18 July 2001 Internal T.I. 2001-0086027 - FISCAL PERIOD AUTHORIZED FOREIGN BANKS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: At what point in time does an authorized foreign bank commence its first fiscal period in Canada? Foreign banks wish to take advantage, for their first taxation year in Canada, of the reduced capital tax liability imposed during short taxation years under subsections 181.1(2) and 190.1(2) of the Income Tax Act by commencing their first fiscal period at the time they actually begin to carry on banking activities in Canada e.g. write loans etc.

Position: The first fiscal period of an authorized foreign bank commences no later than the date the Superintendent of Financial Institutions issues a section 534 order authorizing it to commence and carry on business in Canada. The bank may choose to commence its first fiscal period prior to that time, provided it was in existence at the time it elects to commence that first fiscal period

Reasons: Generally, a non-resident corporation is not obligated to adopt, for Canadian tax purposes, either the same fiscal period that it uses to report income in its home jurisdiction or a fiscal period that commences concurrent to the anniversary of its date of incorporation. Instead, it may commence its fiscal period no later than the day it commences business activities in Canada, or at any earlier time that the corporation was in existence. An authorized foreign bank may not commence to carry on business in Canada until it is authorized to do so by an order made under subsection 534(1) of the Bank Act. Once a section 534 order has been issued, an authorized foreign bank is present in Canada and has taken all prerequisite steps to commence its Canadian business.

July 18, 2001

TORONTO NORTH  TSO				HEADQUARTERS
							Income Tax Rulings
Attention:  Doug Mitchell 			  Directorate
R. Maley
							(613-957-9226)

							2001-008602

Authorized Foreign Banks - First Fiscal Period

This is in reply to your correspondence of May 2, 2001 requesting our views as to what point in time does an authorized foreign bank commence its first fiscal period in Canada. This is a concern as the banks at issue wish to take advantage of the reduced capital tax liability imposed during short taxation years under subsections 181.1(2) and 190.1(2) of the Income Tax Act. Several possible commencement dates exist. First, there is the day that the Minister of Finance makes its order permitting the foreign bank to establish a branch in Canada to carry on a banking business pursuant to subsection 524(1) of the Bank Act. Second, there is the day that the foreign bank actually establishes a permanent establishment in Canada. Third, there is the day that the Superintendent of Financial Institutions makes its order approving the authorized foreign bank's commencement and carrying on of business in Canada pursuant to subsection 534(1) of the Bank Act. Finally, there is the day that the bank actually begins to write loans in Canada. We understand from our meeting with OSFI on May 28 (which you also attended) that these four dates would always fall in this order e.g., the PE would always be established prior to the subsection 534(1) order being issued, etc.

Our view is that the first fiscal period of an authorized foreign bank commences no later than the date the Superintendent of Financial Institutions issues a section 534 order authorizing it to commence and carry on business in Canada. The bank may choose to commence its first fiscal period prior to that time, provided it was in existence at the time it elects to commence that first fiscal period.

Analysis

Subsection 249(1) of the Act provides that

For the purpose of this Act, a "taxation year" is

(a) in the case of a corporation, a fiscal period, and...

and when a taxation year is referred to by reference to a calendar year, the reference is to the taxation year or years coinciding with, or ending in, that year.

Subsection 249.1(1) provides that

For the purposes of this Act, a "fiscal period" of a business or a property of a person or partnership means the period for which the person's or partnership's accounts in respect of the business or property are made up for purposes of assessment under this Act, but no fiscal period may end

(a) in the case of a corporation, more than 53 weeks after the period began,

The Tax Appeal Board in Motivair Limited¹ observed that "the whole purpose for which section 139(1)(r)" (NB now subsection 249.1(1)) was added to the Act was "to give a taxpayer some leeway in the selection of a year end for his business other than the calendar year end". Therefore, any attempt to change the customary commencement of the business - in this case the date of incorporation of the company- was not warranted and should not be supported. Furthermore, there is no discretion to select the commencement date to a fiscal period, which is determined by the law:

Thus, the taxation year of a corporation is always identified by reference to the calendar year in which its fiscal period ended or with which is coincided. The initial starting point of a newly incorporated company is clearly a question of law which, in this appeal, has been clarified by sections 11 and 19 of the Ontario Corporations Act...

Where a corporation is not resident in Canada, its date of incorporation is not necessarily the basis for the commencement of its first fiscal period in Canada. Rulings Opinions E3M06366, E73881 and E1999-0012585 all indicate that a non-resident corporation is not obligated to adopt, for Canadian tax purposes, either the same fiscal period that it uses to report income in its home jurisdiction or a fiscal period that commences concurrent to the anniversary of its date of incorporation. However, it is also clear from the facts of these opinions that the first fiscal period may not begin subsequent in time to the commencement of business activities in Canada. Where the corporation was in existence prior to the commencement of business activities and has not filed a tax return in Canada for any previous taxation year, the non-resident may elect a first fiscal period that commences prior to the commencement of business activities: E1999-0012585.

Thus, our view is that a non-resident's first fiscal period begins at the earlier of the commencement of its business activities in Canada and such earlier time that it elects if it is in existence at that earlier time. The non-resident's first taxation year-end would, pursuant to subsection 149.1(1), appear to be whatever the non-resident elects as its fiscal period year-end, not later than 53 weeks from the beginning of its fiscal period.

The question as to when business operations commence often arises in the context of deductibility of expenses. Pursuant to paragraph 18(1)(a) of the Act, a taxpayer may deduct expenses incurred for the gaining or producing income from a business, which in turn requires that the taxpayer carry on business in the fiscal period in which the expenses are incurred. IT-364, "Commencement of Business Operations" provides that

Generally speaking, it is the Department's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries.²

The IT makes clear, however, that it is not necessary that a business be in a position to commence its sales operations in order to be viewed as having commenced. For example, in paragraph 3 of the bulletin it is stated that "any positive and continuous steps taken to introduce a particular product to an intended market are activities of an operating nature even though they precede the creation of the sales organization of the business." The IT also makes clear that, where regulatory approval is required to engage in certain activities, the receipt of that approval is not required in order for the business to commence:

Another illustration of the time when a business commenced might be a corporation that was formed for the purposes of providing cable television service. An essential preliminary requirement for the carrying on of a business of that kind is the obtaining of a licence from the regulatory authority. Consequently, such a business should be viewed as having commenced not later than the day when steps were taken in a positive way to obtain a licence. While normal operations could not commence until the licence was obtained, the nature of the business required that studies and representations be undertaken to persuade the regulatory authority to issue the licence and the business itself commenced when these activities were started.³ (emphasis added)

Moreover, it is not necessary, for business to commence and be carried on during a particular period, that any revenue be generated in the period: paragraph 5.

In applying these principles to authorized foreign banks, it is necessary to consider the various steps that a non-resident bank must undertake in order to establish a branch in Canada. First, the bank must apply to the Minister of Finance for permission to establish the branch. The Minister may give this approval pursuant to subsection 524(1) of the Bank Act:

524. (1) On application by a foreign bank, the Minister may make an order permitting the foreign bank to establish a branch in Canada to carry on business in Canada under this Part.

Once the Minister of Finance has made a section 524 order in respect of a foreign bank, the bank prepares to carry on business in Canada. When the bank is ready to commence its business, it applies to the Superintendent of Financial Institutions for an order under section 534 of the Bank Act authorizing it to commence and carry on business in Canada:

534. (1) On application by an authorized foreign bank, the Superintendent may make an order approving the commencement and carrying on of business in Canada by the authorized foreign bank.

OSFI advises that a section 534 order would not be issued unless a bank is ready to carry on business and, in particular, has established a PE.

Therefore, once a section 534 order has been issued, an authorized foreign bank is present in Canada and has taken all prerequisite steps to commence its Canadian business. In our view, this is the latest point in time upon which an authorized foreign bank could be viewed as commencing its business for tax purposes. It may also be noted that subsection 534(2) of the Bank Act provides that

534 (2) An authorized foreign bank may not commence to carry on business in Canada until it is authorized to do so by an order made under subsection (1).

For this reason, our view is that the date of the section 534 order is the latest point in time at which the first fiscal period of an authorized foreign bank could be viewed to commence, as the authorized foreign bank clearly exists in Canada for regulatory purposes at that time irrespective as to whether or not it is actually writing loans or otherwise engaging in a banking business. Consistent with the treatment accorded to other non-resident taxpayers, the authorized foreign bank should be permitted to commence its first fiscal period prior to that time, provided it was in existence at the time it elects to commence that first fiscal period.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate

Endnotes

¹ 66 DTC 77 (TAB).

² IT-364, Paragraph 2.

³ Ibid., Paragraph 4.