and
foreign resource properties,
(i) interests in
funds or entities other than corporations, partnerships and trusts, and
(j) interests or
options in respect of property that is included in any of paragraphs (a)
to (i);
lending of money
“lending of money” by a person (for the purpose of this definition referred to as the
“lender”) includes
(a) the
acquisition by the lender of trade accounts receivable (other than trade
accounts receivable owing by a person with whom the lender does not deal at arm’s
length) from another person or the acquisition by the lender of any interest in
any such accounts receivable,
(b) the
acquisition by the lender of loans made by and lending assets (other than loans
or lending assets owing by a person with whom the lender does not deal at arm’s
length) of another person or the acquisition by the lender of any interest in
such a loan or lending asset,
(c) the
acquisition by the lender of a foreign resource property (other than a foreign
resource property that is a rental or royalty payable by a person with whom the
lender does not deal at arm’s length) of another person, and
(d) the sale by
the lender of loans or lending assets (other than loans or lending assets owing
by a person with whom the lender does not deal at arm’s length) or the sale by
the lender of any interest in such loans or lending assets;
and for the purpose of this definition, the definition “lending asset”
in subsection 248(1) shall be read without the words “but does not include a prescribed property”;
participating
percentage
“participating
percentage” of a particular share owned by a taxpayer
of the capital stock of a corporation in respect of any foreign affiliate of
the taxpayer that was, at the end of its taxation year, a controlled foreign
affiliate of the taxpayer is
(a) where the
foreign accrual property income of the affiliate for that year is $5,000 or
less, nil, and
(b) where the
foreign accrual property income of the affiliate for that year exceeds $5,000,
(i) where the affiliate and
each corporation that is relevant to the determination of the taxpayer’s equity
percentage in the affiliate has only one class of issued shares at the end of
that taxation year of the affiliate, the percentage that would be the taxpayer’s
equity percentage in the affiliate at that time on the assumption that the
taxpayer owned no shares other than the particular share (but in no case shall
that assumption be made for the purpose of determining whether or not a
corporation is a foreign affiliate of the taxpayer), and
(ii) in
any other case, the percentage determined in prescribed manner;
permanent
establishment[166]
“permanent
establishment” has the meaning assigned by
regulation;
relevant tax factor[167]
“relevant tax factor”, of a person or partnership for a taxation year, means
(a) in the case of
a corporation, or of a partnership all the members of which, other than non-resident
persons, are corporations, the quotient obtained by the formula
1/(A - B)
where
A is the percentage set
out in paragraph 123(1)(a), and
B is
(i) in the case of a
corporation, the percentage that is the corporation’s general rate reduction
percentage (as defined by section 123.4) for the taxation year, and
(ii) in the case of a partnership,
the percentage that would be determined under subparagraph (i) in respect of
the partnership if the partnership were a corporation whose taxation year is
the partnership’s fiscal period, and
(b) in any other case, 2.2;
trust company
“trust company” includes a corporation that is resident in Canada and that is a
loan company as defined in subsection 2(1) of the Canadian Payments
Association Act.
Clause 95(2)(a)(ii)(B)
For taxation years of a foreign
affiliate of a taxpayer that end after 1999 and begin before 2009, the
applicable version of clause 95(2)(a)(ii)(B) reads:
95(2)
. . .
(a)
in computing the income or loss from an active business for a taxation year of
a particular foreign affiliate of a taxpayer in respect of which the taxpayer
has a qualifying interest throughout the year or that is a controlled foreign
affiliate of the taxpayer throughout the year, there shall be included any
income or loss of the particular foreign affiliate for that year from sources
in a country other than Canada that would otherwise be income or loss from
property of the particular foreign affiliate for the year to the extent that
. . .
(ii) the
income or loss is derived from amounts that were paid or payable, directly or
indirectly, to the particular foreign affiliate or a partnership of which the
particular foreign affiliate was a member
. . .
(B) by
(I)
another foreign affiliate of the taxpayer in respect of which the taxpayer has
a qualifying interest throughout the year, or
(II) a
partnership of which another foreign affiliate of the taxpayer — in respect of
which other foreign affiliate the taxpayer has a qualifying interest throughout
the year or to which other foreign affiliate the particular foreign affiliate
and the taxpayer are related throughout the year — is a qualifying member
throughout each period, in the fiscal period of the partnership that ends in
the year, in which that other foreign affiliate was a member of the partnership
to the
extent that those amounts that were paid or payable are for expenditures that
were deductible by the other foreign affiliate or would (if the partnership
were a foreign affiliate of the taxpayer) be deductible by the partnership in
computing the amounts prescribed to be its earnings or loss for a taxation year
from an active business (other than an active business carried on in Canada),
For all other years in the relevant period, clause
95(2)(a)(ii)(B) read as follows:
95(2)
. . .
(a) [income
related to active business] -- in computing the income or loss from an active
business for a taxation year of a particular foreign affiliate of a taxpayer in
respect of which the taxpayer has a qualifying interest throughout the year or
that is a controlled foreign affiliate of the taxpayer throughout the year,
there shall be included any income or loss of the particular foreign affiliate
for the year from sources in a country other than Canada that would otherwise
be income or loss from property of the particular foreign affiliate for the
year to the extent that
. . .
(ii) the income or loss
is derived from amounts that were paid or payable, directly or indirectly, to
the particular foreign affiliate or a partnership of which the particular
foreign affiliate was a member
. . .
(B) by
(I) another foreign
affiliate of the taxpayer in respect of which the taxpayer has a qualifying
interest throughout the year, to the extent that those amounts that were paid
or payable are for expenditures that were deductible by that other foreign
affiliate in computing the amounts prescribed to be its earnings or loss for a
taxation year from an active business (other than an active business carried on
in Canada), or
(II) a partnership of
which another foreign affiliate of the taxpayer (in respect of which other
foreign affiliate the taxpayer has a qualifying interest throughout the year)
is a qualifying member throughout each period, in the fiscal period of the
partnership that ends in the year, in which that other foreign affiliate was a
member of the partnership, to the extent that those amounts that were paid or
payable are for expenditures that are deductible by the partnership in
computing that other foreign affiliate’s share of any income or loss of the
partnership, for a fiscal period, that is included in computing the amounts
prescribed to be that other foreign affiliate’s earnings or loss for a taxation
year from an active business (other than an active business carried on in
Canada),
Paragraph 95(2)(l)
95(2)
. . .
(l) [trading or dealing in debt] -- in computing the income
from property for a taxation year of a foreign affiliate of a taxpayer there
shall be included the income of the affiliate for the year from a business
(other than an investment business of the affiliate) the principal purpose of
which is to derive income from trading or dealing in indebtedness (which for
the purpose of this paragraph includes the earning of interest on indebtedness)
other than
(i) indebtedness owing by
persons with whom the affiliate deals at arm’s length who are resident in the
country in which the affiliate was formed or continued and exists and is
governed and in which the business is principally carried on, or
(ii) trade accounts
receivable owing by persons with whom the affiliate deals at arm’s length,
unless
(iii) the business is
carried on by the affiliate as a foreign bank, a trust company, a credit union,
an insurance corporation or a trader or dealer in securities or commodities,
the activities of which are regulated under the laws
(A) of each country in
which the business is carried on through a permanent establishment[168]
in that country and of the country under whose laws the affiliate is governed
and any of exists, was (unless the affiliate was continued in any jurisdiction)
formed or organized, or was last continued,
(B) of the country in
which the business is principally carried on, or
(C) if the affiliate is
related to a non-resident corporation, of the country under whose laws that
non-resident corporation is governed and any of exists, was (unless that
non-resident corporation was continued in any jurisdiction) formed or
organized, or was last continued, if those regulating laws are recognized under
the laws of the country in which the business is principally carried on and all
of those countries are members of the European Union, and[169]
(iv) the taxpayer is
(A) a bank, a trust
company, a credit union, an insurance corporation or a trader or dealer in
securities or commodities resident in Canada, the business activities of which
are subject by law to the supervision of a regulating authority such as the
Superintendent of Financial Institutions or a similar authority of a province,
(B) a subsidiary
wholly-owned corporation of a corporation described in clause (A),
(C) a corporation of
which a corporation described in clause (A) is a subsidiary wholly-owned
corporation, or
Subsection 95(2.4)
(2.4) Application of paragraph (2)(a.3) -- Paragraph (2)(a.3)
does not apply to a foreign affiliate of a taxpayer in respect of its income
derived directly or indirectly from indebtedness to the extent that
(a) the income is
derived by the affiliate in the course of a business conducted principally with
persons with whom the affiliate deals at arm’s length carried on by it as a
foreign bank, a trust company, a credit union, an insurance corporation or a
trader or dealer in securities or commodities, the activities of which are
regulated under the laws
(i) of the country under
whose laws the affiliate is governed and any of exists, was (unless the
affiliate was continued in any jurisdiction) formed or organized, or was last
continued and of each country in which the business is carried on through a
permanent establishment[170]
in that country,
(ii) of the country in
which the business is principally carried on, or
(iii) if the affiliate
is related to a corporation, of the country under the laws of which that
related corporation is governed and any of exists, was (unless that related
corporation was continued in any jurisdiction) formed or organized, or was last
continued, if those regulating laws are recognized under the laws of the
country in which the business is principally carried on and all of those
countries are members of the European Union, and[171]
(b) the income is
derived by the affiliate from trading or dealing in the indebtedness (which,
for this purpose, consists of income from the actual trading or dealing in the
indebtedness and interest earned by the affiliate during a short term holding
period on indebtedness acquired by it for the purpose of the trading or
dealing) with persons (in this subsection referred to as “regular customers”) with whom it deals at arm’s length who were resident in a country
other than Canada in which it and any competitor (which is resident in the
country in which the affiliate is resident and regulated in the same manner the
affiliate is regulated in the country under whose laws the affiliate was formed
or continued and exists and is governed and in which its business is
principally carried on) compete and have a substantial market presence,
and, for the purpose of this subsection, an acquisition of
indebtedness from the taxpayer shall be deemed to be part of the trading or
dealing in indebtedness described in paragraph (b) where the
indebtedness is acquired by the affiliate and sold to regular customers and the
terms and conditions of the acquisition and the sale are substantially the same
as the terms and conditions of similar acquisitions and sales made by the
affiliate in transactions with persons with whom it deals at arm’s length.
"specified
deposit" in subsection 95(2.5)
“specified
deposit” means a deposit of a foreign affiliate of
a taxpayer resident in Canada with a prescribed financial institution resident
in Canada where
(a)
the income from the deposit is income of the affiliate for the year that would,
but for paragraph (2)(a.3), be income from an
active business carried on by it in a country other than Canada (other than a
business the principal purpose of which is to derive income from property
including interest, dividends, rents, royalties or similar returns or
substitutes therefor or profits from the disposition of investment property),
or
(b)
the income from the deposit is income of the affiliate for the year that would,
but for paragraph (2)(a.3), be
income from an active business carried on by the affiliate principally with
persons with whom the affiliate deals at arm’s length in the country under
whose laws the affiliate was formed or continued and exists and is governed and
in which the business is principally carried on by it and the deposit was held
by the affiliate in the course of carrying on that part of the business
conducted with non-resident persons with whom the affiliate deals at arm’s
length or that part of the business conducted with a person with whom the
affiliate was related where it can be demonstrated that the related person used
or held the funds deposited in the course of a business carried on by the
related person with non-resident persons with whom the related person and the
affiliate deal at arm’s length.
"lending asset" in subsection 248(1)
“lending asset”
means a bond, debenture, mortgage, hypothecary claim, note, agreement of sale
or any other indebtedness or a prescribed share, but does not include a prescribed property;
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